Fight Finance

Question 14  bond pricing

For a price of $100, Andrea will sell you a 2 year bond paying annual coupons of 10% pa. The face value of the bond is $100. Other bonds with the same risk, maturity and coupon characteristics trade at a yield of 6% pa.

Would you like to the bond or politely ?

Question 113  WACC, CFFA, capital budgeting

The US firm Google operates in the online advertising business. In 2011 Google bought Motorola Mobility which manufactures mobile phones.

Assume the following:

• Google had a 10% after-tax weighted average cost of capital (WACC) before it bought Motorola.
• Motorola had a 20% after-tax WACC before it merged with Google.
• Google and Motorola have the same level of gearing.
• Both companies operate in a classical tax system.

You are a manager at Motorola. You must value a project for making mobile phones. Which method(s) will give the correct valuation of the mobile phone manufacturing project? Select the most correct answer.

The mobile phone manufacturing project's:

(a) Unlevered CFFA should be discounted by Google's 10% WACC after tax.

(b) Unlevered CFFA should be discounted by Motorola's 20% WACC after tax.

(c) Levered CFFA should be discounted by Google's 10% WACC after tax.

(d) Levered CFFA should be discounted by Motorola's 20% WACC after tax.

(e) Unlevered CFFA by 15%, the average of Google and Motorola's WACC after tax.

Question 262  income and capital returns

A 90-day $1 million Bank Accepted Bill (BAB) was bought for $990,000 and sold 30 days later for $996,000 (at t=30 days).

What was the total return, capital return and income return over the 30 days it was held?

Despite the fact that money market instruments such as bills are normally quoted with simple interest rates, please calculate your answers as compound interest rates, specifically, as effective 30-day rates, which is how the below answer choices are listed.

##r_\text{total}##, ##r_\text{capital}##, ## r_\text{income}##

(a) 0.004016, 0, 0.004016

(b) 0.004016, 0.004016, 0

(c) 0.006061, 0.006061, 0

(d) 0.006061, 0, 0.006061

(e) 0, 0.004016, -0.004016

Question 296  CFFA, interest tax shield

Which one of the following will decrease net income (NI) but increase cash flow from assets (CFFA) in this year for a tax-paying firm, all else remaining constant?

Remember:

###NI=(Rev-COGS-FC-Depr-IntExp).(1-t_c )### ###CFFA=NI+Depr-CapEx - ΔNWC+IntExp###

(a) An increase in revenue (##Rev##).

(b) An decrease in revenue (##Rev##).

(c) An increase in rent expense (part of fixed costs, ##FC##).

(d) An increase in interest expense (##IntExp##).

(e) An increase in dividends.

Question 420  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 cash offer will be made that pays the fair price for the target's shares plus 75% of the total synergy value. The cash will be paid out of the firm's cash holdings, no new debt or equity will be raised.

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) $53.5 share price and 30m shares on issue.

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

(c) $43.5 share price and 30m shares on issue.

(d) $40.875 share price and 30m shares on issue.

(e) $37.375 share price and 30m shares on issue.

Question 638  option, option payoff at maturity, no explanation

Which of the below formulas gives the payoff ##(f)## at maturity ##(T)## from being long a put option? Let the underlying asset price at maturity be ##S_T## and the exercise price be ##X_T##.

(a) ##f_{LP,T}=max⁡(S_T-X_T,0)##

(b) ##f_{LP,T}=max⁡(X_T-S_T,0)##

(c) ##f_{LP,T}=-max⁡(S_T-X_T,0)##

(d) ##f_{LP,T}=-max⁡(X_T-S_T,0)##

(e) ##f_{LP,T}=min⁡(X_T-S_T,0)##

Question 729  book and market values, balance sheet, no explanation

If a firm makes a profit and pays no dividends, which of the firm’s accounts will increase?

(a) Asset revaluation reserve.

(b) Foreign currency translation reserve.

(c) Retained earnings, also known as retained profits.

(d) Contributed equity, also known as paid up capital.

(e) General reserve.

Question 761  NPV, annuity due, no explanation

The phone company Optus have 2 mobile service plans on offer which both have the same amount of phone call, text message and internet data credit. Both plans have a contract length of 24 months and the monthly cost is payable in advance. The only difference between the two plans is that one is a:

• 'Bring Your Own' (BYO) mobile service plan, costing $80 per month. There is no phone included in this plan. The other plan is a:
• 'Bundled' mobile service plan that comes with the latest smart phone, costing $100 per month. This plan includes the latest smart phone.

Neither plan has any additional payments at the start or end. Assume that the discount rate is 1% per month given as an effective monthly rate.

The only difference between the plans is the phone, so what is the implied cost of the phone as a present value? Given that the latest smart phone actually costs $600 to purchase outright from another retailer, should you commit to the BYO plan or the bundled plan?

(a) $480, so the bundled plan is best.

(b) $462.94, so the BYO plan is best.

(c) $429.12, so the bundled plan is best.

(d) $424.87, so the BYO plan is best.

(e) $420.66, so the bundled plan is best.

Question 960  DDM, stock pricing

You are an equities analyst trying to value the equity of the Australian supermarket conglomerate Woolworths, with ticker WOW. In Australia, listed companies like Woolworths tend to pay dividends every 6 months. The payment around September is the final dividend and the payment around March is called the interim dividend. Both occur annually.

• Today is mid-November 2018.
• WOW's last final dividend of $0.50 was two months ago in mid-September 2018.
• WOW's last interim dividend of $0.43 was eight months ago in mid-March 2018.
• Judging by the dividend history and WOW's prospects, you judge that the growth rate in the dividends will be 3% pa forever.
• Assume that WOW's total cost of equity is 6.5% pa. All rates are quoted as nominal effective rates.
• The dividends are nominal cash flows and the inflation rate is 2.5% pa.

What should be the current share price of WOW?

(a) $28.511766

(b) $28.066400

(c) $27.839257

(d) $27.655693

(e) $27.368571

Question 988  variance, covariance, beta, CAPM, risk, no explanation

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?

(a) Adjusted closing prices add back dividends and reverse the effect of stock splits.

(b) Apple's effective annual total return between the market close on 2 January 2008 and 2 January 2009 was -0.534269 (=(24.22-11.28)/24.22).

(c) Sample variance of the S&P500's effective annual total returns over the 3 year period was 0.084452.

(d) Sample covariance of effective total annual returns between Apple and the S&P500 index over the 3 year period was 0.041131.

(e) Apple's equity beta of annual total returns over the 3 year period was 3.530767.