1. What is the best way to invest if your primary concern is to minimise risk?

One should invest in debt rather than equity if the aim is to minimise risk. Furthermore, one should aim only to make low- or even no-risk loans for example by investing in short term government bills. Any long-term loans should be at floating interest rates unless you were completely sure when you needed the loan to be repaid.

2. Which source of finance should a new company use if it was intending to go into the oil exploration business?

The appropriate source of finance here would be equity. Oil exploration involves high risk and the potential loss of all money spent if the so-called wildcat well is dry. Hence it would not be appropriate to take on any debt.

3. If a 90 day US T bill was sold for $982 what (to the nearest 0.1%) would the US risk-free rate be?

90 day US T bills will repay $1,000 at the end of the 90 day period.

The interest rate over the 90 day period is 1,000 ÷ 982 = 1.833%

If we work on the basis of there being four 90 day periods in a year (justified because we are only seeking an answer to the nearest 0.1%) then the annual interest rate is:

(1 + 0.01833)4 – 1 = 7.5%

4. If the dividend yield on a share is currently 2% and the market consensus is that this dividend will grow at 5½%, what cost of equity does the market appear to be using for this company?

The relevant equation is cost of equity = yield + growth

So the implied cost of equity is 7½%

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