Question 64 inflation, real and nominal returns and cash flows, APR, effective rate
In Germany, nominal yields on semi-annual coupon paying Government Bonds with 2 years until maturity are currently 0.04% pa.
The inflation rate is currently 1.4% pa, given as an APR compounding per quarter. The inflation rate is not expected to change over the next 2 years.
What is the real yield on these bonds, given as an APR compounding every 6 months?
A share pays annual dividends. It just paid a dividend of $2. The growth rate in the dividend is 3% pa. You estimate that the stock's required return is 8% pa. Both the discount rate and growth rate are given as effective annual rates.
Using the dividend discount model, what is the share price?
Which one of the following will increase the Cash Flow From Assets in this year for a tax-paying firm, all else remaining constant?
Which one of the following will have no effect on net income (NI) but decrease cash flow from assets (CFFA or FFCF) in this year for a tax-paying firm, all else remaining constant?
Remember:
###NI=(Rev-COGS-FC-Depr-IntExp).(1-t_c )### ###CFFA=NI+Depr-CapEx - ΔNWC+IntExp###Question 363 income and capital returns, inflation, real and nominal returns and cash flows, real estate
A residential investment property has an expected nominal total return of 8% pa and nominal capital return of 3% pa.
Inflation is expected to be 2% pa. All rates are given as effective annual rates.
What are the property's expected real total, capital and income returns? The answer choices below are given in the same order.
Question 397 financial distress, leverage, capital structure, NPV
A levered firm has a market value of assets of $10m. Its debt is all comprised of zero-coupon bonds which mature in one year and have a combined face value of $9.9m.
Investors are risk-neutral and therefore all debt and equity holders demand the same required return of 10% pa.
Therefore the current market capitalisation of debt ##(D_0)## is $9m and equity ##(E_0)## is $1m.
A new project presents itself which requires an investment of $2m and will provide a:
- $6.6m cash flow with probability 0.5 in the good state of the world, and a
- -$4.4m (notice the negative sign) cash flow with probability 0.5 in the bad state of the world.
The project can be funded using the company's excess cash, no debt or equity raisings are required.
What would be the new market capitalisation of equity ##(E_\text{0, with project})## if shareholders vote to proceed with the project, and therefore should shareholders proceed with the project?
You have $100,000 in the bank. The bank pays interest at 10% pa, given as an effective annual rate.
You wish to consume twice as much now (t=0) as in one year (t=1) and have nothing left in the bank at the end.
How much can you consume at time zero and one? The answer choices are given in the same order.
An equity index stands at 100 points and the one year equity futures price is 102.
The equity index is expected to have a dividend yield of 4% pa. Assume that investors are risk-neutral so their total required return on the shares is the same as the risk free Treasury bond yield which is 10% pa. Both are given as discrete effective annual rates.
Assuming that the equity index is fairly priced, an arbitrageur would recognise that the equity futures are:
Telsa Motors advertises that its Model S electric car saves $570 per month in fuel costs. Assume that Tesla cars last for 10 years, fuel and electricity costs remain the same, and savings are made at the end of each month with the first saving of $570 in one month from now.
The effective annual interest rate is 15.8%, and the effective monthly interest rate is 1.23%. What is the present value of the savings?
Question 915 price gains and returns over time, IRR, NPV, income and capital returns, effective return
For a share price to double over 7 years, what must its capital return be as an effective annual rate?