Question 69 interest tax shield, capital structure, leverage, WACC
Which statement about risk, required return and capital structure is the most correct?
A company issues a large amount of bonds to raise money for new projects of similar risk to the company's existing projects. The net present value (NPV) of the new projects is positive but small. Assume a classical tax system. Which statement is NOT correct?
A bond maturing in 10 years has a coupon rate of 4% pa, paid semi-annually. The bond's yield is currently 6% pa. The face value of the bond is $100. What is its price?
A share was bought for $30 (at t=0) and paid its annual dividend of $6 one year later (at t=1).
Just after the dividend was paid, the share price fell to $27 (at t=1). What were the total, capital and income returns given as effective annual rates?
The choices are given in the same order:
##r_\text{total}## , ##r_\text{capital}## , ##r_\text{dividend}##.
A five year bond has a face value of $100, a yield of 12% and a fixed coupon rate of 6%, paid semi-annually.
What is the bond's price?
A European company just issued two bonds, a
- 3 year zero coupon bond at a yield of 6% pa, and a
- 4 year zero coupon bond at a yield of 6.5% pa.
What is the company's forward rate over the fourth year (from t=3 to t=4)? Give your answer as an effective annual rate, which is how the above bond yields are quoted.
You own an apartment which you rent out as an investment property.
What is the price of the apartment using discounted cash flow (DCF, same as NPV) valuation?
Assume that:
- You just signed a contract to rent the apartment out to a tenant for the next 12 months at $2,000 per month, payable in advance (at the start of the month, t=0). The tenant is just about to pay you the first $2,000 payment.
- The contract states that monthly rental payments are fixed for 12 months. After the contract ends, you plan to sign another contract but with rental payment increases of 3%. You intend to do this every year.
So rental payments will increase at the start of the 13th month (t=12) to be $2,060 (=2,000(1+0.03)), and then they will be constant for the next 12 months.
Rental payments will increase again at the start of the 25th month (t=24) to be $2,121.80 (=2,000(1+0.03)2), and then they will be constant for the next 12 months until the next year, and so on. - The required return of the apartment is 8.732% pa, given as an effective annual rate.
- Ignore all taxes, maintenance, real estate agent, council and strata fees, periods of vacancy and other costs. Assume that the apartment will last forever and so will the rental payments.
A 30-day Bank Accepted Bill has a face value of $1,000,000. The interest rate is 2.5% pa and there are 365 days in the year. What is its price now?
Question 572 bond pricing, zero coupon bond, term structure of interest rates, expectations hypothesis, forward interest rate, yield curve
In the below term structure of interest rates equation, all rates are effective annual yields and the numbers in subscript represent the years that the yields are measured over:
###(1+r_{0-3})^3 = (1+r_{0-1})(1+r_{1-2})(1+r_{2-3}) ###
Which of the following statements is NOT correct?
Question 877 arithmetic and geometric averages, utility, utility function
Gross discrete returns in different states of the world are presented in the table below. A gross discrete return is defined as ##P_1/P_0##, where ##P_0## is the price now and ##P_1## is the expected price in the future. An investor can purchase only a single asset, A, B, C or D. Assume that a portfolio of assets is not possible.
| Gross Discrete Returns | ||
| In Different States of the World | ||
| Investment | World states (probability) | |
| asset | Good (50%) | Bad (50%) |
| A | 2 | 0.5 |
| B | 1.1 | 0.9 |
| C | 1.1 | 0.95 |
| D | 1.01 | 1.01 |
Which of the following statements about the different assets is NOT correct? Asset: