A firm changes its capital structure by issuing a large amount of debt and using the funds to repurchase shares. Its assets are unchanged. Ignore interest tax shields.

According to the Capital Asset Pricing Model (CAPM), which statement is correct?

You're advising your superstar client 40-cent who is weighing up buying a private jet or a luxury yacht. 40-cent is just as happy with either, but he wants to go with the more cost-effective option. These are the cash flows of the two options:

- The private jet can be bought for $6m now, which will cost $12,000 per month in fuel, piloting and airport costs, payable at the end of each month. The jet will last for
**12**years. - Or the luxury yacht can be bought for $4m now, which will cost $20,000 per month in fuel, crew and berthing costs, payable at the end of each month. The yacht will last for
**20**years.

What's unusual about 40-cent is that he is so famous that he will actually be able to sell his jet or yacht for the same price as it was bought since the next generation of superstar musicians will buy it from him as a status symbol.

Bank interest rates are 10% pa, given as an effective annual rate. You can assume that 40-cent will live for another 60 years and that when the jet or yacht's life is at an end, he will buy a new one with the same details as above.

Would you advise 40-cent to buy the or the ?

Note that the effective monthly rate is ##r_\text{eff monthly}=(1+0.1)^{1/12}-1=0.00797414##

A prospective home buyer can afford to pay $2,000 per month in mortgage loan repayments. The central bank recently lowered its policy rate by 0.25%, and residential home lenders cut their mortgage loan rates from 4.74% to 4.49%.

How much more can the prospective home buyer borrow now that interest rates are **4.49%** rather than **4.74%**? Give your answer as a proportional increase over the original amount he could borrow (##V_\text{before}##), so:

Assume that:

- Interest rates are expected to be
**constant**over the life of the loan. - Loans are
**interest-only**and have a life of 30 years. - Mortgage loan payments are made every month in arrears and all interest rates are given as annualised percentage rates compounding per month.

**Question 312** foreign exchange rate, American and European terms

If the current AUD exchange rate is USD 0.9686 = AUD 1, what is the American terms quote of the AUD against the USD?

A firm has a debt-to-equity ratio of 25%. What is its debt-to-assets ratio?

**Question 728** inflation, real and nominal returns and cash flows, income and capital returns, no explanation

Which of the following statements about gold is **NOT** correct? Assume that the gold price increases by inflation. Gold:

**Question 872** duration, Macaulay duration, modified duration, portfolio duration

A fixed coupon bond’s **modified** duration is **20** years, and yields are currently **10**% pa compounded annually. Which of the following statements about the bond is **NOT** correct?

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 0.7.

In the last 5 minutes, bad economic news was released showing a higher chance of recession. Over this time the share market **fell** by **2**%. 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?

A stock has a beta of **1.2**. Its next dividend is expected to be $**20**, paid one year from now.

Dividends are expected to be paid annually and grow by **1.5**% pa forever.

Treasury bonds yield **3**% pa and the market portfolio's expected return is **7**% pa. All returns are effective annual rates.

What is the price of the stock now?