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Question 73  portfolio risk, standard deviation

Portfolio Details
Stock Expected
Covariance ##(\sigma_{A,B})## Beta Dollars
A 0.2 0.4 0.12 0.5 40
B 0.3 0.8 1.5 80

What is the standard deviation (not variance) of the above portfolio? Note that the stocks' covariance is given, not correlation.

Question 143  bond pricing, zero coupon bond, term structure of interest rates, forward interest rate

An Australian company just issued two bonds:

  • A 6-month zero coupon bond at a yield of 6% pa, and
  • A 12 month zero coupon bond at a yield of 7% pa.

What is the company's forward rate from 6 to 12 months? Give your answer as an APR compounding every 6 months, which is how the above bond yields are quoted.

Question 250  NPV, Loan, arbitrage table

Your neighbour asks you for a loan of $100 and offers to pay you back $120 in one year.

You don't actually have any money right now, but you can borrow and lend from the bank at a rate of 10% pa. Rates are given as effective annual rates.

Assume that your neighbour will definitely pay you back. Ignore interest tax shields and transaction costs.

The Net Present Value (NPV) of lending to your neighbour is $9.09. Describe what you would do to actually receive a $9.09 cash flow right now with zero net cash flows in the future.

Question 287  bond pricing

A 30 year Japanese government bond was just issued at par with a yield of 1.7% pa. The fixed coupon payments are semi-annual. The bond has a face value of $100.

Six months later, just after the first coupon is paid, the yield of the bond increases to 2% pa. What is the bond's new price?

Question 395  real option, option

The cheapest mobile phones available tend to be those that are 'locked' into a cell phone operator's network. Locked phones can not be used with other cell phone operators' networks.

Locked mobile phones are cheaper than unlocked phones because the locked-in network operator helps create a monopoly by:

Question 420  takeover

Acquirer firm plans to launch a takeover of Target firm. The deal is expected to create a present value of synergies totaling $105 million. A cash offer will be made that pays the fair price for the target's shares plus 75% of the total synergy value. The cash will be paid out of the firm's cash holdings, no new debt or equity will be raised.

Firms Involved in the Takeover
Acquirer Target
Assets ($m) 6,000 700
Debt ($m) 4,800 400
Share price ($) 40 20
Number of shares (m) 30 15

Ignore transaction costs and fees. Assume that the firms' debt and equity are fairly priced, and that each firms' debts' risk, yield and values remain constant. The acquisition is planned to occur immediately, so ignore the time value of money.

Calculate the merged firm's share price and total number of shares after the takeover has been completed.

Question 450  CAPM, risk, portfolio risk, no explanation

The accounting identity states that the book value of a company's assets (A) equals its liabilities (L) plus owners equity (OE), so A = L + OE.

The finance version states that the market value of a company's assets (V) equals the market value of its debt (D) plus equity (E), so V = D + E.

Therefore a business's assets can be seen as a portfolio of the debt and equity that fund the assets.

Let ##\sigma_\text{V total}^2## be the total variance of returns on assets, ##\sigma_\text{V syst}^2## be the systematic variance of returns on assets, and ##\sigma_\text{V idio}^2## be the idiosyncratic variance of returns on assets, and ##\rho_\text{D idio, E idio}## be the correlation between the idiosyncratic returns on debt and equity.

Which of the following equations is NOT correct?

Question 666  rights issue, capital raising

A company conducts a 2 for 3 rights issue at a subscription price of $8 when the pre-announcement stock price was $9. Assume that all investors use their rights to buy those extra shares.

What is the percentage increase in the stock price and the number of shares outstanding? The answers are given in the same order.

Question 753  NPV, perpetuity, DDM, no explanation

The following cash flows are expected:

  • A perpetuity of yearly payments of $30, with the first payment in 5 years (first payment at t=5, which continues every year after that forever).
  • One payment of $100 in 6 years and 3 months (t=6.25).

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

Question 869  economic order quantity

A Queensland farmer grows strawberries in greenhouses and supplies Australian supermarkets all year round. The farmer must decide how often he should contract the truck driver to deliver his strawberries and how many boxes to send on each delivery. The farmer:

  • Sells 100,000 boxes of strawberries per year;
  • Incurs holding costs (refrigeration and spoilage) of $16 per box per year; and
  • Must pay the truck driver delivery fees at $0.20 per box plus a $500 fixed fee per delivery.

Which of the following statements about the Economic Order Quantity is NOT correct?