Fight Finance

Question 70  payout policy

Due to floods overseas, there is a cut in the supply of the mineral iron ore and its price increases dramatically. An Australian iron ore mining company therefore expects a large but temporary increase in its profit and cash flows. The mining company does not have any positive NPV projects to begin, so what should it do? Select the most correct answer.

(a) Pay out the excess cash by increasing the regular dividend, and cutting it later.

(b) Pay out a special dividend.

(c) Conduct an on or off-market share repurchase.

(d) Conduct a share dividend (also called a 'bonus issue').

(e) Either b or c.

Question 139  implicit interest rate in wholesale credit

A wholesale shop offers credit to its customers. The customers are given 21 days to pay for their goods. But if they pay straight away (now) they get a 1% discount.

What is the effective interest rate given to customers who pay in 21 days? All rates given below are effective annual rates. Assume 365 days in a year.

(a) 0.0005

(b) 0.0006

(c) 0.1603

(d) 0.1738

(e) 0.1909

Question 161  DDM

A share just paid its semi-annual dividend of $10. The dividend is expected to grow at 2% every 6 months forever. This 2% growth rate is an effective 6 month rate. Therefore the next dividend will be $10.20 in six months. The required return of the stock 10% pa, given as an effective annual rate.

What is the price of the share now?

(a) $127.50

(b) $171.14

(c) $173.33

(d) $174.56

(e) $354.06

Question 193  bond pricing, premium par and discount bonds

Which one of the following bonds is trading at par?

(a) a ten-year bond with a $4000 face value whose yield to maturity is 6.0% and coupon rate is 6.5% paid semi-annually.

(b) a 6-year bond with a principal of $40,000 and a price of $45,000.

(c) a 15-year bond with a $10,000 face value whose yield to maturity is 8.0% and coupon rate is 10.0% paid semi-annually.

(d) a two-year bond with a $50,000 face value whose yield to maturity is 5.2% compounding semi-annually which has a price of $50,000.

(e) None of the above bonds are trading at par.

Question 296  CFFA, interest tax shield

Which one of the following will decrease net income (NI) but increase cash flow from assets (CFFA) in this year for a tax-paying firm, all else remaining constant?

Remember:

###NI=(Rev-COGS-FC-Depr-IntExp).(1-t_c )### ###CFFA=NI+Depr-CapEx - ΔNWC+IntExp###

(a) An increase in revenue (##Rev##).

(b) An decrease in revenue (##Rev##).

(c) An increase in rent expense (part of fixed costs, ##FC##).

(d) An increase in interest expense (##IntExp##).

(e) An increase in dividends.

Question 543  price gains and returns over time, IRR, NPV, income and capital returns, effective return

For an asset price to triple every 5 years, what must be the expected future capital return, given as an effective annual rate?

(a) 0.6

(b) 0.319508

(c) 0.269705

(d) 0.245731

(e) 0.219755

Question 591  short selling, future, option

After doing extensive fundamental analysis of a company, you believe that their shares are overpriced and will soon fall significantly. The market believes that there will be no such fall.

Which of the following strategies is NOT a good idea, assuming that your prediction is true?

(a) Sell any of the firm's shares that you already own.

(b) Short-sell the firm's shares.

(c) Sell futures written on the shares.

(d) Buy put options written on the shares.

(e) Buy call options written on the shares.

Question 634  continuously compounding rate

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 one year?

(a) $112.749685

(b) $110.517092

(c) $110

(d) $108.328707

(e) $108

Question 673  CAPM, beta, expected and historical returns

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.

In the last 5 minutes, bad economic news was released showing a higher chance of recession. Over this time the share market fell by 1%. The risk free rate was unchanged.

What do you think was the stock's historical return over the last 5 minutes, given as an effective 5 minute rate?

(a) -12.5%

(b) -4%

(c) -1.5%

(d) -1%

(e) 12.5%

Question 807  market efficiency, expected and historical returns, CAPM, beta, systematic risk, no explanation

You work in Asia and just woke up. It looked like a nice day but then you read the news and found out that last night the American share market fell by 10% while you were asleep due to surprisingly poor macro-economic world news. You own a portfolio of liquid stocks listed in Asia with a beta of 1.6. When the Asian equity markets open, what do you expect to happen to your share portfolio? Assume that the capital asset pricing model (CAPM) is correct and that the market portfolio contains all shares in the world, of which American shares are a big part. Your portfolio beta is measured against this world market portfolio.

When the Asian equity market opens for trade, you would expect your portfolio value to:

(a) Remain unchanged.

(b) Instantaneously fall by 10%.

(c) Slowly fall by 10% over the day.

(d) Instantaneously fall by 16%.

(e) Slowly fall by 16% over the day.