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?
The equations for Net Income (NI, also known as Earnings or Net Profit After Tax) and Cash Flow From Assets (CFFA, also known as Free Cash Flow to the Firm) per year are:
###NI=(Rev-COGS-FC-Depr-IntExp).(1-t_c)###
###CFFA=NI+Depr-CapEx - \varDelta NWC+IntExp###
For a firm with debt, what is the formula for the present value of interest tax shields if the tax shields occur in perpetuity?
You may assume:
- the value of debt (D) is constant through time,
- The cost of debt and the yield on debt are equal and given by ##r_D##.
- the appropriate rate to discount interest tax shields is ##r_D##.
- ##\text{IntExp}=D.r_D##
Question 210 real estate, inflation, real and nominal returns and cash flows, income and capital returns
Assume that the Gordon Growth Model (same as the dividend discount model or perpetuity with growth formula) is an appropriate method to value real estate.
An old rule of thumb in the real estate industry is that properties should yield a 5% pa rental return. Some investors also regard property to be as risky as the stock market, therefore property is thought to have a required total return of 9% pa which is the average total return on the stock market including dividends.
Assume that all returns are effective annual rates and they are nominal (not reduced by inflation). Inflation is expected to be 2% pa.
You're considering purchasing an investment property which has a rental yield of 5% pa and you expect it to have the same risk as the stock market. Select the most correct statement about this property.
Question 247 cross currency interest rate parity, no explanation
In the so called 'Swiss Loans Affair' of the 1980's, Australian banks offered loans denominated in Swiss Francs to Australian farmers at interest rates as low as 4% pa. This was far lower than interest rates on Australian Dollar loans which were above 10% due to very high inflation in Australia at the time.
In the late-1980's there was a large depreciation in the Australian Dollar. The Australian Dollar nearly halved in value against the Swiss Franc. Many Australian farmers went bankrupt since they couldn't afford the interest payments on the Swiss Franc loans because the Australian Dollar value of those payments nearly doubled. The farmers accused the banks of promoting Swiss Franc loans without making them aware of the risks.
What fundamental principal of finance did the Australian farmers (and the bankers) fail to understand?
Question 446 working capital decision, corporate financial decision theory
The working capital decision primarily affects which part of a business?
An asset's total expected return over the next year is given by:
###r_\text{total} = \dfrac{c_1+p_1-p_0}{p_0} ###
Where ##p_0## is the current price, ##c_1## is the expected income in one year and ##p_1## is the expected price in one year. The total return can be split into the income return and the capital return.
Which of the following is the expected capital return?
A home loan company advertises an interest rate of 6% pa, payable monthly. Which of the following statements about the interest rate is NOT correct? All rates are given to four decimal places.
An effective monthly return of 1% ##(r_\text{eff monthly})## is equivalent to an effective annual return ##(r_\text{eff annual})## of:
The famous investor Warren Buffett is one of few portfolio managers who appears to have consistently beaten the market. His company Berkshire Hathaway (BRK) appears to have outperformed the US S&P500 market index, shown in the graph below.
Read the below statements about Warren Buffett and the implications for the Efficient Markets Hypothesis (EMH) theory of Eugene Fama. Assume that the first sentence is true. Analyse the second sentence and select the answer option which is NOT correct. In other words, find the false statement in the second sentence.