# Fight Finance

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Assume that there exists a perfect world with no transaction costs, no asymmetric information, no taxes, no agency costs, equal borrowing rates for corporations and individual investors, the ability to short the risk free asset, semi-strong form efficient markets, the CAPM holds, investors are rational and risk-averse and there are no other market frictions.

For a firm operating in this perfect world, which statement(s) are correct?

(i) When a firm changes its capital structure and/or payout policy, share holders' wealth is unaffected.

(ii) When the idiosyncratic risk of a firm's assets increases, share holders do not expect higher returns.

(iii) When the systematic risk of a firm's assets increases, share holders do not expect higher returns.

Select the most correct response:

One method for calculating a firm's free cash flow (FFCF, or CFFA) is to ignore interest expense. That is, pretend that interest expense $(IntExp)$ is zero:

\begin{aligned} FFCF &= (Rev - COGS - Depr - FC - IntExp)(1-t_c) + Depr - CapEx -\Delta NWC + IntExp \\ &= (Rev - COGS - Depr - FC - 0)(1-t_c) + Depr - CapEx -\Delta NWC - 0\\ \end{aligned}
Does this annual FFCF with zero interest expense or the annual interest tax shield?

A man just sold a call option to his counterparty, a lady. The man has just now:

The current gold price is $700, gold storage costs are 2% pa and the risk free rate is 10% pa, both with continuous compounding. What should be the 3 year gold futures price? A home loan company advertises an interest rate of 9% pa, payable monthly. Which of the following statements about the interest rate is NOT correct? All rates are given with an accuracy of 4 decimal places. Which of the following interest rate labels does NOT make sense? You're considering a business project which costs$11m now and is expected to pay a single cash flow of $11m in one year. So you pay$11m now, then one year later you receive $11m. Assume that the initial$11m cost is funded using the your firm's existing cash so no new equity or debt will be raised. The cost of capital is 10% pa.

Which of the following statements about the net present value (NPV), internal rate of return (IRR) and payback period is NOT correct?

Suppose the market expects the Bank of Japan (BoJ) to decrease their short term interest rate by 15 basis points at their next meeting. The current short term interest rate is -0.1% pa and the exchange rate is 100 JPY per USD.

Then unexpectedly, the BoJ announce that they will leave the short term interest rate unchanged.

What do you expect to happen to Japan’s exchange rate on the day when the surprise announcement is made? The Japanese Yen (JPY) is likely to suddenly:

Arthur and Bindi are the only people on a remote island. Their production possibility curves are shown in the graph.

Which of the following statements is NOT correct?

 Price Data Time Series Sourced from Yahoo Finance Historical Price Data Date S&P500 Index (^GSPC) Apple (AAPL) Open High Low Close Adj close Open High Low Close Adj close 2007, Wed 3 Jan 1418 1429 1408 1417 1417 12.33 12.37 11.7 11.97 10.42 2008, Wed 2 Jan 1468 1472 1442 1447 1447 28.47 28.61 27.51 27.83 24.22 2009, Fri 2 Jan 903 935 899 932 932 12.27 13.01 12.17 12.96 11.28 2010, Mon 4 Jan 1117 1134 1117 1133 1133 30.49 30.64 30.34 30.57 26.6 Source: Yahoo Finance.

Which of the following statements about the above table which is used to calculate Apple's equity beta is NOT correct?