Fight Finance

Question 134  fully amortising loan, APR

You want to buy an apartment worth $400,000. You have saved a deposit of $80,000. The bank has agreed to lend you the $320,000 as a fully amortising mortgage loan with a term of 30 years. The interest rate is 6% pa and is not expected to change. What will be your monthly payments?

(a) $888.89

(b) $1,600.00

(c) $1,885.99

(d) $1,918.56

(e) $23,247.65

Question 236  diversification, correlation, risk

Diversification in a portfolio of two assets works best when the correlation between their returns is:

(a) -1

(b) -0.5

(c) 0

(d) 0.5

(e) 1

Question 272  NPV

Suppose you had $100 in a savings account and the interest rate was 2% per year.

After 5 years, how much do you think you would have in the account if you left the money to grow?

than $102, $102 or than $102?

Question 371  interest tax shield, CFFA

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?

Question 377  leverage, capital structure

Issuing debt doesn't give away control of the firm because debt holders can't cast votes to determine the company's affairs, such as at the annual general meeting (AGM), and can't appoint directors to the board. or ?

Question 421  takeover

Acquirer firm plans to launch a takeover of Target firm. The deal is expected to create a present value of synergies totaling $105 million. A scrip offer will be made that pays the fair price for the target's shares plus 75% of the total synergy value.

Firms Involved in the Takeover
	Acquirer	Target
Assets ($m)	6,000	700
Debt ($m)	4,800	400
Share price ($)	40	20
Number of shares (m)	30	15

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) $26.7778 share price and 45m shares on issue.

(b) $40.875 share price and 39.266055m shares on issue.

(c) $42.0639 share price and 38.15625m shares on issue.

(d) $42.8 share price and 37.5m shares on issue.

(e) $50.875 share price and 30m shares on issue.

Question 479  perpetuity with growth, DDM, NPV

Discounted cash flow (DCF) valuation prices assets by finding the present value of the asset's future cash flows. The single cash flow, annuity, and perpetuity equations are very useful for this.

Which of the following equations is the 'perpetuity with growth' equation?

(a) ##V_0=\dfrac{C_t}{(1+r)^t} ##

(b) ##V_0=\dfrac{C_1}{r}.\left(1-\dfrac{1}{(1+r)^T} \right)= \sum\limits_{t=1}^T \left( \dfrac{C_t}{(1+r)^t} \right) ##

(c) ##V_0=\dfrac{C_1}{r-g}.\left(1-\left(\dfrac{1+g}{1+r}\right)^T \right)= \sum\limits_{t=1}^T \left( \dfrac{C_t.(1+g)^t}{(1+r)^t} \right) ##

(d) ##V_0=\dfrac{C_1}{r} = \sum\limits_{t=1}^\infty \left( \dfrac{C_t}{(1+r)^t} \right) ##

(e) ##V_0=\dfrac{C_1}{r-g} = \sum\limits_{t=1}^\infty \left( \dfrac{C_t.(1+g)^t}{(1+r)^t} \right) ##

Question 526  real and nominal returns and cash flows, inflation, no explanation

How can a nominal cash flow be precisely converted into a real cash flow?

(a) ##C_\text{real, t}=C_\text{nominal,t}.(1+r_\text{inflation})^t##

(b) ##C_\text{real,t}=\dfrac{C_\text{nominal,t}}{(1+r_\text{inflation})^t} ##

(c) ##C_\text{real,t}=\dfrac{C_\text{nominal,t}}{r_\text{inflation}} ##

(d) ##C_\text{real,t}=C_\text{nominal,t}.r_\text{inflation} ##

(e) ##C_\text{real,t}=C_\text{nominal,t}.r_\text{inflation}.t##

Question 622  expected and historical returns, risk

An economy has only two investable assets: stocks and cash.

Stocks had a historical nominal average total return of negative two percent per annum (-2% pa) over the last 20 years. Stocks are liquid and actively traded. Stock returns are variable, they have risk.

Cash is riskless and has a nominal constant return of zero percent per annum (0% pa), which it had in the past and will have in the future. Cash can be kept safely at zero cost. Cash can be converted into shares and vice versa at zero cost.

The nominal total return of the shares over the next year is expected to be:

(a) Less than or equal to negative two percent per annum ##(r_\text{shares} \leq -0.02)##.

(b) Exactly negative two percent per annum ##(r_\text{shares} = -0.02)##.

(c) More than or equal to negative two percent per annum ##(r_\text{shares} \geq -0.02)##.

(d) Less than or equal to zero percent per annum ##(r_\text{shares} \leq 0)##.

(e) More than or equal to zero percent per annum ##(r_\text{shares} \geq 0)##.

Question 900  Basel accord

Which of the following statements about the Basel 3 minimum capital requirements is NOT correct? Common equity tier 1 (CET1) comprises the highest quality components of capital that fully satisfy all of the following characteristics:

(a) Provide a permanent and unrestricted commitment of funds;

(b) Are freely available to absorb losses;

(c) Impose unavoidable servicing charges against earnings;

(d) Rank behind the claims of depositors and other creditors in the event of winding-up of the issuer.