Fight Finance

Courses  Tags  Random  All  Recent  Scores

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 93  correlation, CAPM, systematic risk

A stock's correlation with the market portfolio increases while its total risk is unchanged. What will happen to the stock's expected return and systematic risk?

Question 195  equivalent annual cash flow

An industrial chicken farmer grows chickens for their meat. Chickens:

  1. Cost $0.50 each to buy as chicks. They are bought on the day they’re born, at t=0.
  2. Grow at a rate of $0.70 worth of meat per chicken per week for the first 6 weeks (t=0 to t=6).
  3. Grow at a rate of $0.40 worth of meat per chicken per week for the next 4 weeks (t=6 to t=10) since they’re older and grow more slowly.
  4. Feed costs are $0.30 per chicken per week for their whole life. Chicken feed is bought and fed to the chickens once per week at the beginning of the week. So the first amount of feed bought for a chicken at t=0 costs $0.30, and so on.
  5. Can be slaughtered (killed for their meat) and sold at no cost at the end of the week. The price received for the chicken is their total value of meat (note that the chicken grows fast then slow, see above).

The required return of the chicken farm is 0.5% given as an effective weekly rate.

Ignore taxes and the fixed costs of the factory. Ignore the chicken’s welfare and other environmental and ethical concerns.

Find the equivalent weekly cash flow of slaughtering a chicken at 6 weeks and at 10 weeks so the farmer can figure out the best time to slaughter his chickens. The choices below are given in the same order, 6 and 10 weeks.

Question 333  DDM, time calculation

When using the dividend discount model, care must be taken to avoid using a nominal dividend growth rate that exceeds the country's nominal GDP growth rate. Otherwise the firm is forecast to take over the country since it grows faster than the average business forever.

Suppose a firm's nominal dividend grows at 10% pa forever, and nominal GDP growth is 5% pa forever. The firm's total dividends are currently $1 billion (t=0). The country's GDP is currently $1,000 billion (t=0).

In approximately how many years will the company's total dividends be as large as the country's GDP?

Question 401  capital budgeting, CFFA

The hardest and most important aspect of business project valuation is the estimation of the:

Question 529  DDM, real and nominal returns and cash flows, inflation, real estate, no explanation

If housing rents are constrained from growing more than the maximum target inflation rate, and houses can be priced as a perpetuity of growing net rental cash flows, then what is the implication for house prices, all things remaining equal? Select the most correct answer.

Background: Since 1990, many central banks across the world have become 'inflation targeters'. They have adopted a policy of trying to keep inflation in a predictable narrow range, with the hope of encouraging long-term lending to fund more investment and maintain higher GDP growth.

Australia's central bank, the Reserve Bank of Australia (RBA), has specifically stated their inflation target range is between 2 and 3% pa.

Some Australian residential property market commentators suggest that because rental costs comprise a large part of the Australian consumer price index (CPI), rent costs across the nation cannot significantly exceed the maximum inflation target range of 3% pa without the prices of other goods growing by less than the target range for long periods, which is unlikely.

Question 710  continuously compounding rate, continuously compounding rate conversion

A continuously compounded monthly return of 1% ##(r_\text{cc monthly})## is equivalent to a continuously compounded annual return ##(r_\text{cc annual})## of:

Question 731  DDM, income and capital returns, no explanation

In the dividend discount model (DDM), share prices fall when dividends are paid. Let the high price before the fall be called the peak, and the low price after the fall be called the trough.


Which of the following statements about the DDM is NOT correct?

Question 776  market efficiency, systematic and idiosyncratic risk, beta, income and capital returns

Which of the following statements about returns is NOT correct? A stock's:

Question 869  economic order quantity

A Queensland farmer grows strawberries in greenhouses and supplies Australian supermarkets all year round. The farmer must decide how often he should contract the truck driver to deliver his strawberries and how many boxes to send on each delivery. The farmer:

  • Sells 100,000 boxes of strawberries per year;
  • Incurs holding costs (refrigeration and spoilage) of $16 per box per year; and
  • Must pay the truck driver delivery fees at $0.20 per box plus a $500 fixed fee per delivery.

Which of the following statements about the Economic Order Quantity is NOT correct?

Copyright © 2014 Keith Woodward