Fight Finance

Question 9  DDM, NPV

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.

Would you like to the share or politely ?

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?

(a) -1.3529627%

(b) -0.4977348%

(c) 0.4977348%

(d) 1.3529627%

(e) 1.3621776%

Question 271  CAPM, option, risk, systematic risk, systematic and idiosyncratic risk

All things remaining equal, according to the capital asset pricing model, if the systematic variance of an asset increases, its required return will increase and its price will decrease.
If the idiosyncratic variance of an asset increases, its price will be unchanged.

What is the relationship between the price of a call or put option and the total, systematic and idiosyncratic variance of the underlying asset that the option is based on? Select the most correct answer.

Call and put option prices increase when the:

(a) Systematic variance of the underlying asset increases.

(b) Idiosyncratic variance of the underlying asset increases.

(c) Systematic, idiosyncratic or total variance of the underlying asset increases.

(d) Systematic variance of the underlying asset decreases.

(e) Systematic, idiosyncratic or total variance of the underlying asset decreases.

Question 368  interest tax shield, CFFA

A method commonly seen in textbooks for calculating a levered firm's free cash flow (FFCF, or CFFA) is the following:

###\begin{aligned} FFCF &= (Rev - COGS - Depr - FC - IntExp)(1-t_c) + \\ &\space\space\space+ Depr - CapEx -\Delta NWC + IntExp(1-t_c) \\ \end{aligned}###

Does this annual FFCF or the annual interest tax shield?

Question 399  option, no explanation

A European call option will mature in ##T## years with a strike price of ##K## dollars. The underlying asset has a price of ##S## dollars.

What is an expression for the payoff at maturity ##(f_T)## in dollars from owning (being long) the call option?

(a) ##\max(S_T - K, 0)##.

(b) ##\max(S_T - K, K)##.

(c) ##\max(K-S_T, 0)##.

(d) ##\max(K-S_T, K)##.

(e) ##\min(K-S_T, 0)##.

Question 656  debt terminology

Which of the following statements is NOT correct? Lenders:

(a) Buy debt.

(b) Own debt.

(c) Are owed money.

(d) Write debt.

(e) Have debt assets.

Question 698  utility, risk aversion, utility function

Mr Blue, Miss Red and Mrs Green are people with different utility functions. Which of the statements about the 3 utility functions is NOT correct?

(a) Neither Miss Red nor Mrs Green would appear rational to an economist.

(b) Mrs Green is satiated when she has $25 of wealth. That is her bliss point.

(c) Mrs Green is risk loving when she has between zero and $25 of wealth, same as Mr Blue.

(d) Mrs Green is risk averse when she has between $25 and $50 of wealth.

(e) Mrs Green is risk loving when she has between $50 and $100 of wealth, same as Mr Blue.

Question 727  inflation, real and nominal returns and cash flows

The Australian Federal Government lends money to domestic students to pay for their university education. This is known as the Higher Education Contribution Scheme (HECS). The nominal interest rate on the HECS loan is set equal to the consumer price index (CPI) inflation rate. The interest is capitalised every year, which means that the interest is added to the principal. The interest and principal does not need to be repaid by students until they finish study and begin working.

Which of the following statements about HECS loans is NOT correct?

(a) The real interest rate is zero.

(b) The nominal amount owing on the loan will increase at the inflation rate over time, if there are no extra payments or borrowings.

(c) The real amount owing on the loan in today's money will remain the same over time, if there are no extra payments or borrowings.

(d) The interest rate on the HECS loan advantages rich domestic students because they are able to pay off their debt sooner and avoid paying as much HECS interest.

(e) The interest rate on the HECS loan advantages all domestic students because the alternative of borrowing from the bank to pay for education would usually attract a higher interest rate.

Question 782  portfolio return, portfolio weights

An investor owns a portfolio with:

• 80% invested in stock A; and
• 20% invested in stock B.

Today there was a:

• 10% rise in stock A's price; and
• No change in stock B's price.

No dividends were paid on either stock. What was the total historical portfolio return on this day? All returns above and answer options below are given as effective daily rates.

(a) 2%

(b) 4%

(c) 8%

(d) 10%

(e) 80%

Question 859  money supply, no explanation

The below table shows Australian monetary aggregates. Note that ‘M3’ is the sum of all the figures in the table and ‘ADI’ stands for Authorised Deposit-taking Institution such as a bank, building society or credit union.

Australian Monetary Aggregates
March 2017, AUD billions
Currency	Current deposits with banks	Certificates of deposit issued by banks	Term deposits with banks	Other deposits with banks	Deposits with non-bank ADIs	M3
69.3	271.6	207.2	562.3	838.7	36.9	1986.0

 

Source: RBA Statistical Table D3 Monetary Aggregates.

Which of the following statements is NOT correct?

(a) Current deposits are the notes and coins that banks keep in their physical vaults and Automatic Teller Machines (ATM’s).

(b) Current deposits with banks pay little interest to depositors but are highly liquid since they can be withdrawn using ATM’s.

(c) The government directly controls the amount of notes and coins.

(d) The central bank indirectly controls the amount of deposits by changing the cash rate.

(e) When a commercial bank lends money to a borrower to buy a house, that money is likely to be deposited by the house seller into another bank.