For a price of $10.20 each, Renee will sell you 100 shares. Each share is expected to pay dividends in perpetuity, growing at a rate of 5% pa. The next dividend is one year away (t=1) and is expected to be $1 per share.

The required return of the stock is 15% pa.

The security market line (SML) shows the relationship between beta and expected return.

Investment projects that plot **above** the SML would have:

A project has the following cash flows:

Project Cash Flows | |

Time (yrs) | Cash flow ($) |

0 | -400 |

1 | 200 |

2 | 250 |

What is the Profitability Index (PI) of the project? Assume that the cash flows shown in the table are paid all at once at the given point in time. The required return is **10**% pa, given as an effective annual rate.

**Question 413** CFFA, interest tax shield, depreciation tax shield

There are many ways to calculate a firm's free cash flow (FFCF), also called cash flow from assets (CFFA).

One method is to use the following formulas to transform net income (NI) into FFCF including interest and depreciation tax shields:

###FFCF=NI + Depr - CapEx -ΔNWC + IntExp###

###NI=(Rev - COGS - Depr - FC - IntExp).(1-t_c )###

Another popular method is to use EBITDA rather than net income. EBITDA is defined as:

###EBITDA=Rev - COGS - FC###

One of the below formulas correctly calculates FFCF from EBITDA, including interest and depreciation tax shields, giving an identical answer to that above. Which formula is correct?

An investor bought a **10** year **2.5**% pa fixed coupon government bond priced at **par**. The face value is $**100**. Coupons are paid **semi-annually** and the next one is in 6 months.

**Six months later**, just **after** the coupon at that time was paid, yields suddenly and unexpectedly fell to **2**% pa. Note that all yields above are given as APR's compounding semi-annually.

What was the bond investors' historical total return over that first 6 month period, given as an effective semi-annual rate?

**Question 575** inflation, real and nominal returns and cash flows

You expect a **nominal** payment of $100 in 5 years. The **real** discount rate is 10% pa and the inflation rate is 3% pa. Which of the following statements is **NOT** correct?

A **4.5**% fixed coupon Australian Government bond was issued at **par** in mid-**April 2009**. Coupons are paid **semi-annually** in arrears in mid-April and mid-October each year. The face value is $**1,000**. The bond will mature in mid-**April 2020**, so the bond had an original tenor of **11** years.

Today is mid-**September 2015** and similar bonds now yield **1.9**% pa.

What is the bond's new price? Note: there are 10 semi-annual coupon payments remaining from now (mid-September 2015) until maturity (mid-April 2020); both yields are given as APR's compounding semi-annually; assume that the yield curve was flat before the change in yields, and remained flat afterwards as well.

You **bought** a **1.5** year (18 month) futures contract on oil. Oil storage costs are **4**% pa continuously compounded and oil pays no dividends. The futures contract is entered into when the oil price is $**40** per barrel and the risk-free rate of interest is **10**% per annum with continuous compounding.

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