Fight Finance

Question 574  inflation, real and nominal returns and cash flows, NPV

What is the present value of a nominal payment of $100 in 5 years? The real discount rate is 10% pa and the inflation rate is 3% pa.

(a) $71.2986

(b) $62.0921

(c) $61.5028

(d) $54.276

(e) $53.5612

Question 624  franking credit, personal tax on dividends, imputation tax system, no explanation

Which of the following statements about Australian franking credits is NOT correct? Franking credits:

(a) Refund the corporate tax paid by companies to their individual shareholders. Therefore they prevent the double-taxation of dividends at the corporate and personal level.

(b) Are distributed to shareholders together with cash dividends.

(c) Are also called imputation credits.

(d) Are worthless to individuals who earn less than the tax-free threshold because they have a zero marginal personal tax rate.

(e) Are worthless to individual shareholders who are foreigners for tax purposes.

Question 666  rights issue, capital raising

A company conducts a 2 for 3 rights issue at a subscription price of $8 when the pre-announcement stock price was $9. Assume that all investors use their rights to buy those extra shares.

What is the percentage increase in the stock price and the number of shares outstanding? The answers are given in the same order.

(a) -60%,   150%

(b) -42.22%,   150%

(c) -40%,   66.67%

(d) -22.22%,   66.67%

(e) -4.44%,   66.67%

Question 667  forward foreign exchange rate, foreign exchange rate, cross currency interest rate parity, no explanation

The Australian cash rate is expected to be 2% pa over the next one year, while the US cash rate is expected to be 0% pa, both given as nominal effective annual rates. The current exchange rate is 0.73 USD per AUD.

What is the implied 1 year USD per AUD forward foreign exchange rate?

(a) 0.7157 USD per AUD

(b) 0.73 USD per AUD

(c) 0.7446 USD per AUD

(d) 0.9804 USD per AUD

(e) 1.02 USD per AUD

Question 727  inflation, real and nominal returns and cash flows

The Australian Federal Government lends money to domestic students to pay for their university education. This is known as the Higher Education Contribution Scheme (HECS). The nominal interest rate on the HECS loan is set equal to the consumer price index (CPI) inflation rate. The interest is capitalised every year, which means that the interest is added to the principal. The interest and principal does not need to be repaid by students until they finish study and begin working.

Which of the following statements about HECS loans is NOT correct?

(a) The real interest rate is zero.

(b) The nominal amount owing on the loan will increase at the inflation rate over time, if there are no extra payments or borrowings.

(c) The real amount owing on the loan in today's money will remain the same over time, if there are no extra payments or borrowings.

(d) The interest rate on the HECS loan advantages rich domestic students because they are able to pay off their debt sooner and avoid paying as much HECS interest.

(e) The interest rate on the HECS loan advantages all domestic students because the alternative of borrowing from the bank to pay for education would usually attract a higher interest rate.

Question 794  option, Black-Scholes-Merton option pricing, option delta, no explanation

Which of the following quantities from the Black-Scholes-Merton option pricing formula gives the Delta of a European call option?

(a) ##N[d_1]##

(b) ##N[d_2]##

(c) ##−N[−d_1]##

(d) ##−N[−d_2]##

(e) ##N[−d_2]##

Where:

###d_1=\dfrac{\ln⁡[S_0/K]+(r+\sigma^2/2).T)}{\sigma.\sqrt{T}}### ###d_2=d_1-\sigma.\sqrt{T}=\dfrac{\ln⁡[S_0/K]+(r-\sigma^2/2).T)}{\sigma.\sqrt{T}}###

Question 798  idiom, diversification, market efficiency, sunk cost, no explanation

The following quotes are most closely related to which financial concept?

• “Opportunity is missed by most people because it is dressed in overalls and looks like work” -Thomas Edison
• “The only place where success comes before work is in the dictionary” -Vidal Sassoon
• “The safest way to double your money is to fold it over and put it in your pocket” - Kin Hubbard

(a) The efficient markets hypothesis.

(b) Time value of money.

(c) Separation of the investment and financing decisions.

(d) Diversification.

(e) Sunk costs.

Question 867  limited liability, business structure

Which one of the following businesses is likely to be a public company in Australia, judging by its name?

(a) Joe Bloggs

(b) Jane Doe

(c) Bloggs and Doe

(d) Bloggs Ltd

(e) Doe Pty Ltd

Question 933  confidence interval, normal distribution

A stock has an expected return of 10% pa and you're 90% sure that over the next year, the return will be between -15% and 35%. The stock's returns are normally distributed. Note that the Z-statistic corresponding to a one-tail:

• 90% normal probability density function is 1.282.
• 95% normal probability density function is 1.645.
• 97.5% normal probability density function is 1.960.

What is the stock’s standard deviation of returns in percentage points per annum (pp pa)?

(a) 6.08 pp pa

(b) 15.2 pp pa

(c) 21.28 pp pa

(d) 27.36 pp pa

(e) 41.13 pp pa

Question 949  future, contango

If futures prices are in contango, then futures prices (##F_{0,T}##) are than, than or to spot prices (##S_0##)?