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.
Stock A and B's returns have a correlation of 0.3. Which statement is NOT correct?
A person is thinking about borrowing $100 from the bank at 7% pa and investing it in shares with an expected return of 10% pa. One year later the person intends to sell the shares and pay back the loan in full. Both the loan and the shares are fairly priced.
What is the Net Present Value (NPV) of this one year investment? Note that you are asked to find the present value (##V_0##), not the value in one year (##V_1##).
Suppose that the US government recently announced that subsidies for fresh milk producers will be gradually phased out over the next year. Newspapers say that there are expectations of a 40% increase in the spot price of fresh milk over the next year.
Option prices on fresh milk trading on the Chicago Mercantile Exchange (CME) reflect expectations of this 40% increase in spot prices over the next year. Similarly to the rest of the market, you believe that prices will rise by 40% over the next year.
What option trades are likely to be profitable, or to be more specific, result in a positive Net Present Value (NPV)?
Assume that:
- Only the spot price is expected to increase and there is no change in expected volatility or other variables that affect option prices.
- No taxes, transaction costs, information asymmetry, bid-ask spreads or other market frictions.
When using the dividend discount model, care must be taken to avoid using a nominal dividend growth rate that exceeds the country's nominal GDP growth rate. Otherwise the firm is forecast to take over the country since it grows faster than the average business forever.
Suppose a firm's nominal dividend grows at 10% pa forever, and nominal GDP growth is 5% pa forever. The firm's total dividends are currently $1 billion (t=0). The country's GDP is currently $1,000 billion (t=0).
In approximately how many years will the company's total dividends be as large as the country's GDP?
Find Ching-A-Lings Corporation's Cash Flow From Assets (CFFA), also known as Free Cash Flow to the Firm (FCFF), over the year ending 30th June 2013.
| Ching-A-Lings Corp | ||
| Income Statement for | ||
| year ending 30th June 2013 | ||
| $m | ||
| Sales | 100 | |
| COGS | 20 | |
| Depreciation | 20 | |
| Rent expense | 11 | |
| Interest expense | 19 | |
| Taxable Income | 30 | |
| Taxes at 30% | 9 | |
| Net income | 21 | |
| Ching-A-Lings Corp | ||
| Balance Sheet | ||
| as at 30th June | 2013 | 2012 |
| $m | $m | |
| Inventory | 49 | 38 |
| Trade debtors | 14 | 2 |
| Rent paid in advance | 5 | 5 |
| PPE | 400 | 400 |
| Total assets | 468 | 445 |
| Trade creditors | 4 | 10 |
| Bond liabilities | 200 | 190 |
| Contributed equity | 145 | 145 |
| Retained profits | 119 | 100 |
| Total L and OE | 468 | 445 |
Note: All figures are given in millions of dollars ($m).
The cash flow from assets was:
Question 452 limited liability, expected and historical returns
What is the lowest and highest expected share price and expected return from owning shares in a company over a finite period of time?
Let the current share price be ##p_0##, the expected future share price be ##p_1##, the expected future dividend be ##d_1## and the expected return be ##r##. Define the expected return as:
##r=\dfrac{p_1-p_0+d_1}{p_0} ##
The answer choices are stated using inequalities. As an example, the first answer choice "(a) ##0≤p<∞## and ##0≤r< 1##", states that the share price must be larger than or equal to zero and less than positive infinity, and that the return must be larger than or equal to zero and less than one.
The perpetuity with growth equation is:
###P_0=\dfrac{C_1}{r-g}###
Which of the following is NOT equal to the expected capital return as an effective annual rate?
A non-dividend paying stock has a current price of $20.
The risk free rate is 5% pa given as a continuously compounded rate.
A 2 year futures contract on the stock has a futures price of $24.
You suspect that the futures contract is mis-priced and would like to conduct a risk-free arbitrage that requires zero capital. Which of the following steps about arbitraging the situation is NOT correct?