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Question 43  pay back period

A project to build a toll road will take 3 years to complete, costing three payments of $50 million, paid at the start of each year (at times 0, 1, and 2).

After completion, the toll road will yield a constant $10 million at the end of each year forever with no costs. So the first payment will be at t=4.

The required return of the project is 10% pa given as an effective nominal rate. All cash flows are nominal.

What is the payback period?



Question 558  portfolio weights, portfolio return, short selling

An investor wants to make a portfolio of two stocks A and B with a target expected portfolio return of 16% pa.

  • Stock A has an expected return of 8% pa.
  • Stock B has an expected return of 12% pa.

What portfolio weights should the investor have in stocks A and B respectively?



Question 179  bond pricing, capital raising

A firm wishes to raise $20 million now. They will issue 8% pa semi-annual coupon bonds that will mature in 5 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?



Question 1039  gross domestic product, inflation

In this business cycle graph shown in the RBA's article explaining recessions, how might 'output' on the y-axis be measured?

The ‘output’ y-axis amount in the business cycle chart can be measured by:



Question 12  bond pricing

For a price of $100, Carol will sell you a 5 year bond paying semi-annual coupons of 16% pa. The face value of the bond is $100. Other bonds with similar risk, maturity and coupon characteristics trade at a yield of 12% pa.

Would you like to her bond or politely ?


Question 566  capital structure, capital raising, rights issue, on market repurchase, dividend, stock split, bonus issue

A company's share price fell by 20% and its number of shares rose by 25%. Assume that there are no taxes, no signalling effects and no transaction costs.

Which one of the following corporate events may have happened?



Question 744  income and capital returns, real and nominal returns and cash flows, inflation

If someone says "my shares rose by 10% last year", what do you assume that they mean?



Question 846  monetary policy, fiscal policy, no explanation

Below is the Australian central bank’s cash rate.

Graph

From 2011 to 2017 the Australian central bank has implemented:



Question 593  future, arbitrage table

The price of gold is currently $700 per ounce. The forward price for delivery in 1 year is $800. An arbitrageur can borrow money at 10% per annum given as an effective discrete annual rate. Assume that gold is fairly priced and the cost of storing gold is zero.

What is the best way to conduct an arbitrage in this situation? The best arbitrage strategy requires zero capital, has zero risk and makes money straight away. An arbitrageur should sell 1 forward on gold and:



Question 1006  CAPM, beta, leverage, WACC, real estate

Four retail business people compete in the same city. They are all exactly the same except that they have different ways of funding or leasing the shop real estate needed to run their retail business.

The two main assets that retail stores need are:

  • Inventory typically worth $1 million which has a beta of 2, and;
  • Shopfront real estate worth $1 million which has a beta of 1. Shops can be bought or leased.

Lease contract prices are fixed for the term of the lease and based on expectations of the future state of the economy. When leases end, a new lease contract is negotiated and the lease cost may be higher or lower depending on the state of the economy and demand and supply if the economy is:

  • Booming, shop real estate is worth more and lease costs are higher.
  • In recession, shop real estate is worth less and lease costs are low.
Assume that the market’s expected return is 10% pa, required returns are expected to remain constant, shop assets can be valued as a perpetuity of lease profits, and that buying, selling, shutting down, moving out, moving in and opening a new shop has negligible (low) cost. Store owners can invest surplus funds in alternative investments that also earn the 10% pa market return.

Which retail business person will have the LOWEST beta of equity (or net wealth)?