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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.

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:

Question 158 DDM, income and capital returns

The following equation is the Dividend Discount Model, also known as the 'Gordon Growth Model' or the 'Perpetuity with growth' equation.

###p_0=\frac{d_1}{r_\text{eff}-g_\text{eff}}###

Which expression is NOT equal to the expected capital return?

Question 225 CFFA

A firm has forecast its Cash Flow From Assets (CFFA) for this year and management is worried that it is too low. Which one of the following actions will lead to a higher CFFA for this year (t=0 to 1)? Only consider cash flows this year. Do not consider cash flows after one year, or the change in the NPV of the firm. Consider each action in isolation.

(a) Buy less land, buildings and trucks than what was planned. Assume that this has no impact on revenue.

(b) Pay off more debt than was planned, to reduce the firm’s interest expense.

(c) Change the depreciation method used for tax purposes from diminishing value to straight line, so less depreciation occurs this year and more occurs in later years. Assume that the government’s tax department allow this.

(d) Buying more inventory than was planned, so there is an increase in net working capital. Assume that there is no increase in sales.

(e) Raising new equity through a rights issue. Assume that all of the money raised is spent on new capital assets such as land and trucks, but they will be fitted out and delivered in one year so no new cash will be earned from them.

Question 233 bond pricing

A four year bond has a face value of $100, a yield of 9% and a fixed coupon rate of 6%, paid semi-annually. What is its price?

Question 402 PE ratio, no explanation

Which of the following companies is most suitable for valuation using PE multiples techniques?

Question 581 APR, effective rate, effective rate conversion

A home loan company advertises an interest rate of 6% pa, payable monthly. Which of the following statements about the interest rate is NOT correct? All rates are given to four decimal places.

Question 612 debt terminology

Question 718 arithmetic and geometric averages

The symbol ##\text{GDR}_{0\rightarrow 1}## represents a stock's gross discrete return per annum over the first year. ##\text{GDR}_{0\rightarrow 1} = P_1/P_0##. The subscript indicates the time period that the return is mentioned over. So for example, ##\text{AAGDR}_{1 \rightarrow 3}## is the arithmetic average GDR measured over the two year period from years 1 to 3, but it is expressed as a per annum rate.

Which of the below statements about the arithmetic and geometric average GDR is NOT correct?

(a) Arithmetic average gross discrete return is ##\text{AAGDR}_{0\rightarrow T} = \dfrac{\text{GDR}_{0 \rightarrow 1}+\text{GDR}_{1\rightarrow 2}+...+\text{GDR}_{T-1 \rightarrow T}}{T}##

(b) Geometric average gross discrete return is ##\text{GAGDR}_{0\rightarrow T} = \dfrac{\text{GDR}_{0 \rightarrow 1} . \text{GDR}_{1\rightarrow 2} ... \text{GDR}_{T-1 \rightarrow T}}{T}##

(c) The geometric average gross discrete return can be quickly found using the first ##(P_0)## and last ##(P_T)## prices. ##\text{GAGDR}_{0\rightarrow T} = \left( \dfrac{P_T}{P_0} \right)^{1/T}##

(d) The arithmetic average is always bigger than or equal to the geometric average, ##\text{AAGDR} \ge \text{GAGDR}##.

(e) The arithmetic and geometric averages of returns will be equal if the variance of the stock's returns is zero.

Question 882 Asian currency crisis, foreign exchange rate, original sin, no explanation

In the 1997 Asian currency crisis, the businesses most vulnerable to bankruptcy were those that: