Fight Finance

(a) If stock A's return increases, stock B's return is also expected to increase.

(b) If stock A's return decreases, stock B's return is also expected to decrease.

(c) If stock A and B were combined in a portfolio, there would be no diversification at all since they are positively correlated.

(d) Stock A and B's returns have positive covariance.

(e) a and b.

(a) Discount the project's unlevered CFFA by the furniture manufacturing firms' 30% WACC after tax.

(b) Discount the project's unlevered CFFA by the company's 20% WACC after tax.

(c) Discount the project's levered CFFA by the company's 20% WACC after tax.

(d) Discount the project's levered CFFA by the furniture manufacturing firms' 30% WACC after tax.

(e) The methods outlined in answers (a) and (c) will give the same valuations, both are correct.

(a) A positive NPV and should be accepted.

(b) A zero NPV.

(c) A negative NPV and should be rejected.

(d) A large amount of diversifiable risk.

(e) Zero diversifiable risk.

(a) The more diversification is possible when those stocks are combined in a portfolio.

(b) The lower the variance of returns of an equally-weighted portfolio of those stocks.

(c) The lower the volatility of returns of an equal-weighted portfolio of those stocks.

(d) The higher the covariance between those stocks' returns.

(e) The more likely that when one stock has a positive return, the other has a negative return.

(a) The beta of equity is 5 and the expected return on equity is 30% pa.

(b) The beta of equity is 4.2 and the expected return on equity is 26% pa.

(c) The beta of equity is 0.86 and the expected return on equity is 9.3% pa.

(d) The beta of equity is 1 and the expected return on equity is 10% pa.

(e) The beta of equity is 0.6 and the expected return on equity is 8% pa.

Two call options are exactly the same, but one has a low and the other has a high exercise price. Which option would you expect to have the higher price, the option with the or exercise price, or should they have the price?

(a) A bullet loan has no interest payments but it does have a face value. Therefore it's a discount loan.

(b) A fully amortising loan has interest payments but does not have a face value. Therefore it's a premium loan.

(c) An interest only loan has interest payments and its price and face value are equal. Therefore it's a par loan.

(d) A zero coupon bond has no coupon payments but it does have a face value. Therefore it's a premium bond.

(e) A balloon loan has interest payments and its face value is more than its price. Therefore it's a discount loan.

(a) Are discount bonds.

(b) Have positive expected capital returns.

(c) Have higher expected income returns than total returns.

(d) Have prices less than their face values.

(e) Have significant credit risk.

(a) In between dividends, the stock price is expected to grow by the total return ‘r’.

(b) From trough to trough, the stock price is expected to grow by the capital return ‘g’.

(c) From peak to peak, the stock price is expected to grow by the capital return ‘g’.

(d) Dividends are expected to grow by the total return ‘r’.

(e) If the stock’s dividends are re-invested by using the cash to buy more stocks, then the growth rate of the shareholder’s wealth will be the total return ‘r’.

(a) Daniel Bernoulli.

(b) John Larry Kelly Jr.

(c) Henry Allen Latane.

(d) Ole Peters.

(e) Paul Anthony Samuelson.