Fight Finance

Question 128  debt terminology, needs refinement

An 'interest payment' is the same thing as a 'coupon payment'. or ?

Question 218  NPV, IRR, profitability index, average accounting return

Which of the following statements is NOT correct?

(a) If a project has a positive NPV, its Profitability Index (PI) will be more than 1.

(b) If a project has a negative NPV and the discount rate is zero, then the payback period will be infinite so the project will never pay back its costs.

(c) If a project's NPV is zero, then the PI must be 1.

(d) If a project has a negative NPV, its IRR will be negative.

(e) If a project has a positive NPV, its Average Accounting Return (AAR) is not necessarily positive, it could be positive, negative or zero.

Question 394  real option, option

According to option theory, it's rational for students to submit their assignments as or as possible?

Question 427  takeover

In a takeover deal where the offer is 100% cash, the merged firm's number of shares will be equal to the acquirer firm's original number of shares. or ?

Question 465  NPV, perpetuity

The boss of WorkingForTheManCorp has a wicked (and unethical) idea. He plans to pay his poor workers one week late so that he can get more interest on his cash in the bank.

Every week he is supposed to pay his 1,000 employees $1,000 each. So $1 million is paid to employees every week.

The boss was just about to pay his employees today, until he thought of this idea so he will actually pay them one week (7 days) later for the work they did last week and every week in the future, forever.

Bank interest rates are 10% pa, given as a real effective annual rate. So ##r_\text{eff annual, real} = 0.1## and the real effective weekly rate is therefore ##r_\text{eff weekly, real} = (1+0.1)^{1/52}-1 = 0.001834569##

All rates and cash flows are real, the inflation rate is 3% pa and there are 52 weeks per year. The boss will always pay wages one week late. The business will operate forever with constant real wages and the same number of employees.

What is the net present value (NPV) of the boss's decision to pay later?

(a) $261.16

(b) $1,919.39

(c) $13,580.21

(d) $18,295.38

(e) $1,000,000.00

Question 475  payout ratio, dividend, no explanation

The below screenshot of Commonwealth Bank of Australia's (CBA) details were taken from the Google Finance website on 7 Nov 2014. Some information has been deliberately blanked out.

What was CBA's approximate payout ratio over the 2014 financial year?

Note that the firm's interim and final dividends were $1.83 and $2.18 respectively over the 2014 financial year.

(a) 2.48%

(b) 4.85%

(c) 77.00%

(d) 129.93%

(e) 247.53%

Question 496  NPV, IRR, pay back period

A firm is considering a business project which costs $10m now and is expected to pay a single cash flow of $12.1m in two years.

Assume that the initial $10m cost is funded using the 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 net present value (NPV), internal rate of return (IRR) and payback period is NOT correct?

(a) The NPV is zero.

(b) The IRR is 10% pa, equal to the 10% cost of capital.

(c) The payback period is two years assuming that the whole $12.1m cash flow occurs at t=2, or 1.826 years if the $12.1m cash flow is paid smoothly over the second year.

(d) The project could be accepted or rejected, the owners would be indifferent.

(e) If the project is accepted then the market value of the firm's assets will increase by $2.1m more than it would otherwise if the project was rejected.

Question 860  idiom, hedging, speculation, arbitrage, market making, insider trading, no explanation

Which class of derivatives market trader is NOT principally focused on ‘buying low and selling high’?

(a) Hedgers.

(b) Speculators.

(c) Arbitrageurs.

(d) Market makers.

(e) Insider traders.

Question 959  negative gearing, leverage, capital structure, interest tax shield, real estate

Last year, two friends Gear and Nogear invested in residential apartments. Each invested $1 million of their own money (their net wealth).

Apartments cost $1,000,000 last year and they earned net rents of $30,000 pa over the last year. Net rents are calculated as rent revenues less the costs of renting such as property maintenance, land tax and council rates. However, interest expense and personal income taxes are not deducted from net rents.

Gear and Nogear funded their purchases in different ways:

• Gear used $1,000,000 of her own money and borrowed $4,000,000 from the bank in the form of an interest-only loan with an interest rate of 5% pa to buy 5 apartments.
• Nogear used $1,000,000 of his own money to buy one apartment. He has no mortgage loan on his property.

Both Gear and Nogear also work in high-paying jobs and are subject personal marginal tax rates of 45%.

Which of the below statements about the past year is NOT correct?

(a) Gear’s total annual interest expense would have been $200,000.

(b) Gear’s total annual loss before tax on the investment properties was $50,000

(c) Gear’s total annual loss after tax on the investment properties was $27,500

(d) Gear’s total personal tax saving due to the investment properties was $22,500.

(e) Nogear’s total personal tax payable due to the investment property was $16,500.

Question 983  corporate financial decision theory, DuPont formula, accounting ratio

A company manager is thinking about the firm's book assets-to-equity ratio, also called the 'equity multiplier' in the DuPont formula:

###\text{Equity multiplier} = \dfrac{\text{Total Assets}}{\text{Owners' Equity}}###

What's the name of the decision that the manager is thinking about? In other words, the assets-to-equity ratio is the main subject of what decision?

(a) Investment decision.

(b) Financing decision.

(c) Working capital decision.

(d) Payout policy decision.

(e) Capital or labour decision.

Note: DuPont formula for analysing book return on equity:

###\begin{aligned} \text{ROE} &= \dfrac{\text{Net Profit}}{\text{Sales}} \times \dfrac{\text{Sales}}{\text{Total Assets}} \times \dfrac{\text{Total Assets}}{\text{Owners' Equity}} \\ &= \text{Net profit margin} \times \text{Total asset turnover} \times \text{Equity multiplier} \\ \end{aligned}###