**Question 31** DDM, perpetuity with growth, effective rate conversion

What is the NPV of the following series of cash flows when the discount rate is **5**% given as an effective **annual** rate?

The first payment of $10 is in 4 years, followed by payments every 6 months forever after that which shrink by 2% every 6 months. That is, the growth rate every 6 months is actually **negative 2%**, given as an effective **6 month** rate. So the payment at ## t=4.5 ## years will be ## 10(1-0.02)^1=9.80 ##, and so on.

A stock is expected to pay the following dividends:

Cash Flows of a Stock | ||||||

Time (yrs) | 0 | 1 | 2 | 3 | 4 | ... |

Dividend ($) | 0 | 6 | 12 | 18 | 20 | ... |

After year 4, the dividend will grow in perpetuity at 5% pa. The required return of the stock is 10% pa. Both the growth rate and required return are given as effective annual rates.

What is the current price of the stock?

Which firms tend to have **low** forward-looking price-earnings (PE) ratios?

Only consider firms with positive earnings, disregard firms with negative earnings and therefore negative PE ratios.

**Question 383** Merton model of corporate debt, real option, option

In the Merton model of corporate debt, buying a levered company's debt is equivalent to buying the company's assets and:

**Question 526** real and nominal returns and cash flows, inflation, no explanation

How can a **nominal** cash flow be precisely converted into a **real** cash flow?

You deposit money into a bank. Which of the following statements is **NOT** correct? You:

Radio-Rentals.com offers the Apple iphone 5S smart phone for rent at $**12.95** per week paid in **advance** on a **2** year contract. After renting the phone, you must return it to Radio-Rentals.

Kogan.com offers the Apple iphone 5S smart phone for sale at $**699**. You estimate that the phone will last for **3** years before it will break and be worthless.

Currently, the effective annual interest rate is **11.351**%, the effective monthly interest rate **0.9**% and the effective weekly interest rate is **0.207**%. Assume that there are exactly **52** weeks per year and **12** months per year.

Find the equivalent annual cost of renting the phone and also buying the phone. The answers below are listed in the same order.

**Question 877** arithmetic and geometric averages, utility, utility function

Gross discrete returns in different states of the world are presented in the table below. A gross discrete return is defined as ##P_1/P_0##, where ##P_0## is the price now and ##P_1## is the expected price in the future. An investor can purchase only a single asset, A, B, C or D. Assume that a portfolio of assets is not possible.

Gross Discrete Returns |
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In Different States of the World |
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Investment | World states (probability) | |

asset | Good (50%) | Bad (50%) |

A | 2 | 0.5 |

B | 1.1 | 0.9 |

C | 1.1 | 0.95 |

D | 1.01 | 1.01 |

Which of the following statements about the different assets is **NOT** correct? Asset:

**Question 892** foreign exchange reserve, foreign exchange rate, no explanation

The Chinese central bank has the largest amount of foreign currency reserves.

What could the large amounts of foreign exchange reserves held by the Chinese government be used for in a currency crisis? China's currency is called the Renminbi (RMB) or Yuan (CNY). In a Chinese currency crisis the Chinese government is likely to use its FX reserves to: