Which statement(s) are correct?
(i) All stocks that plot on the Security Market Line (SML) are fairly priced.
(ii) All stocks that plot above the Security Market Line (SML) are overpriced.
(iii) All fairly priced stocks that plot on the Capital Market Line (CML) have zero idiosyncratic risk.
Select the most correct response:
A company has:
- 100 million ordinary shares outstanding which are trading at a price of $5 each. Market analysts estimated that the company's ordinary stock has a beta of 1.5. The risk-free rate is 5% and the market return is 10%.
- 1 million preferred shares which have a face (or par) value of $100 and pay a constant annual dividend of 9% of par. The next dividend will be paid in one year. Assume that all preference dividends will be paid when promised. They currently trade at a price of $90 each.
- Debentures that have a total face value of $200 million and a yield to maturity of 6% per annum. They are publicly traded and their market price is equal to 110% of their face value.
The corporate tax rate is 30%. All returns and yields are given as effective annual rates.
What is the company's after-tax Weighted Average Cost of Capital (WACC)? Assume a classical tax system.
You just signed up for a 30 year fully amortising mortgage loan with monthly payments of $2,000 per month. The interest rate is 9% pa which is not expected to change.
How much did you borrow? After 5 years, how much will be owing on the mortgage? The interest rate is still 9% and is not expected to change.
Which of the following statements about effective rates and annualised percentage rates (APR's) is NOT correct?
Which firms tend to have low forward-looking price-earnings (PE) ratios? Only consider firms with positive PE ratios.
An equity index fund manager controls a USD1 billion diversified equity portfolio with a beta of 1.3. The equity manager fears that a global recession will begin in the next year, causing equity prices to tumble. The market does not think that this will happen. If the fund manager wishes to reduce her portfolio beta to 0.5, how many S&P500 futures should she sell?
The US market equity index is the S&P500. One year CME futures on the S&P500 currently trade at 2,062 points and the spot price is 2,091 points. Each point is worth $250. How many one year S&P500 futures contracts should the fund manager sell?
Question 767 idiom, corporate financial decision theory, no explanation
The sayings "Don't cry over spilt milk", "Don't regret the things that you can't change" and "What's done is done" are most closely related to which financial concept?
The market's expected total return is 10% pa and the risk free rate is 5% pa, both given as effective annual rates.
A stock has a beta of 0.5.
In the last 5 minutes, the federal government unexpectedly raised taxes. Over this time the share market fell by 3%. The risk free rate was unchanged.
What do you think was the stock's historical return over the last 5 minutes, given as an effective 5 minute rate?
Question 876 foreign exchange rate, forward foreign exchange rate, cross currency interest rate parity
Suppose the yield curve in the USA and Germany is flat and the:
- USD federal funds rate at the Federal Reserve is 1% pa;
- EUR deposit facility at the European Central Bank is -0.4% pa (note the negative sign);
- Spot EUR exchange rate is 1 USD per EUR;
- One year forward EUR exchange rate is 1.011 USD per EUR.
You suspect that there’s an arbitrage opportunity. Which one of the following statements about the potential arbitrage opportunity is NOT correct?
Examine the graph of the AUD versus the USD, EUR and JPY. Note that RHS means right hand side and LHS left hand side which indicates which axis each line corresponds to. Assume inflation rates in each country were equal over the time period 1984 to 2018.
Which of the following statements is NOT correct?