Globalization and deregulation of financial markets are the main forces of change in the external environment. Which of the following is not generally considered a major class of financial decisions. Which of the following is not one of the four basic types of business organization or legal entity.
Which of the following are powers that a company does not have under the Corporations Act 2001. Ensuring the stability of the financial system as a whole is the role of the Reserve Bank of Australia (see top of page 77). The other three are Australian Securities and Investments Commission filings: see top of page 57.
Which of the following can best be described as a hybrid equity instrument with some characteristics of equity and some of debt. Which of the following is not an issue a financial manager should consider when raising debt financing.
Financial Mathematics
Question 3 If I borrow $20,000 at a simple interest rate of 6% per year, how much interest would I owe after six months? Q4 If I borrow $20,000 at an interest rate of 9% per year, compounded monthly and payable quarterly, how much interest would I have to pay after three months. Question 9 If the nominal monthly interest rate is 6% per year, what is the effective annual interest rate.
Q10 What is the present value of an ordinary annuity of $1000 per month for 20 years discounted at 9% p.a. (assume monthly compounding). Q13 What is the present value of an annuity of $200 per month for two years, starting five years from now, discounted at 6% p.a. Q14 What is the future value of an ordinary annuity of $100 per month for two years if the interest rate is 12% p.a. compounded monthly.
Q17 If I invest $100 per month for two years at 6% p.a. compounded monthly, how much will I have after four years. Q18 If I can invest at 6% p.a. compounded monthly, how much would I need to invest today to provide an allowance of $200 per month for two years to a child starting boarding school two years from now.
Understanding Risk & Returns
Q8 If returns are normally distributed, the expected return plus or minus one standard deviation will cover a percentage of all possible returns. If returns are normally distributed, the expected return plus or minus one standard deviation will cover 68% of all possible returns. V10. What is the expected return on an asset that has the following possible returns and their associated probabilities.
An investment's expected return is the probability-weighted average of possible outcomes associated with the investment. For example, see Question 10 above in which the most likely return is 15%, while the expected return is 14%. An expected return in the probability-weighted average of possible outcomes associated with an investment (see margin note on page 103).
Note that the expected return on an investment must be greater than the investor's required rate of return to persuade the investor to choose that particular investment. The Capital Asset Pricing Model (CAPM) can be used to calculate a security's required rate of return, which is assumed equal to its expected return in an equilibrium situation.
Valuation of Bonds and Shares
The intrinsic value of a bond is the present value of the bond's future cash flows, discounted at the bondholder's required rate of return. Note that bonds are purchased at maturity value, which is usually the same as their face value.). regular interest payments received by the holder of a common share b. regular interest payments received by the holder of a preference share c. regular interest payments received by the holder of a bond. regular interest payments received by the holder of a bank deposit. Q7 Which of the following does not provide a means of calculating the intrinsic value of a common stock.
Market capitalization is the number of shares issued multiplied by the current market value of the share. Although each of the above answers is applicable to most blue businesses in Australia, answer c best describes the key differentiating characteristic of blue businesses. If dividends are expected to grow indefinitely at a rate of 5% per year and the investor's required rate of return is 15%, what is the intrinsic value of the stock.
Q18 A zero-coupon bond will be redeemed at its face value of $100 five years from now. It has just paid $40 in interest and will be redeemed five years from now at its face value of $1,000. If an investor's required rate of return is 10% per year, what is the intrinsic value of the bond.
A PE ratio is the current price of a share divided by projected earnings per share (EPS), see margin note and commentary on page 197. Q22 When calculating the intrinsic value of an investment using discounted cash flow principles, which of the following will lead to an increase in intrinsic value, all else equal. Intrinsic value is the present value of expected future cash flows discounted at the investor's required rate of return.
It can be seen that the intrinsic value calculated according to a particular dividend discount model is sensitive to the choice of estimates used in the model.
Cost of Capital
