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 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 282  expected and historical returns, income and capital returns

You're the boss of an investment bank's equities research team. Your five analysts are each trying to find the expected total return over the next year of shares in a mining company. The mining firm:

• Is regarded as a mature company since it's quite stable in size and was floated around 30 years ago. It is not a high-growth company;
• Share price is very sensitive to changes in the price of the market portfolio, economic growth, the exchange rate and commodities prices. Due to this, its standard deviation of total returns is much higher than that of the market index;
• Experienced tough times in the last 10 years due to unexpected falls in commodity prices.
• Shares are traded in an active liquid market.

Your team of analysts present their findings, and everyone has different views. While there's no definitive true answer, whose calculation of the expected total return is the most plausible? Assume that:

• The analysts' source data is correct and true, but their inferences might be wrong;
• All returns and yields are given as effective annual nominal rates.

(a) Alice says 5% pa since she calculated that this was the average total yield on government bonds over the last 10 years. She says that this is also the expected total yield implied by current prices on one year government bonds.

(b) Bob says 4% pa since he calculated that this was the average total return on the mining stock over the last 10 years.

(c) Cate says 3% pa since she calculated that this was the average growth rate of the share price over the last 10 years.

(d) Dave says 6% pa since he calculated that this was the average growth rate of the share market price index (not the accumulation index) over the last 10 years.

(e) Eve says 15% pa since she calculated that this was the discount rate implied by the dividend discount model using the current share price, forecast dividend in one year and a 3% growth rate in dividends thereafter, which is the expected long term inflation rate.

Question 361  CFFA

Over the next year, the management of an unlevered company plans to:

• Make $5m in sales, $1.9m in net income and $2m in equity free cash flow (EFCF).
• Pay dividends of $1m.
• Complete a $1.3m share buy-back.

Assume that:

• All amounts are received and paid at the end of the year so you can ignore the time value of money.
• The firm has sufficient retained profits to legally pay the dividend and complete the buy back.
• The firm plans to run a very tight ship, with no excess cash above operating requirements currently or over the next year.

How much new equity financing will the company need? In other words, what is the value of new shares that will need to be issued?

(a) $2m

(b) $1m

(c) $0.4m

(d) $0.3m

(e) No new shares need to be issued, the firm will be sufficiently financed.

Question 467  book and market values

Which of the following statements about book and market equity is NOT correct?

(a) The market value of equity of a listed company's common stock is equal to the number of common shares multiplied by the share price.

(b) The book value of equity is the sum of contributed equity, retained profits and reserves.

(c) A company's book value of equity is recorded in its income statement, also known as the 'profit and loss' or the 'statement of financial performance'.

(d) A new company's market value of equity equals its book value of equity the moment that its shares are first sold. From then on, the market value changes continuously but the book value is recorded at historical cost which typically only changes due to retained profits.

(e) To buy all of the firm's shares, generally a price close to the market value of equity will have to be paid.

Question 473  market capitalisation of equity

The below screenshot of Commonwealth Bank of Australia's (CBA) details were taken from the Google Finance website on 7 Nov 2014. Some information has been deliberately blanked out.

What was CBA's market capitalisation of equity?

(a) $431.18 billion

(b) $429 billion

(c) $134.07 billion

(d) $8.44 billion

(e) $3.21 billion

Question 503  DDM, NPV, stock pricing

A share currently worth $100 is expected to pay a constant dividend of $4 for the next 5 years with the first dividend in one year (t=1) and the last in 5 years (t=5).

The total required return is 10% pa.

What do you expected the share price to be in 5 years, just after the dividend at that time has been paid?

(a) $100

(b) $115.16

(c) $136.63

(d) $161.05

(e) $185.47

Question 625  dividend re-investment plan, capital raising

Which of the following statements about dividend re-investment plans (DRP's) is NOT correct?

(a) DRP's are voluntary, shareholders only participate if they choose.

(b) DRP's increase the number of shares.

(c) The number of shares issued to a shareholder participating in a DRP is usually calculated as their total dividends owed, divided by the allocation share price which is usually close to the current market share price.

(d) DRP's do not incur brokerage costs for the shareholder. This is unlike the case where the shareholder uses the cash dividend to buy more shares herself.

(e) If all shareholders participated in a company's DRP, the company would not pay any dividends and the firm's share price would not fall due to the cash dividend or the DRP.

Question 646  open interest, trade volume, future

Alice, Bob, Chris and Delta are traders in the futures market. The following trades occur over a single day in a newly-opened equity index future that matures in one year which the exchange just made available.

1. Alice buys a future from Bob.

2. Chris buys a future from Delta.

3. Delta buys a future from Alice.

These were the only trades made in this equity index future. What was the trading volume and what is the open interest?

(a) Daily trading volume is 3 contracts, open interest is 3 contracts.

(b) Daily trading volume is 3 contracts, open interest is 2 contracts.

(c) Daily trading volume is 3 contracts, open interest is 1 contract.

(d) Daily trading volume is 2 contracts, open interest is 3 contracts.

(e) Daily trading volume is 2 contracts, open interest is 2 contracts.

Question 757  bond pricing, capital raising, no explanation

A firm wishes to raise $50 million now. They will issue 5% pa semi-annual coupon bonds that will mature in 10 years and have a face value of $100 each. Bond yields are 5% pa, given as an APR compounding every 6 months, and the yield curve is flat.

How many bonds should the firm issue?

(a) 305,136

(b) 308,888

(c) 359,783

(d) 500,000

(e) 809,358