Fight Finance

Question 93  correlation, CAPM, systematic risk

A stock's correlation with the market portfolio increases while its total risk is unchanged. What will happen to the stock's expected return and systematic risk?

(a) The stock will have a higher return and higher systematic risk.

(b) The stock will have a lower return and higher systematic risk.

(c) The stock will have a higher return and lower systematic risk.

(d) The stock will have a lower return and lower systematic risk.

(e) The stock's return and systematic risk will be unchanged.

Question 131  APR, effective rate

Calculate the effective annual rates of the following three APR's:

• A credit card offering an interest rate of 18% pa, compounding monthly.
• A bond offering a yield of 6% pa, compounding semi-annually.
• An annual dividend-paying stock offering a return of 10% pa compounding annually.

All answers are given in the same order:

##r_\text{credit card, eff yrly}##, ##r_\text{bond, eff yrly}##, ##r_\text{stock, eff yrly}##

(a) 0.1956, 0.0609, 0.1.

(b) 0.015, 0.09, 0.1.

(c) 0.1881, 0.0609, 0.1025.

(d) 0.1956, 0.0617, 0.1047.

(e) 6.2876, 0.1236, 0.1.

Question 203  fully amortising loan, APR

You just signed up for a 30 year fully amortising mortgage loan with monthly payments of $1,500 per month. The interest rate is 9% pa which is not expected to change.

How much did you borrow? After 10 years, how much will be owing on the mortgage? The interest rate is still 9% and is not expected to change.

(a) 184,925.77,     164,313.82

(b) 184,925.77,     115,517.84

(c) 186,422.80,     166,717.43

(d) 186,422.80,     118,412.54

(e) 192,435.28,     170,986.32

Question 311  foreign exchange rate

When someone says that they're "buying American dollars" (USD), what type of asset are they probably buying? They're probably buying:

(a) Short term debt denominated in USD, for example lending to a US bank as a USD deposit.

(b) Long term debt denominated in USD, for example lending to a US company by buying their USD bonds.

(c) Shares denominated in USD, for example buying shares in Coca-Cola which is listed on the NYSE.

(d) Real estate denominated in USD, for example buying an apartment in Chicago.

(e) Commodities with USD, for example buying gold, wheat, or coal.

Question 349  CFFA, depreciation tax shield

Which one of the following will decrease net income (NI) but increase cash flow from assets (CFFA) in this year for a tax-paying firm, all else remaining constant?

Remember:

###NI = (Rev-COGS-FC-Depr-IntExp).(1-t_c )### ###CFFA=NI+Depr-CapEx - \Delta NWC+IntExp###

(a) An increase in revenue (Rev).

(b) An increase in rent expense (part of fixed costs, FC).

(c) An increase in depreciation expense (Depr).

(d) An decrease in net working capital (ΔNWC).

(e) An increase in dividends.

Question 652  future, continuously compounding rate

An equity index is currently at 5,200 points. The 6 month futures price is 5,300 points and the total required return is 6% pa with continuous compounding. Each index point is worth $25.

What is the implied dividend yield as a continuously compounded rate per annum?

(a) 5.7145% pa

(b) 4.0952% pa

(c) 3.8096% pa

(d) 2.1904% pa

(e) 1.9048% pa

Question 781  NPV, IRR, pay back period

You're considering a business project which costs $11m now and is expected to pay a single cash flow of $11m in one year. So you pay $11m now, then one year later you receive $11m.

Assume that the initial $11m cost is funded using the your firm's existing cash so no new equity or debt will be raised. The cost of capital is 10% pa.

Which of the following statements about the net present value (NPV), internal rate of return (IRR) and payback period is NOT correct?

(a) The NPV is negative $1m.

(b) The IRR is 0% pa, less than the 10% cost of capital.

(c) The payback period is one year.

(d) The project should be rejected.

(e) If the project is accepted now then the market value of the firm's assets will fall by $11m.

Question 806  stock split, no explanation

A firm conducts a two-for-one stock split. Which of the following consequences would NOT be expected?

(a) The share price would halve.

(b) The number of shares would double.

(c) The market capitalisation of equity would be unchanged.

(d) The earnings per share (EPS) would halve.

(e) The price-earnings (PE) ratio would halve.

Question 820  option, future, no explanation

What derivative position are you exposed to if you have the obligation to sell the underlying asset at maturity, so you will definitely be forced to sell the underlying asset?

(a) Long a future.

(b) Short a future.

(c) Long a put.

(d) Short a put.

(e) Short a call.

Question 961  stock split, bonus issue

Which one of the following statements is NOT correct? A 1-for-4 bonus issue:

(a) Will increase the number of shares by 25%.

(b) Will decrease the share price by 25%.

(c) Is equivalent to a 5-for-4 stock split.

(d) Is equivalent to a 25% stock dividend.

(e) Has no effect on the firm's cash flow.