Fight Finance

Question 7  DDM

For a price of $1040, Camille will sell you a share which just paid a dividend of $100, and is expected to pay dividends every year forever, growing at a rate of 5% pa.

So the next dividend will be ##100(1+0.05)^1=$105.00##, and the year after it will be ##100(1+0.05)^2=110.25## and so on.

The required return of the stock is 15% pa.

Would you like to the share or politely ?

Question 109  credit rating, credit risk

Bonds with lower (worse) credit ratings tend to have:

(a) Lower yields to maturity.

(b) Higher probabilities of default.

(c) Lower coupon rates when priced at par.

(d) Lower total risk.

(e) Lower credit risk.

Question 162  income and capital returns

A share was bought for $10 (at t=0) and paid its annual dividend of $0.50 one year later (at t=1). Just after the dividend was paid, the share price was $11 (at t=1).

What was the total return, capital return and income return? Calculate your answers as effective annual rates. The choices are given in the same order:

##r_\text{total}##, ##r_\text{capital}##, ##r_\text{dividend}##.

(a) -0.15, -0.1, -0.05.

(b) 0.05, 0.15, 0.1.

(c) 0.1, 0.05, 0.05.

(d) 0.15, 0.05, 0.1.

(e) 0.15, 0.1, 0.05.

Question 222  fully amortising loan, APR

You just agreed to a 30 year fully amortising mortgage loan with monthly payments of $2,500. The interest rate is 9% pa which is not expected to change.

How much did you borrow? After 10 years, how much will be owing on the mortgage? The interest rate is still 9% and is not expected to change. The below choices are given in the same order.

(a) $320,725.47,     $284,977.19

(b) $310,704.66,     $277,862.39

(c) $310,704.66,     $197,354.23

(d) $308,209.62,     $273,856.37

(e) $308,209.62,     $192,529.73

Question 371  interest tax shield, CFFA

One method for calculating a firm's free cash flow (FFCF, or CFFA) is to ignore interest expense. That is, pretend that interest expense ##(IntExp)## is zero:

###\begin{aligned} FFCF &= (Rev - COGS - Depr - FC - IntExp)(1-t_c) + Depr - CapEx -\Delta NWC + IntExp \\ &= (Rev - COGS - Depr - FC - 0)(1-t_c) + Depr - CapEx -\Delta NWC - 0\\ \end{aligned}###

Does this annual FFCF with zero interest expense or the annual interest tax shield?

Question 428  takeover

In a takeover deal where the offer is 100% scrip (shares), the merged firm's number of shares will be equal to the acquirer firm's original number of shares. or ?

Question 541  debt terminology

Which of the following statements is NOT correct? Bond investors:

(a) Buy debt.

(b) Are debtors.

(c) Have debt assets.

(d) Provide debt funding.

(e) Are lenders.

Question 542  price gains and returns over time, IRR, NPV, income and capital returns, effective return

For an asset price to double every 10 years, what must be the expected future capital return, given as an effective annual rate?

(a) 0.2

(b) 0.116123

(c) 0.082037

(d) 0.071773

(e) 0.06054

Question 586  option

Which one of the following statements about option contracts is NOT correct?

(a) Option premium is another name for option price.

(b) An option contract's price is always changing.

(c) Strike price is another name for exercise price.

(d) An option contract's strike price is always changing.

(e) Call and put option premiums are paid at the start when the option is bought. Call option exercise prices are paid when they are exercised, usually at maturity.

Question 605  cross currency interest rate parity, foreign exchange rate

If the Reserve Bank of Australia is expected to keep its interbank overnight cash rate at 2% pa while the US Federal Reserve is expected to keep its federal funds rate at 0% pa over the next year, is the AUD is expected to , , or remain against the USD over the next year?