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Question 69 interest tax shield, capital structure, leverage, WACC

Which statement about risk, required return and capital structure is the most correct?

(a) The before-tax cost of debt is less than the before-tax cost of equity. Therefore debt is a cheaper form of financing than equity so companies should try to finance their projects with debt only.

(b) Debt makes a firm's equity more risky. Therefore the higher the amount of debt, the higher the cost of equity.

(c) The more debt a firm has, the higher its tax shields. Therefore firms should seek to have as much debt and as little equity as possible.

(d) The more debt, the lower the firm's after tax WACC. The after tax WACC is the discount rate that discounts the firm's cash flows, so the lower it is the more the firm is worth. Therefore firms should try to make their after tax WACC as low as possible by using as much debt as possible.

(e) The less debt, the lower the chance of bankruptcy. Therefore firms should try to pay off all of their debt so that they are financed by equity only.

Question 85 WACC, CAPM

A company has:

140 million shares outstanding.
The market price of one share is currently $2.
The company's debentures are publicly traded and their market price is equal to 93% of the face value.
The debentures have a total face value of $50,000,000 and the current yield to maturity of corporate debentures is 12% per annum.
The risk-free rate is 8.50% and the market return is 13.7%.
Market analysts estimated that the company's stock has a beta of 0.90.
The corporate tax rate is 30%.

What is the company's after-tax weighted average cost of capital (WACC) in a classical tax system?

Question 201 DDM, income and capital returns

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

###P_0=\dfrac{C_1}{r-g}###

If the assumptions of the DDM hold and the stock is fairly priced, which one of the following statements is NOT correct? The long term expected:

Question 328 bond pricing, APR

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?

Question 338 market efficiency, CAPM, opportunity cost, technical analysis

A man inherits $500,000 worth of shares.

He believes that by learning the secrets of trading, keeping up with the financial news and doing complex trend analysis with charts that he can quit his job and become a self-employed day trader in the equities markets.

What is the expected gain from doing this over the first year? Measure the net gain in wealth received at the end of this first year due to the decision to become a day trader. Assume the following:

He earns $60,000 pa in his current job, paid in a lump sum at the end of each year.
He enjoys examining share price graphs and day trading just as much as he enjoys his current job.
Stock markets are weak form and semi-strong form efficient.
He has no inside information.
He makes 1 trade every day and there are 250 trading days in the year. Trading costs are $20 per trade. His broker invoices him for the trading costs at the end of the year.
The shares that he currently owns and the shares that he intends to trade have the same level of systematic risk as the market portfolio.
The market portfolio's expected return is 10% pa.

Measure the net gain over the first year as an expected wealth increase at the end of the year.

Question 444 investment decision, corporate financial decision theory

The investment decision primarily affects which part of a business?

Question 811 log-normal distribution, mean and median returns, return distribution, arithmetic and geometric averages

Which of the following statements about probability distributions is NOT correct?

Question 846 monetary policy, fiscal policy

Below is the Australian central bank’s cash rate.

From 2011 to 2017 the Australian central bank has implemented:

Question 932 confidence interval, normal distribution

A stock's returns are normally distributed with a mean of 10% pa and a standard deviation of 20 percentage points pa. What is the 95% confidence interval of returns over the next year? Note that the Z-statistic corresponding to a one-tail:

90% normal probability density function is 1.282.
95% normal probability density function is 1.645.
97.5% normal probability density function is 1.960.

The 95% confidence interval of annual returns is between:

Question 934 standard deviation, risk

Which of the following statements about an asset’s standard deviation of returns is NOT correct? All other things remaining equal, the higher the asset’s standard deviation of returns: