Fight Finance

Question 6  DDM

For a price of $102, Andrea will sell you a share which just paid a dividend of $10 yesterday, and is expected to pay dividends every year forever, growing at a rate of 5% pa.

So the next dividend will be ##10(1+0.05)^1=$10.50## in one year from now, and the year after it will be ##10(1+0.05)^2=11.025## and so on.

The required return of the stock is 15% pa.

Would you like to the share or politely ?

Question 41  DDM, income and capital returns

The following is the Dividend Discount Model (DDM) used to price stocks:

### P_0 = \frac{d_1}{r-g} ###

Assume that the assumptions of the DDM hold and that the time period is measured in years.

Which of the following is equal to the expected dividend in 3 years, ## d_3 ##?

(a) ## d_1(1+g)^3 ##

(b) ## P_3(r-g) ##

(c) ## d_2(1+g)^2 ##

(d) ## P_0(1+g)^3(r-g) ##

(e) ## P_0(1+g)^2(r-g) ##

Question 294  short selling, portfolio weights

Which of the following statements about short-selling is NOT true?

(a) Short sellers benefit from price falls.

(b) To short sell, you must borrow the asset from person A and sell it to person B, then later on buy an identical asset from person C and return it to person A.

(c) Short selling only works for assets that are 'fungible' which means that there are many that are identical and substitutable, such as shares and bonds and unlike real estate.

(d) An investor who short-sells an asset has a negative weight in that asset.

(e) An investor who short-sells an asset is said to be 'long' that asset.

Question 314  foreign exchange rate, American and European terms

If the USD appreciates against the AUD, the American terms quote of the AUD will or ?

Question 464  mispriced asset, NPV, DDM, market efficiency

A company advertises an investment costing $1,000 which they say is underpriced. They say that it has an expected total return of 15% pa, but a required return of only 10% pa. Assume that there are no dividend payments so the entire 15% total return is all capital return.

Assuming that the company's statements are correct, what is the NPV of buying the investment if the 15% return lasts for the next 100 years (t=0 to 100), then reverts to 10% pa after that time? Also, what is the NPV of the investment if the 15% return lasts forever?

In both cases, assume that the required return of 10% remains constant. All returns are given as effective annual rates.

The answer choices below are given in the same order (15% for 100 years, and 15% forever):

(a)             $0,          $0

(b) $1,977.19,   $2,000

(c) $2,977.19,   $3,000

(d)    $499.96,      $500

(e) $84,214.9,   Infinite

Question 803  capital raising, rights issue, initial public offering, on market repurchase, no explanation

Which one of the following capital raisings or payouts involve the sale of shares to existing shareholders only?

(a) Rights issues.

(b) Private placements.

(c) Initial public offerings.

(d) Seasoned equity offerings.

(e) On-market buy backs.

Question 854  speculation motive for keeping money, no explanation

What is the speculation motive for keeping money? The speculation motive encourages people to keep money available:

(a) To buy consumables like food and clothes at the shops.

(b) For a ‘rainy day’ such as becoming sick and having to pay for a doctor.

(c) To preserve their wealth, such as keeping cash under the bed, in the piggy bank or in a safe.

(d) To invest in assets such as houses, shares or bonds if they become cheap.

(e) To gamble and waste on the poker machines at the casino.

Question 880  gold standard, no explanation

Under the Gold Standard (1876 to 1913), currencies were priced relative to:

(a) The United States Dollar, USD.

(b) The Greater British Pound, GBP.

(c) Gold.

(d) Silver.

(e) Rum.

Question 907  continuously compounding rate, return types, return distribution, price gains and returns over time

For an asset's price to double from say $1 to $2 in one year, what must its continuously compounded return ##(r_{CC})## be? If the price now is ##P_0## and the price in one year is ##P_1## then the continuously compounded return over the next year is:

###r_\text{CC annual} = \ln{\left[ \dfrac{P_1}{P_0} \right]} = \text{LGDR}_\text{annual}###

(a) 0%

(b) 30.102999566%

(c) 69.314718056%

(d) 100%

(e) 200%

Question 914  bill pricing, money market, return types

A bank bill was bought for $99,000 and sold for $100,000 thirty (30) days later. There are 365 days in the year. Which of the following formulas gives the simple interest rate per annum over those 30 days?

(a) ##12.28956229\% = \left( \dfrac{100,000}{99,000} - 1 \right) \times (365/30)##

(b) ##13.00694446\% = \left( \dfrac{100,000}{99,000} \right)^{365/30} -1##

(c) ##12.60944895\% = \left( \left( \dfrac{100,000}{99,000} \right)^{(365/2)/30} -1 \right) \times 2##

(d) ##12.2904215\% = \left( \left( \dfrac{100,000}{99,000} \right)^{(365/12)/30} -1 \right) \times 12##

(e) ##12.22790862\% = \ln \left( \dfrac{100,000}{99,000} \right) \times 365/30##

Note: To help you identify which is the correct answer without doing any calculations yourself, the formulas used to calculate the numbers are given.