Fight Finance

Question 86  CAPM

Treasury bonds currently have a return of 5% pa. A stock has a beta of 0.5 and the market return is 10% pa. What is the expected return of the stock?

(a) 5% pa

(b) 7.5% pa

(c) 10% pa

(d) 12.5% pa

(e) 20% pa

Question 139  implicit interest rate in wholesale credit

A wholesale shop offers credit to its customers. The customers are given 21 days to pay for their goods. But if they pay straight away (now) they get a 1% discount.

What is the effective interest rate given to customers who pay in 21 days? All rates given below are effective annual rates. Assume 365 days in a year.

(a) 0.0005

(b) 0.0006

(c) 0.1603

(d) 0.1738

(e) 0.1909

Question 253  NPV, APR

You just started work at your new job which pays $48,000 per year.

The human resources department have given you the option of being paid at the end of every week or every month.

Assume that there are 4 weeks per month, 12 months per year and 48 weeks per year.

Bank interest rates are 12% pa given as an APR compounding per month.

What is the dollar gain over one year, as a net present value, of being paid every week rather than every month?

(a) $179.6269

(b) $177.8484

(c) $168.4762

(d) $166.8081

(e) $165.1565

Question 382  Merton model of corporate debt, real option, option

In the Merton model of corporate debt, buying a levered company's shares is equivalent to:

(a) Buying the company's assets.

(b) Buying a call option on the company's assets.

(c) Buying a put option on the company's assets.

(d) Buying the company's assets and buying a call option on those assets.

(e) Buying the company's assets and buying a put option on those assets.

Question 479  perpetuity with growth, DDM, NPV

Discounted cash flow (DCF) valuation prices assets by finding the present value of the asset's future cash flows. The single cash flow, annuity, and perpetuity equations are very useful for this.

Which of the following equations is the 'perpetuity with growth' equation?

(a) ##V_0=\dfrac{C_t}{(1+r)^t} ##

(b) ##V_0=\dfrac{C_1}{r}.\left(1-\dfrac{1}{(1+r)^T} \right)= \sum\limits_{t=1}^T \left( \dfrac{C_t}{(1+r)^t} \right) ##

(c) ##V_0=\dfrac{C_1}{r-g}.\left(1-\left(\dfrac{1+g}{1+r}\right)^T \right)= \sum\limits_{t=1}^T \left( \dfrac{C_t.(1+g)^t}{(1+r)^t} \right) ##

(d) ##V_0=\dfrac{C_1}{r} = \sum\limits_{t=1}^\infty \left( \dfrac{C_t}{(1+r)^t} \right) ##

(e) ##V_0=\dfrac{C_1}{r-g} = \sum\limits_{t=1}^\infty \left( \dfrac{C_t.(1+g)^t}{(1+r)^t} \right) ##

Question 498  NPV, Annuity, perpetuity with growth, multi stage growth model

A business project is expected to cost $100 now (t=0), then pay $10 at the end of the third (t=3), fourth, fifth and sixth years, and then grow by 5% pa every year forever. So the cash flow will be $10.5 at the end of the seventh year (t=7), then $11.025 at the end of the eighth year (t=8) and so on perpetually. The total required return is 10℅ pa.

Which of the following formulas will NOT give the correct net present value of the project?

(a) ##-100+ \dfrac{ \dfrac{10}{0.1} \left(1-\dfrac{1}{(1+0.1)^3} \right)}{(1+0.1)^2} +\dfrac{\left(\dfrac{10}{0.1-0.05}\right)}{(1+0.1)^5} ##

(b) ##-100+ \dfrac{10}{(1+0.1)^3} +\dfrac{10}{(1+0.1)^4} +\dfrac{10}{(1+0.1)^5} +\dfrac{\left(\dfrac{10}{0.1-0.05}\right)}{(1+0.1)^5} ##

(c) ##-100+ \dfrac{ \dfrac{10}{0.1} \left(1-\dfrac{1}{(1+0.1)^4} \right)}{(1+0.1)^2} +\dfrac{\left(\dfrac{10.5}{0.1-0.05}\right)}{(1+0.1)^6} ##

(d) ##-100+ \dfrac{10}{(1+0.1)^3} +\dfrac{10}{(1+0.1)^4} +\dfrac{10}{(1+0.1)^5} +\dfrac{10}{(1+0.1)^6} +\dfrac{\left(\dfrac{10.5}{0.1-0.05}\right)}{(1+0.1)^6} ##

(e) ##-100+ \dfrac{ \dfrac{10}{0.1} \left(1-\dfrac{1}{(1+0.1)^3} \right)}{(1+0.1)^3} +\dfrac{\left(\dfrac{10}{0.1-0.05}\right)}{(1+0.1)^5} ##

Question 507  leverage, accounting ratio

A firm has a debt-to-equity ratio of 60%. What is its debt-to-assets ratio?

(a) 64%

(b) 40%

(c) 37.5%

(d) 25%

(e) 6.25%

Question 660  fully amortising loan, interest only loan, APR

How much more can you borrow using an interest-only loan compared to a 25-year fully amortising loan if interest rates are 6% pa compounding per month and are not expected to change? If it makes it easier, assume that you can afford to pay $2,000 per month on either loan. Express your answer as a proportional increase using the following formula:

###\text{Proportional Increase} = \dfrac{V_\text{0,interest only}}{V_\text{0,fully amortising}} - 1###

(a) 77.6034%

(b) 30.3779%

(c) 28.8603%

(d) 22.3966%

(e) 7.5304%

Question 851  labour force, no explanation

Below is a table showing some figures about the Australian labour force.

Australian Labour Force and Employment Data
April 2017 Seasonally Adjusted figures
Employed persons ('000)	12 061.9
Unemployed persons ('000)	751.4
Unemployment rate (%)	5.9
Participation rate (%)	64.8

 

Source: ABS 6202.0 Labour Force, Australia, Apr 2017

What do you estimate is the size of working age population in thousands (‘000)?

(a) 1,160

(b) 12,813

(c) 18,614

(d) 19,774

(e) 217,175

Question 924  foreign exchange rate, forward foreign exchange rate, arbitrage, forward interest rate, no explanation

Suppose that the yield curve in the United States of America and Australia is flat and that the current:

• USD federal funds rate is 1% pa;
• AUD cash rate is 1.5% pa;
• Spot AUD exchange rate is 1 USD per AUD;
• One year forward AUD exchange rate is 0.97 USD per AUD.

You suspect that there’s an arbitrage opportunity.

Which one of the following statements about the potential arbitrage opportunity is NOT correct?

(a) Right now, borrow USD in America, convert it into AUD at the spot, lend it in Australia, lock in to buy USD and sell AUD forward one year. One year later, withdraw the AUD, convert it into USD and pay back the USD loan.

(b) American debt may be over-priced, sell it.

(c) Australian debt may be under-priced, buy it.

(d) The spot AUD may be under-priced compared to the USD, buy the AUD now.

(e) The forward AUD may be under-priced compared to the USD, lock in to buy the AUD in one year.