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.

**Question 119** market efficiency, fundamental analysis, joint hypothesis problem

Your friend claims that by reading 'The Economist' magazine's economic news articles, she can identify shares that will have positive abnormal expected returns over the next 2 years. Assuming that her claim is true, which statement(s) are correct?

(i) Weak form market efficiency is broken.

(ii) Semi-strong form market efficiency is broken.

(iii) Strong form market efficiency is broken.

(iv) The asset pricing model used to measure the abnormal returns (such as the CAPM) is either wrong (mis-specification error) or is measured using the wrong inputs (data errors) so the returns may not be abnormal but rather fair for the level of risk.

Select the most correct response:

The following cash flows are expected:

- 10 yearly payments of $60, with the first payment in 3 years from now (first payment at t=3 and last at t=12).
- 1 payment of $400 in 5 years and 6 months (t=5.5) from now.

What is the NPV of the cash flows if the discount rate is 10% given as an effective annual rate?

**Question 213** income and capital returns, bond pricing, premium par and discount bonds

The coupon rate of a fixed annual-coupon bond is constant (always the same).

What can you say about the income return (##r_\text{income}##) of a fixed annual coupon bond? Remember that:

###r_\text{total} = r_\text{income} + r_\text{capital}###

###r_\text{total, 0 to 1} = \frac{c_1}{p_0} + \frac{p_1-p_0}{p_0}###

Assume that there is no change in the bond's total annual yield to maturity from when it is issued to when it matures.

Select the most correct statement.

From its date of issue until maturity, the **income return** of a fixed annual coupon:

A firm is considering a business project which costs $**11**m now and is expected to pay a constant $**1**m at the end of every year forever.

Assume that the initial $**11**m cost is funded using the firm's **existing cash** so no new equity or debt will be raised. The cost of capital is **10**% pa.

Which of the following statements about net present value (NPV), internal rate of return (IRR) and payback period is **NOT** correct?

A $**100** stock has a continuously compounded expected **total** return of **10**% pa. Its **dividend** yield is **2**% pa with continuous compounding. What do you expect its price to be in **2.5** years?

A stock has a beta of **1.5**. The market's expected total return is **10**% pa and the risk free rate is **5**% pa, both given as effective annual rates.

What do you think will be the stock's expected return over the next year, given as an effective annual rate?

**Question 738** financial statement, balance sheet, income statement

Where can a private firm's market value of equity be found? It can be sourced from the company's:

**Question 904** option, Black-Scholes-Merton option pricing, option on future on stock index

A **six** month European-style **call** option on six month S&P500 index **futures** has a strike price of **2800** points.

The six month **futures** price on the S&P500 index is currently at **2740.805274** points. The futures underlie the call option.

The S&P500 stock index currently trades at **2700** points. The stock index underlies the futures. The stock index's standard deviation of continuously compounded returns is **25**% pa.

The risk-free interest rate is **5**% pa continuously compounded.

Use the Black-Scholes-Merton formula to calculate the option price. The call option price now is:

Examine the below graph.

Which of the below statements is **NOT** correct?