# Fight Finance

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Your friend wants to borrow $1,000 and offers to pay you back$100 in 6 months, with more $100 payments at the end of every month for another 11 months. So there will be twelve$100 payments in total. She says that 12 payments of $100 equals$1,200 so she's being generous.

If interest rates are 12% pa, given as an APR compounding monthly, what is the Net Present Value (NPV) of your friend's deal?

A company increases the proportion of debt funding it uses to finance its assets by issuing bonds and using the cash to repurchase stock, leaving assets unchanged.

Ignoring the costs of financial distress, which of the following statements is NOT correct:

Find Ching-A-Lings Corporation's Cash Flow From Assets (CFFA), also known as Free Cash Flow to the Firm (FCFF), over the year ending 30th June 2013.

 Ching-A-Lings Corp Income Statement for year ending 30th June 2013 $m Sales 100 COGS 20 Depreciation 20 Rent expense 11 Interest expense 19 Taxable Income 30 Taxes at 30% 9 Net income 21  Ching-A-Lings Corp Balance Sheet as at 30th June 2013 2012$m $m Inventory 49 38 Trade debtors 14 2 Rent paid in advance 5 5 PPE 400 400 Total assets 468 445 Trade creditors 4 10 Bond liabilities 200 190 Contributed equity 145 145 Retained profits 119 100 Total L and OE 468 445 Note: All figures are given in millions of dollars ($m).

The cash flow from assets was:

There are many ways to calculate a firm's free cash flow (FFCF), also called cash flow from assets (CFFA).

One method is to use the following formulas to transform net income (NI) into FFCF including interest and depreciation tax shields:

$$FFCF=NI + Depr - CapEx -ΔNWC + IntExp$$

$$NI=(Rev - COGS - Depr - FC - IntExp).(1-t_c )$$

Another popular method is to use EBITDA rather than net income. EBITDA is defined as:

$$EBITDA=Rev - COGS - FC$$

One of the below formulas correctly calculates FFCF from EBITDA, including interest and depreciation tax shields, giving an identical answer to that above. Which formula is correct?

Which of the following interest rate labels does NOT make sense?

Which of the below formulas gives the profit $(\pi)$ from being short a put option? Let the underlying asset price at maturity be $S_T$, the exercise price be $X_T$ and the option price be $f_{LP,0}$. Note that $S_T$, $X_T$ and $f_{LP,0}$ are all positive numbers.

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?

One year ago you bought a $1,000,000 house partly funded using a mortgage loan. The loan size was$800,000 and the other \$200,000 was your wealth or 'equity' in the house asset.

The interest rate on the home loan was 4% pa.

Over the year, the house produced a net rental yield of 2% pa and a capital gain of 2.5% pa.

Assuming that all cash flows (interest payments and net rental payments) were paid and received at the end of the year, and all rates are given as effective annual rates, what was the total return on your wealth over the past year?

Hint: Remember that wealth in this context is your equity (E) in the house asset (V = D+E) which is funded by the loan (D) and your deposit or equity (E).

The market's expected total return is 10% pa and the risk free rate is 5% pa, both given as effective annual rates.

A stock has a beta of 0.5.

In the last 5 minutes, the federal government unexpectedly raised taxes. Over this time the share market fell by 3%. The risk free rate was unchanged.

What do you think was the stock's historical return over the last 5 minutes, given as an effective 5 minute rate?

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: