For a price of $129, Joanne will sell you a share which is expected to pay a $30 dividend in one year, and a $10 dividend every year after that forever. So the stock's dividends will be $30 at t=1, $10 at t=2, $10 at t=3, and $10 forever onwards.
The required return of the stock is 10% pa.
The theory of fixed interest bond pricing is an application of the theory of Net Present Value (NPV). Also, a 'fairly priced' asset is not over- or under-priced. Buying or selling a fairly priced asset has an NPV of zero.
Considering this, which of the following statements is NOT correct?
Question 64 inflation, real and nominal returns and cash flows, APR, effective rate
In Germany, nominal yields on semi-annual coupon paying Government Bonds with 2 years until maturity are currently 0.04% pa.
The inflation rate is currently 1.4% pa, given as an APR compounding per quarter. The inflation rate is not expected to change over the next 2 years.
What is the real yield on these bonds, given as an APR compounding every 6 months?
The US firm Google operates in the online advertising business. In 2011 Google bought Motorola Mobility which manufactures mobile phones.
Assume the following:
- Google had a 10% after-tax weighted average cost of capital (WACC) before it bought Motorola.
- Motorola had a 20% after-tax WACC before it merged with Google.
- Google and Motorola have the same level of gearing.
- Both companies operate in a classical tax system.
You are a manager at Motorola. You must value a project for making mobile phones. Which method(s) will give the correct valuation of the mobile phone manufacturing project? Select the most correct answer.
The mobile phone manufacturing project's:
You want to buy an apartment priced at $500,000. You have saved a deposit of $50,000. The bank has agreed to lend you the $450,000 as a fully amortising loan with a term of 30 years. The interest rate is 6% pa and is not expected to change. What will be your monthly payments?
Question 370 capital budgeting, NPV, interest tax shield, WACC, CFFA
| Project Data | ||
| Project life | 2 yrs | |
| Initial investment in equipment | $600k | |
| Depreciation of equipment per year | $250k | |
| Expected sale price of equipment at end of project | $200k | |
| Revenue per job | $12k | |
| Variable cost per job | $4k | |
| Quantity of jobs per year | 120 | |
| Fixed costs per year, paid at the end of each year | $100k | |
| Interest expense in first year (at t=1) | $16.091k | |
| Interest expense in second year (at t=2) | $9.711k | |
| Tax rate | 30% | |
| Government treasury bond yield | 5% | |
| Bank loan debt yield | 6% | |
| Levered cost of equity | 12.5% | |
| Market portfolio return | 10% | |
| Beta of assets | 1.24 | |
| Beta of levered equity | 1.5 | |
| Firm's and project's debt-to-equity ratio | 25% | |
Notes
- The project will require an immediate purchase of $50k of inventory, which will all be sold at cost when the project ends. Current liabilities are negligible so they can be ignored.
Assumptions
- The debt-to-equity ratio will be kept constant throughout the life of the project. The amount of interest expense at the end of each period has been correctly calculated to maintain this constant debt-to-equity ratio. Note that interest expense is different in each year.
- Thousands are represented by 'k' (kilo).
- All cash flows occur at the start or end of the year as appropriate, not in the middle or throughout the year.
- All rates and cash flows are nominal. The inflation rate is 2% pa.
- All rates are given as effective annual rates.
- The 50% capital gains tax discount is not available since the project is undertaken by a firm, not an individual.
What is the net present value (NPV) of the project?
Which firms tend to have low forward-looking price-earnings (PE) ratios? Only consider firms with positive PE ratios.
Which of the following is NOT a valid method for estimating the beta of a company's stock? Assume that markets are efficient, a long history of past data is available, the stock possesses idiosyncratic and market risk. The variances and standard deviations below denote total risks.
Question 810 CAPM, systematic and idiosyncratic risk, market efficiency
Examine the graphs below. Assume that asset A is a single stock. Which of the following statements is NOT correct? Asset A:
Which of the following statements about the Basel 3 minimum capital requirements is NOT correct? Common equity tier 1 (CET1) comprises the highest quality components of capital that fully satisfy all of the following characteristics: