Fight Finance

Question 149  fully amortising loan, APR

You want to buy an apartment priced at $500,000. You have saved a deposit of $50,000. The bank has agreed to lend you the $450,000 as a fully amortising 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) $32,692.01

(b) $2,697.98

(c) $2,652.17

(d) $2,250.00

(e) $1,250.00

Question 194  bond pricing, capital raising

A firm wishes to raise $8 million now. They will issue 7% pa semi-annual coupon bonds that will mature in 10 years and have a face value of $100 each. Bond yields are 10% pa, given as an APR compounding every 6 months, and the yield curve is flat.

How many bonds should the firm issue?

(a) 107,441

(b) 98,393

(c) 90,480

(d) 80,000

(e) 64,039

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 425  takeover

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) $10.15 share price and 4.926108m shares on issue.

(b) $10.2881 share price and 4.86m shares on issue.

(c) $10.4167 share price and 4.8m shares on issue.

(d) $11.6279 share price and 4.3m shares on issue.

(e) $9.6 share price and 5m shares on issue.

Question 495  risk, accounting ratio, no explanation

High risk firms in danger of bankruptcy tend to have:

(a) Low debt to assets ratios.

(b) Low quick ratios.

(c) High interest coverage ratios.

(d) Positive amounts of net working capital.

(e) High net profit margins.

Question 564  covariance

What is the covariance of a variable X with a constant C?

The cov(X, C) or ##\sigma_{X,C}## equals:

(a) var(X) or ##\sigma_X^2##

(b) sd(X) or ##\sigma_X##

(c) 1

(d) 0

(e) Mathematically undefined

Question 578  inflation, real and nominal returns and cash flows

Which of the following statements about inflation is NOT correct?

(a) Real returns approximately equal nominal returns less the inflation rate.

(b) Constant prices are the same as real prices.

(c) Current prices are the same as nominal prices.

(d) If your nominal wage grows by inflation, then your real wage won't change because you will be able to buy the same amount of goods and services as before.

(e) Interest rates advertised at the bank are usually quoted in real terms.

Question 715  return distribution

If a variable, say X, is normally distributed with mean ##\mu## and variance ##\sigma^2## then mathematicians write ##X \sim \mathcal{N}(\mu, \sigma^2)##.

If a variable, say Y, is log-normally distributed and the underlying normal distribution has mean ##\mu## and variance ##\sigma^2## then mathematicians write ## Y \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##.

The below three graphs show probability density functions (PDF) of three different random variables Red, Green and Blue.

Select the most correct statement:

(a)##Red \sim \mathcal{N}(\mu, \sigma^2)##,   ##Green \sim \mathcal{N}(\mu, \sigma^2)##   and   ##Blue \sim \mathcal{N}(\mu, \sigma^2)##

(b) ##Red \sim \mathcal{N}(\mu, \sigma^2)##,   ##Green \sim \mathcal{N}(\mu, \sigma^2)##   and   ##Blue \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##

(c) ##Red \sim \mathcal{N}(\mu, \sigma^2)##,   ##Green \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##   and   ##Blue \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##

(d) ##Red \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##,   ##Green \sim \mathcal{N}(\mu, \sigma^2)##   and   ##Blue \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##

(e) ##Red \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##,   ##Green \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##   and   ##Blue \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##

Question 750  PE ratio, Multiples valuation

Itau Unibanco is a major listed bank in Brazil with a market capitalisation of equity equal to BRL 85.744 billion, EPS of BRL 3.96 and 2.97 billion shares on issue.

Banco Bradesco is another major bank with total earnings of BRL 8.77 billion and 2.52 billion shares on issue.

Estimate Banco Bradesco's current share price using a price-earnings multiples approach assuming that Itau Unibanco is a comparable firm.

Note that BRL is the Brazilian Real, their currency. Figures sourced from Google Finance on the market close of the BVMF on 24 July 2015.

(a) BRL 28.87

(b) BRL 25.372

(c) BRL 22.1

(d) BRL 21.653

(e) BRL 21.528

Question 894  balance of payments, current account, no explanation

Below are four graphs of Australia's external position, published in the RBA's chart pack.

Assume that all assets and liabilities are debt which makes interest income and equity which makes dividend income.

Which of the following statements is NOT correct? As at the end of 2017, Australia’s:

(a) Trade surplus was roughly zero, so Australians exported as much as they imported.

(b) Net Income was negative, so Australians paid more dividends and interest to foreigners than they received. This is probably because Australia has greater gross foreign liabilities than gross foreign assets.

(c) Current account deficit means Australians have to lend to foreigners by buying foreigners’ debt and equity which represent net capital outflows out of Australia.

(d) Net foreign equity liabilities were negative (less than zero) so Australians had positive net foreign equity assets which means that Australians owned more foreign shares than foreigners owned of Australian shares.

(e) Persistent current account deficit will make its net foreign liabilities greater and greater.