Answer the following:

a. Why would you offer agency trading as a bank?

To bet on certain market movements.

To select the best available agents.

To offer liquidity and earn the bid-ask spreads.

To construct efficient portfolios for the trading books.

To increase the correlation of profits across the trading books.

b. Equity factors (only one possible answer)

Dare orthogonal by construction.

do not need rebalancing.

do not depend on financial statements.

are more diversified than the market index.

can include ESG features.

c. The Gordon growth model

(only one possible answer)

uses earnings, but not the dividends for calculating year-to-year growth variable.

relies on the equity discount rate, which equals roughly 10% across market phases.

assumes constant growth of dividends from year to year, this being its main weakness.

includes time-varying assumption on dividend growth and terminal value.

involves the analysis of cash flows, EBIT, and further accounting terms.

d. Free cash flow to the company can be calculated using balance sheet items:

(only one possible answer)

includes the net working capital, which is equal to WACC minus depreciation.

is derived from P/E valuation with adjustment for CAPEX and dividend payout ratio.

similar to the P/E ratio, does not involve discounting or complex calculation.

takes into account EBIT, depreciation, working capital, and CAPEX.

Answer rating: 100% (QA)

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