Fight Finance

Question 8  DDM

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.

Would you like to the shares or politely ?

Question 41  DDM, income and capital returns

The following is the Dividend Discount Model (DDM) used to price stocks:

### P_0 = \frac{d_1}{r-g} ###

Assume that the assumptions of the DDM hold and that the time period is measured in years.

Which of the following is equal to the expected dividend in 3 years, ## d_3 ##?

(a) ## d_1(1+g)^3 ##

(b) ## P_3(r-g) ##

(c) ## d_2(1+g)^2 ##

(d) ## P_0(1+g)^3(r-g) ##

(e) ## P_0(1+g)^2(r-g) ##

Question 43  pay back period

A project to build a toll road will take 3 years to complete, costing three payments of $50 million, paid at the start of each year (at times 0, 1, and 2).

After completion, the toll road will yield a constant $10 million at the end of each year forever with no costs. So the first payment will be at t=4.

The required return of the project is 10% pa given as an effective nominal rate. All cash flows are nominal.

What is the payback period?

(a) Negative since the NPV is negative.

(b) Zero since the project's internal rate of return is less than the required return.

(c) 15 years.

(d) 18 years.

(e) Infinite, since the project will never pay itself off.

Question 199  NPV, DDM, no explanation

A stock is expected to pay the following dividends:

Cash Flows of a Stock
Time (yrs)	0	1	2	3	4	...
Dividend ($)	0	6	12	18	20	...

After year 4, the dividend will grow in perpetuity at 5% pa. The required return of the stock is 10% pa. Both the growth rate and required return are given as effective annual rates.

What will be the price of the stock in 7 years (t = 7), just after the dividend at that time has been paid?

(a) 420.00

(b) 463.05

(c) 463.53

(d) 486.20

(e) 510.51

Question 388  real option, option

A moped is a bicycle with pedals and a little motor that can be switched on to assist the rider. Mopeds are useful for quick transport using the motor, and for physical exercise when using the pedals unassisted. This offers the rider:

(a) An expansion option.

(b) An abandonment option.

(c) A timing (or delaying) option.

(d) A production (or switching) option.

(e) Lots of options to exercise if they're out-of-money and have no fuel.

Question 476  income and capital returns, idiom

The saying "buy low, sell high" suggests that investors should make a:

(a) Positive income return.

(b) Positive capital return.

(c) Negative income return.

(d) Negative capital return.

(e) Positive total return.

Question 501  NPV, IRR, pay back period

The below graph shows a project's net present value (NPV) against its annual discount rate.

Which of the following statements is NOT correct?

(a) When the project's discount rate is 18% pa, the NPV is approximately -$30m.

(b) The payback period is infinite, the project never pays itself off.

(c) The addition of the project's cash flows, ignoring the time value of money, is approximately $20m.

(d) The project's IRR is approximately 5.5% pa.

(e) As the discount rate rises, the NPV falls.

Question 749  Multiples valuation, PE ratio, price to revenue ratio, price to book ratio, NPV

A real estate agent says that the price of a house in Sydney Australia is approximately equal to the gross weekly rent times 1000.

What type of valuation method is the real estate agent using?

(a) Price to EBITDA multiple.

(b) Price to book multiple.

(c) Price to earnings multiple.

(d) Price to revenue multiple.

(e) Discounted cash flow (DCF).

Question 756  bond pricing, capital raising, no explanation

A firm wishes to raise $50 million now. They will issue 5% pa semi-annual coupon bonds that will mature in 3 years and have a face value of $100 each. Bond yields are 6% pa, given as an APR compounding every 6 months, and the yield curve is flat.

How many bonds should the firm issue?

(a) 418,743

(b) 420,478

(c) 513,921

(d) 552,365

(e) 594,562

Question 972  foreign exchange rate, no explanation

Examine the below graphs. The first graph shows daily FX turnover in the world by both the public (government) and private sectors. The second graph 'Official Reserve Assets' shows the FX reserves of the Australian central bank, the RBA. The third graph's top panel shows the FX reserves of the Chinese central bank, the PBoC.

Assume that the AUD and USD are priced at parity so 1 AUD = 1 USD.

Which of the following statements is NOT correct?

(a) If the RBA tried to make the AUD appreciate, it would buy AUD and this would reduce its FX reserves.

(b) The Australian central bank’s FX reserves as a proportion of daily AUD per USD turnover is around 0.3.

(c) The Chinese central bank’s FX reserves as a proportion of daily RMB per USD turnover is around 15.

(d) The Australian central bank’s FX reserves may include AUD.

(e) The Chinese central bank’s FX reserves may include AUD.