A zero coupon bond that matures in 6 months has a face value of $1,000.
The firm that issued this bond is trying to forecast its income statement for the year. It needs to calculate the interest expense of the bond this year.
The bond is highly illiquid and hasn't traded on the market. But the finance department have assessed the bond's fair value to be $950 and this is its book value right now at the start of the year.
Assume that:
- the firm uses the 'effective interest method' to calculate interest expense.
- the market value of the bond is the same as the book value.
- the firm is only interested in this bond's interest expense. Do not include the interest expense for a new bond issued to refinance the current one, as would normally happen.
What will be the interest expense of the bond this year for the purpose of forecasting the income statement?
Find World Bar's Cash Flow From Assets (CFFA), also known as Free Cash Flow to the Firm (FCFF), over the year ending 30th June 2013.
| World Bar | ||
| Income Statement for | ||
| year ending 30th June 2013 | ||
| $m | ||
| Sales | 300 | |
| COGS | 150 | |
| Operating expense | 50 | |
| Depreciation | 40 | |
| Interest expense | 10 | |
| Taxable income | 50 | |
| Tax at 30% | 15 | |
| Net income | 35 | |
| World Bar | ||
| Balance Sheet | ||
| as at 30th June | 2013 | 2012 |
| $m | $m | |
| Assets | ||
| Current assets | 200 | 230 |
| PPE | ||
| Cost | 400 | 400 |
| Accumul. depr. | 75 | 35 |
| Carrying amount | 325 | 365 |
| Total assets | 525 | 595 |
| Liabilities | ||
| Current liabilities | 150 | 205 |
| Non-current liabilities | 235 | 250 |
| Owners' equity | ||
| Retained earnings | 100 | 100 |
| Contributed equity | 40 | 40 |
| Total L and OE | 525 | 595 |
Note: all figures above and below are given in millions of dollars ($m).
One formula for calculating a levered firm's free cash flow (FFCF, or CFFA) is to use earnings before interest and tax (EBIT).
###\begin{aligned} FFCF &= (EBIT)(1-t_c) + Depr - CapEx -\Delta NWC + IntExp.t_c \\ &= (Rev - COGS - Depr - FC)(1-t_c) + Depr - CapEx -\Delta NWC + IntExp.t_c \\ \end{aligned} \\###
Acquirer firm plans to launch a takeover of Target firm. The deal is expected to create a present value of synergies totaling $2 million. A scrip offer will be made that pays the fair price for the target's shares plus 70% of the total synergy value.
| Firms Involved in the Takeover | ||
| Acquirer | Target | |
| Assets ($m) | 60 | 10 |
| Debt ($m) | 20 | 2 |
| Share price ($) | 10 | 8 |
| Number of shares (m) | 4 | 1 |
Ignore transaction costs and fees. Assume that the firms' debt and equity are fairly priced, and that each firms' debts' risk, yield and values remain constant. The acquisition is planned to occur immediately, so ignore the time value of money.
Calculate the merged firm's share price and total number of shares after the takeover has been completed.
A mining firm has just discovered a new mine. So far the news has been kept a secret.
The net present value of digging the mine and selling the minerals is $250 million, but $500 million of new equity and $300 million of new bonds will need to be issued to fund the project and buy the necessary plant and equipment.
The firm will release the news of the discovery and equity and bond raising to shareholders simultaneously in the same announcement. The shares and bonds will be issued shortly after.
Once the announcement is made and the new shares and bonds are issued, what is the expected increase in the value of the firm's assets ##(\Delta V)##, market capitalisation of debt ##(\Delta D)## and market cap of equity ##(\Delta E)##? Assume that markets are semi-strong form efficient.
The triangle symbol ##\Delta## is the Greek letter capital delta which means change or increase in mathematics.
Ignore the benefit of interest tax shields from having more debt.
Remember: ##\Delta V = \Delta D+ \Delta E##
Private equity firms are known to buy medium sized private companies operating in the same industry, merge them together into a larger company, and then sell it off in a public float (initial public offering, IPO).
If medium-sized private companies trade at PE ratios of 5 and larger listed companies trade at PE ratios of 15, what return can be achieved from this strategy?
Assume that:
- The medium-sized companies can be bought, merged and sold in an IPO instantaneously.
- There are no costs of finding, valuing, merging and restructuring the medium sized companies. Also, there is no competition to buy the medium-sized companies from other private equity firms.
- The large merged firm's earnings are the sum of the medium firms' earnings.
- The only reason for the difference in medium and large firm's PE ratios is due to the illiquidity of the medium firms' shares.
- Return is defined as: ##r_{0→1} = (p_1-p_0+c_1)/p_0## , where time zero is just before the merger and time one is just after.
A stock just paid a dividend of $1. Future annual dividends are expected to grow by 2% pa. The next dividend of $1.02 (=1*(1+0.02)^1) will be in one year, and the year after that the dividend will be $1.0404 (=1*(1+0.02)^2), and so on forever.
Its required total return is 10% pa. The total required return and growth rate of dividends are given as effective annual rates.
Calculate the current stock price.
Question 625 dividend re-investment plan, capital raising
Which of the following statements about dividend re-investment plans (DRP's) is NOT correct?
Question 844 gross domestic product deflator, consumer price index, inflation, no explanation
An Australian-owned company produces milk in New Zealand and exports all of it to China. If the price of the milk increases, which of the following would increase?
A one year European-style put option has a strike price of $4. The option's underlying stock pays no dividends and currently trades at $5. The risk-free interest rate is 10% pa continuously compounded. Use a single step binomial tree to calculate the option price, assuming that the price could rise to $8 ##(u = 1.6)## or fall to $3.125 ##(d = 1/1.6)## in one year. The put option price now is: