Fight Finance

Question 155  inflation, real and nominal returns and cash flows, Loan, effective rate conversion

You are a banker about to grant a 2 year loan to a customer. The loan's principal and interest will be repaid in a single payment at maturity, sometimes called a zero-coupon loan, discount loan or bullet loan.

You require a real return of 6% pa over the two years, given as an effective annual rate. Inflation is expected to be 2% this year and 4% next year, both given as effective annual rates.

You judge that the customer can afford to pay back $1,000,000 in 2 years, given as a nominal cash flow. How much should you lend to her right now?

(a) $838,907.00

(b) $838,986.09

(c) $841,754.97

(d) $889,996.44

(e) $944,108.22

Question 219  profitability index

A project has the following cash flows:

Project Cash Flows
Time (yrs)	Cash flow ($)
0	-90
1	30
2	105

The required return of a project is 10%, given as an effective annual rate. Assume that the cash flows shown in the table are paid all at once at the given point in time.

What is the Profitability Index (PI) of the project?

(a) 1.0862

(b) 1.2672

(c) 1.3143

(d) 1.5333

(e) 1.7783

Question 275  derivative terminology, future

The 'futures price' in a futures contract is paid at the start when the futures contract is agreed to. or ?

Question 341  Multiples valuation, PE ratio

Estimate Microsoft's (MSFT) share price using a price earnings (PE) multiples approach with the following assumptions and figures only:

• Apple, Google and Microsoft are comparable companies,
• Apple's (AAPL) share price is $526.24 and historical EPS is $40.32.
• Google's (GOOG) share price is $1,215.65 and historical EPS is $36.23.
• Micrsoft's (MSFT) historical earnings per share (EPS) is $2.71.

Source: Google Finance 28 Feb 2014.

(a) $63.15

(b) $61.67

(c) $30.83

(d) $28.25

(e) $8.60

Question 375  interest tax shield, CFFA

One formula for calculating a levered firm's free cash flow (FFCF, or CFFA) is to use net operating profit after tax (NOPAT).

###\begin{aligned} FFCF &= NOPAT + Depr - CapEx -\Delta NWC \\ &= (Rev - COGS - Depr - FC)(1-t_c) + Depr - CapEx -\Delta NWC \\ \end{aligned} \\###

Does this annual FFCF or the annual interest tax shield?

Question 431  option, no explanation

A European put option will mature in ##T## years with a strike price of ##K## dollars. The underlying asset has a price of ##S## dollars.

What is an expression for the payoff at maturity ##(f_T)## in dollars from having written (being short) the put option?

(a) ##\max(S_T - K, 0)##.

(b) ##-\max(S_T - K, 0)##.

(c) ##\max(K-S_T, 0)##.

(d) ##-\max(K-S_T, 0)##.

(e) ##-\min(S_T - K, 0)##.

Question 513  stock split, reverse stock split, stock dividend, bonus issue, rights issue

Which of the following statements is NOT correct?

(a) A 3 for 2 stock split means that for every 2 existing shares, all shareholders will receive 1 extra share.

(b) A 3 for 10 bonus issue means that for every 10 existing shares, all shareholders will receive 3 extra shares.

(c) A 20% stock dividend means that for every 10 existing shares, all shareholders will receive 2 extra shares.

(d) A 1 for 10 reverse stock split means that for every 10 existing shares, all shareholders will lose 9 shares, so they will only be left with 1 share.

(e) A 3 for 10 rights issue at a subscription price of $8 means that for every 10 existing shares, all shareholders can sell 3 of their shares back to the company at a price of $8 each, so shareholders receive money.

Question 702  utility, risk aversion, utility function, gamble

Mr Blue, Miss Red and Mrs Green are people with different utility functions.

Each person has $50 of initial wealth. A coin toss game is offered to each person at a casino where the player can win or lose $50. Each player can flip a coin and if they flip heads, they receive $50. If they flip tails then they will lose $50. Which of the following statements is NOT correct?

(a) Mr Blue would enjoy the gamble.

(b) Miss Red would be indifferent to gambling or not.

(c) Mrs Green would dislike the gamble.

(d) Mr Blue's certainty equivalent of the risky gamble is $70.71. This is more than his current wealth which is why he would like to gamble.

(e) Miss Red's certainty equivalent of the risky gamble is $50. This is the same as her current wealth which is why she is indifferent to gambling or not.

Question 880  gold standard, no explanation

Under the Gold Standard (1876 to 1913), currencies were priced relative to:

(a) The United States Dollar, USD.

(b) The Greater British Pound, GBP.

(c) Gold.

(d) Silver.

(e) Rum.

Question 899  comparative advantage in trade, production possibilities curve, no explanation

Adam and Bella are the only people on a remote island. Their production possibility curves are shown in the graph.

Assume that Adam and Bella cooperate according to the principle of comparative advantage.

Which of the following statements is NOT correct?

(a) Adam and Bella can pick zero dates and 10 coconuts in one hour.

(b) Adam and Bella could pick 2 dates and 8.8 coconuts in one hour.

(c) Adam and Bella could pick 5 dates and 7 coconuts in one hour.

(d) Adam and Bella could pick 8 dates and 5.2 coconuts in one hour.

(e) Adam and Bella could pick 11 dates and zero coconuts in one hour.