Fight Finance

Question 90  CAPM, risk

According to the theory of the Capital Asset Pricing Model (CAPM), total variance can be broken into two components, systematic variance and idiosyncratic variance. Which of the following events would be considered the most diversifiable according to the theory of the CAPM?

(a) Global economic recession.

(b) A major terrorist attack, grounding all commercial aircraft in the US and Europe.

(c) An increase in corporate tax rates.

(d) The outbreak of world war.

(e) A company's poor earnings announcement.

Question 183  bond pricing

A five year bond has a face value of $100, a yield of 12% and a fixed coupon rate of 6%, paid semi-annually.

What is the bond's price?

(a) 36.2655

(b) 55.8395

(c) 59.3381

(d) 77.9197

(e) 87.3629

Question 198  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 is the current price of the stock?

(a) 302.10

(b) 315.76

(c) 329.42

(d) 344.45

(e) 428.90

Question 371  interest tax shield, CFFA

One method for calculating a firm's free cash flow (FFCF, or CFFA) is to ignore interest expense. That is, pretend that interest expense ##(IntExp)## is zero:

###\begin{aligned} FFCF &= (Rev - COGS - Depr - FC - IntExp)(1-t_c) + Depr - CapEx -\Delta NWC + IntExp \\ &= (Rev - COGS - Depr - FC - 0)(1-t_c) + Depr - CapEx -\Delta NWC - 0\\ \end{aligned}###

Does this annual FFCF with zero interest expense or the annual interest tax shield?

Question 395  real option, option

The cheapest mobile phones available tend to be those that are 'locked' into a cell phone operator's network. Locked phones can not be used with other cell phone operators' networks.

Locked mobile phones are cheaper than unlocked phones because the locked-in network operator helps create a monopoly by:

(a) Destroying customers' expansion option.

(b) Destroying customers' abandonment option.

(c) Destroying customers' timing (or delaying) option.

(d) Destroying customers' production (or switching) option.

(e) Growing customers' binomial tree.

Question 430  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 having written (being short) the call option?

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

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

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

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

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

Question 533  NPV, no explanation

You have $100,000 in the bank. The bank pays interest at 10% pa, given as an effective annual rate.

You wish to consume twice as much now (t=0) as in one year (t=1) and have nothing left in the bank at the end.

How much can you consume at time zero and one? The answer choices are given in the same order.

(a) $52,380.95,   $52,380.95

(b) $62,500,   $31,250

(c) $66,666.67,   $33,333.33

(d) $68,750,   $34,375

(e) $70,967.74,   $35,483.87

Question 587  option

Which of the following statements about option contracts is NOT correct? For every:

(a) Long call option there must be a short call option.

(b) Long put option there must be a short put option.

(c) Long option there must be a short option.

(d) Call option there must be a put option.

(e) Option trader who gains there must be one or more option traders who lose.

Question 854  speculation motive for keeping money, no explanation

What is the speculation motive for keeping money? The speculation motive encourages people to keep money available:

(a) To buy consumables like food and clothes at the shops.

(b) For a ‘rainy day’ such as becoming sick and having to pay for a doctor.

(c) To preserve their wealth, such as keeping cash under the bed, in the piggy bank or in a safe.

(d) To invest in assets such as houses, shares or bonds if they become cheap.

(e) To gamble and waste on the poker machines at the casino.

Question 902  Basel accord

Below is a table of the 'Risk-weights for residential mortgages' as shown in APRA Basel 3 Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk January 2013.

LVR (%)	Standard eligible mortgages		Non-standard eligible mortgages
	Risk-weight (no mortgage insurance) %	Risk-weight (with at least 40% of the mortgage insured by an acceptable LMI) %	Risk-weight (no mortgage insurance) %	Risk-weight (with at least 40% of the mortgage insured by an acceptable LMI) %
0 – 60	35	35	50	35
60.01 – 80	35	35	75	50
80.01 – 90	50	35	100	75
90.01 – 100	75	50	100	75
> 100.01	100	75	100	100

A bank is considering granting a home loan to a man to buy a house worth $1.25 million using his own funds and the loan. The loan would be standard with no lenders mortgage insurance (LMI) and an LVR of 80%.

What is the minimum regulatory capital that the bank requires to grant the home loan under the Basel 3 Accord? Ignore the capital conservation buffer.

(a) $20,000

(b) $28,000

(c) $35,000

(d) $40,000

(e) $50,000