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Question 20  NPV, APR, Annuity

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?



Question 280  equivalent annual cash flow

You own a nice suit which you wear once per week on nights out. You bought it one year ago for $600. In your experience, suits used once per week last for 6 years. So you expect yours to last for another 5 years.

Your younger brother said that retro is back in style so he wants to wants to borrow your suit once a week when he goes out. With the increased use, your suit will only last for another 4 years rather than 5.

What is the present value of the cost of letting your brother use your current suit for the next 4 years?

Assume: that bank interest rates are 10% pa, given as an effective annual rate; you will buy a new suit when your current one wears out and your brother will not use the new one; your brother will only use your current suit so he will only use it for the next four years; and the price of a new suit never changes.



Question 422  takeover

Acquirer firm plans to launch a takeover of Target firm. The firms operate in different industries and the CEO's rationale for the merger is to increase diversification and thereby decrease risk. The deal is not expected to create any synergies. An 80% scrip and 20% cash offer will be made that pays the fair price for the target's shares. The cash will be paid out of the firms' 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.



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.



Question 555  capital budgeting, CFFA

Find the cash flow from assets (CFFA) of the following project.

Project Data
Project life 2 years
Initial investment in equipment $8m
Depreciation of equipment per year for tax purposes $3m
Unit sales per year 10m
Sale price per unit $9
Variable cost per unit $4
Fixed costs per year, paid at the end of each year $2m
Tax rate 30%
 

Note 1: Due to the project, the firm will have to purchase $40m of inventory initially (at t=0). Half of this inventory will be sold at t=1 and the other half at t=2.

Note 2: The equipment will have a book value of $2m at the end of the project for tax purposes. However, the equipment is expected to fetch $1m when it is sold. Assume that the full capital loss is tax-deductible and taxed at the full corporate tax rate.

Note 3: The project will be fully funded by equity which investors will expect to pay dividends totaling $10m at the end of each year.

Find the project's CFFA at time zero, one and two. Answers are given in millions of dollars ($m).



Question 631  foreign exchange rate

The Australian dollar's value was:

  • 1.4875 USD per AUD on 31 August 1974.
  • 0.4890 USD per AUD on 31 March 2001.

Did the Australian dollar or against the US dollar between these dates?


Question 760  time calculation, interest only loan, no explanation

Five years ago (##t=-5## years) you entered into an interest-only home loan with a principal of $500,000, an interest rate of 4.5% pa compounding monthly with a term of 25 years.

Then interest rates suddenly fall to 3% pa (##t=0##), but you continue to pay the same monthly home loan payments as you did before. Will your home loan be paid off by the end of its remaining term? If so, in how many years from now? Measure the time taken to pay off the home loan from the current time which is 5 years after the home loan was first entered into.

Assume that the lower interest rate was given to you immediately after the loan repayment at the end of year 5, which was the 60th payment since the loan was granted. Also assume that rates were and are expected to remain constant.



Question 840  gross domestic product, no explanation

Calculate Australia’s GDP over the 2016 calendar year using the below table:

Australian Gross Domestic Product Components
A$ billion, 2016 Calendar Year from 1 Jan 2016 to 31 Dec 2016 inclusive
Consumption Investment Government spending Exports Imports
971 421 320 328 344
 

 

Source: ABS 5206.0 Australian National Accounts: National Income, Expenditure and Product. Table 3. Expenditure on Gross Domestic Product (GDP), Current prices.

Australia’s GDP was:



Question 845  accounting ratio, no explanation

Safe firms with low chances of bankruptcy will tend to have:



Question 975  comparative advantage in trade, production possibilities curve, no explanation

Arthur and Bindi are the only people on a remote island.

Luckily there are Coconut and Date palm trees on the island that grow delicious fruit. The problem is that harvesting the fruit takes a lot of work.

Arthur can pick 1 coconut per hour, 4 dates per hour or any linear combination of coconuts and dates. For example, he could pick 0.5 coconuts and 2 dates per hour.

Bindi can pick 2 coconuts per hour, 1 date per hour or any linear combination. For example, she could pick 0.5 coconuts and 0.75 dates per hour.

This information is summarised in the table and graph:

Harvest Rates Per Hour
  Coconuts Dates
Arthur 1 4
Bindi 2 1
 

 

Which of the following statements is NOT correct?