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 own a nice suit which you wear once per week on nights out. You bought it one year ago for $600. In your experience, suits used once per week last for 6 years. So you expect yours to last for another 5 years.
Your younger brother said that retro is back in style so he wants to wants to borrow your suit once a week when he goes out. With the increased use, your suit will only last for another 4 years rather than 5.
What is the present value of the cost of letting your brother use your current suit for the next 4 years?
Assume: that bank interest rates are 10% pa, given as an effective annual rate; you will buy a new suit when your current one wears out and your brother will not use the new one; your brother will only use your current suit so he will only use it for the next four years; and the price of a new suit never changes.
Discounted cash flow (DCF) valuation prices assets by finding the present value of the asset's future cash flows. The single cash flow, annuity, and perpetuity equations are very useful for this.
Which of the following equations is the 'perpetuity with growth' equation?
Question 523 income and capital returns, real and nominal returns and cash flows, inflation
A low-growth mature stock has an expected nominal total return of 6% pa and nominal capital return of 2% pa. Inflation is expected to be 3% pa.
All of the above are effective nominal rates and investors believe that they will stay the same in perpetuity.
What are the stock's expected real total, capital and income returns?
The answer choices below are given in the same order.
A trader buys a one year futures contract on crude oil. The contract is for the delivery of 1,000 barrels. The current futures price is $38.94 per barrel. The initial margin is $3,410 per contract, and the maintenance margin is $3,100 per contract.
What is the smallest price change that would lead to a margin call for the buyer?
Question 720 mean and median returns, return distribution, arithmetic and geometric averages, continuously compounding rate
A stock has an arithmetic average continuously compounded return (AALGDR) of 10% pa, a standard deviation of continuously compounded returns (SDLGDR) of 80% pa and current stock price of $1. Assume that stock prices are log-normally distributed.
In 5 years, what do you expect the median and mean prices to be? The answer options are given in the same order.
A firm wishes to raise $50 million now. They will issue 5% pa semi-annual coupon bonds that will mature in 3 years and have a face value of $100 each. Bond yields are 6% pa, given as an APR compounding every 6 months, and the yield curve is flat.
How many bonds should the firm issue?
An Apple (NASDAQ:AAPL) stock was purchased by an investor for $120 and one year later was sold for $150. A dividend of $4 was also collected at the end of the year just before the stock was sold.
Which of the following statements about the stock investment is NOT correct? Ignore taxes.
Over the year, the investor made a:
.