# Fight Finance

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What is the Internal Rate of Return (IRR) of the project detailed in the table below?

Assume that the cash flows shown in the table are paid all at once at the given point in time. All answers are given as effective annual rates.

 Project Cash Flows Time (yrs) Cash flow ($) 0 -100 1 0 2 121 A wholesale shop offers credit to its customers. The customers are given 21 days to pay for their goods. But if they pay straight away (now) they get a 1% discount. What is the effective interest rate given to customers who pay in 21 days? All rates given below are effective annual rates. Assume 365 days in a year. A 30-day Bank Accepted Bill has a face value of$1,000,000. The interest rate is 8% pa and there are 365 days in the year. What is its price now?

Which one of the following is NOT usually considered an 'investable' asset for long-term wealth creation?

The CAPM can be used to find a business's expected opportunity cost of capital:

$$r_i=r_f+β_i (r_m-r_f)$$

What should be used as the risk free rate $r_f$?

A residential real estate investor believes that house prices will grow at a rate of 5% pa and that rents will grow by 2% pa forever.

All rates are given as nominal effective annual returns. Assume that:

• His forecast is true.
• Real estate is and always will be fairly priced and the capital asset pricing model (CAPM) is true.
• Ignore all costs such as taxes, agent fees, maintenance and so on.
• All rental income cash flow is paid out to the owner, so there is no re-investment and therefore no additions or improvements made to the property.
• The non-monetary benefits of owning real estate and renting remain constant.

Which one of the following statements is NOT correct? Over time:

 Project Data Project life 1 year Initial investment in equipment $6m Depreciation of equipment per year$6m Expected sale price of equipment at end of project 0 Unit sales per year 9m Sale price per unit $8 Variable cost per unit$6 Fixed costs per year, paid at the end of each year $1m Interest expense in first year (at t=1)$0.53m Tax rate 30% Government treasury bond yield 5% Bank loan debt yield 6% Market portfolio return 10% Covariance of levered equity returns with market 0.08 Variance of market portfolio returns 0.16 Firm's and project's debt-to-assets ratio 50%

Notes

1. Due to the project, current assets will increase by $5m now (t=0) and fall by$5m at the end (t=1). Current liabilities will not be affected.

Assumptions

• The debt-to-assets ratio will be kept constant throughout the life of the project. The amount of interest expense at the end of each period has been correctly calculated to maintain this constant debt-to-equity ratio.
• Millions are represented by 'm'.
• All cash flows occur at the start or end of the year as appropriate, not in the middle or throughout the year.
• All rates and cash flows are real. The inflation rate is 2% pa.
• All rates are given as effective annual rates.
• The 50% capital gains tax discount is not available since the project is undertaken by a firm, not an individual.

What is the net present value (NPV) of the project?

In February a company sold one December 40,000 pound (about 18 metric tons) lean hog futures contract. It closed out its position in May.

The spot price was $0.68 per pound in February. The December futures price was$0.70 per pound when the trader entered into the contract in February, $0.60 when he closed out his position in May, and$0.55 when the contract matured in December.

What was the total profit?

If the nominal gold price is expected to increase at the same rate as inflation which is 3% pa, which of the following statements is NOT correct?

If future required returns fall, and future expected cash flows remain the same, then prices will , or remain the ?