Government bonds currently have a return of 5% pa. A stock has an expected return of 6% pa and the market return is 7% pa. What is the beta of the stock?
A student won $1m in a lottery. Currently the money is in a bank account which pays interest at 6% pa, given as an APR compounding per month.
She plans to spend $20,000 at the beginning of every month from now on (so the first withdrawal will be at t=0). After each withdrawal, she will check how much money is left in the account. When there is less than $500,000 left, she will donate that remaining amount to charity.
In how many months will she make her last withdrawal and donate the remainder to charity?
A 10 year Australian government bond was just issued at par with a yield of 3.9% pa. The fixed coupon payments are semi-annual. The bond has a face value of $1,000.
Six months later, just after the first coupon is paid, the yield of the bond decreases to 3.65% pa. What is the bond's new price?
Find the cash flow from assets (CFFA) of the following project.
|Project life||2 years|
|Initial investment in equipment||$8m|
|Depreciation of equipment per year for tax purposes||$3m|
|Unit sales per year||10m|
|Sale price per unit||$9|
|Variable cost per unit||$4|
|Fixed costs per year, paid at the end of each year||$2m|
Note 1: Due to the project, the firm will have to purchase $40m of inventory initially (at t=0). Half of this inventory will be sold at t=1 and the other half at t=2.
Note 2: The equipment will have a book value of $2m at the end of the project for tax purposes. However, the equipment is expected to fetch $1m when it is sold. Assume that the full capital loss is tax-deductible and taxed at the full corporate tax rate.
Note 3: The project will be fully funded by equity which investors will expect to pay dividends totaling $10m at the end of each year.
Find the project's CFFA at time zero, one and two. Answers are given in millions of dollars ($m).
A firm wishes to raise $50 million now. They will issue 7% pa semi-annual coupon bonds that will mature in 6 years and have a face value of $100 each. Bond yields are 5% pa, given as an APR compounding every 6 months, and the yield curve is flat.
How many bonds should the firm issue?
A firm wishes to raise $30 million now. The firm's current market value of equity is $60m and the market price per share is $20. They estimate that they'll be able to issue shares in a rights issue at a subscription price of $15. Ignore the time value of money and assume that all shareholders exercise their rights. Which of the following statements is NOT correct?
Which of the following statements about an option (either a call or put) and its underlying stock is NOT correct?
|European Call Option|
|on a non-dividend paying stock|
|Spot price ($)||##S_0##||20|
|Strike price ($)||##K_T##||18|
|Risk free cont. comp. rate (pa)||##r##||0.05|
|Standard deviation of the stock's cont. comp. returns (pa)||##\sigma##||0.3|
|Option maturity (years)||##T##||1|
|Call option price ($)||##c_0##||3.939488|
|Delta||##\Delta = N[d_1]##||0.747891|
|Theta ($/year)||##\Theta = \partial c / \partial T##||-1.566433|
A one year European-style put option has a strike price of $4.
The option's underlying stock currently trades at $5, pays no dividends and its standard deviation of continuously compounded returns is 47% pa.
The risk-free interest rate is 10% pa continuously compounded.
Use the Black-Scholes-Merton formula to calculate the option price. The put option price now is: