Fight Finance

Question 206  CFFA, interest expense, interest tax shield

Interest expense (IntExp) is an important part of a company's income statement (or 'profit and loss' or 'statement of financial performance').

How does an accountant calculate the annual interest expense of a fixed-coupon bond that has a liquid secondary market? Select the most correct answer:

Annual interest expense is equal to:

(a) the bond's face value multiplied by its annual yield to maturity.

(b) the bond's face value multiplied by its annual coupon rate.

(c) the bond's market price at the start of the year multiplied by its annual yield to maturity.

(d) the bond's market price at the start of the year multiplied by its annual coupon rate.

(e) the future value of the actual cash payments of the bond over the year, grown to the end of the year, and grown by the bond's yield to maturity.

Question 359  CFFA

Which one of the following will have no effect on net income (NI) but decrease cash flow from assets (CFFA or FFCF) 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 increase in rent expense (a type of recurring fixed cost, FC).

(c) An increase in depreciation expense (Depr).

(d) An increase in inventories (a current asset).

(e) An decrease in interest expense (IntExp).

Question 473  market capitalisation of equity

The below screenshot of Commonwealth Bank of Australia's (CBA) details were taken from the Google Finance website on 7 Nov 2014. Some information has been deliberately blanked out.

What was CBA's market capitalisation of equity?

(a) $431.18 billion

(b) $429 billion

(c) $134.07 billion

(d) $8.44 billion

(e) $3.21 billion

Question 550  fully amortising loan, interest only loan, APR

Many Australian home loans that are interest-only actually require payments to be made on a fully amortising basis after a number of years.

You decide to borrow $600,000 from the bank at an interest rate of 4.25% pa for 25 years. The payments will be interest-only for the first 10 years (t=0 to 10 years), then they will have to be paid on a fully amortising basis for the last 15 years (t=10 to 25 years).

Assuming that interest rates will remain constant, what will be your monthly payments over the first 10 years from now, and then the next 15 years after that? The answer options are given in the same order.

(a) $3,250.43,     $4,513.67

(b) $3,250.43,     $1,530.28

(c) $2,125,     $4,513.67

(d) $2,125,     $3,250.43

(e) $1,530.28,     $3,250.43

Question 598  future, tailing the hedge, cross hedging

The standard deviation of monthly changes in the spot price of lamb is $0.015 per pound. The standard deviation of monthly changes in the futures price of live cattle is $0.012 per pound. The correlation between the spot price of lamb and the futures price of cattle is 0.4.

It is now January. A lamb producer is committed to selling 1,000,000 pounds of lamb in May. The spot price of live cattle is $0.30 per pound and the June futures price is $0.32 per pound. The spot price of lamb is $0.60 per pound.

The producer wants to use the June live cattle futures contracts to hedge his risk. Each futures contract is for the delivery of 50,000 pounds of cattle.

How many live cattle futures should the lamb farmer sell to hedge his risk? Round your answer to the nearest whole number of contracts.

(a) 9

(b) 10

(c) 19

(d) 23

(e) 47

Question 678  option, option profit, no explanation

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.

(a) ##\pi_{SP}=-max⁡(S_T-X_T,0) - f_{LP,0}##

(b) ##\pi_{SP}=-max⁡(X_T-S_T,0) + f_{LP,0}##

(c) ##\pi_{SP}=max⁡(S_T-X_T,0) - f_{LP,0}##

(d) ##\pi_{SP}=max⁡(X_T-S_T,0) + f_{LP,0}##

(e) ##\pi_{SP}=max(X_T-S_T,0) - f_{LP,0}##

Question 749  Multiples valuation, PE ratio, price to revenue ratio, price to book ratio, NPV

A real estate agent says that the price of a house in Sydney Australia is approximately equal to the gross weekly rent times 1000.

What type of valuation method is the real estate agent using?

(a) Price to EBITDA multiple.

(b) Price to book multiple.

(c) Price to earnings multiple.

(d) Price to revenue multiple.

(e) Discounted cash flow (DCF).

Question 825  future, hedging, tailing the hedge, speculation, no explanation

An equity index fund manager controls a USD500 million diversified equity portfolio with a beta of 0.9. The equity manager expects a significant rally in equity prices next year. The market does not think that this will happen. If the fund manager wishes to increase his portfolio beta to 1.5, how many S&P500 futures should he buy?

The US market equity index is the S&P500. One year CME futures on the S&P500 currently trade at 2,155 points and the spot price is 2,180 points. Each point is worth $250.

The number of one year S&P500 futures contracts that the fund manager should buy is:

(a) 550

(b) 557

(c) 826

(d) 835

(e) 1392

Question 859  money supply, no explanation

The below table shows Australian monetary aggregates. Note that ‘M3’ is the sum of all the figures in the table and ‘ADI’ stands for Authorised Deposit-taking Institution such as a bank, building society or credit union.

Australian Monetary Aggregates
March 2017, AUD billions
Currency	Current deposits with banks	Certificates of deposit issued by banks	Term deposits with banks	Other deposits with banks	Deposits with non-bank ADIs	M3
69.3	271.6	207.2	562.3	838.7	36.9	1986.0

 

Source: RBA Statistical Table D3 Monetary Aggregates.

Which of the following statements is NOT correct?

(a) Current deposits are the notes and coins that banks keep in their physical vaults and Automatic Teller Machines (ATM’s).

(b) Current deposits with banks pay little interest to depositors but are highly liquid since they can be withdrawn using ATM’s.

(c) The government directly controls the amount of notes and coins.

(d) The central bank indirectly controls the amount of deposits by changing the cash rate.

(e) When a commercial bank lends money to a borrower to buy a house, that money is likely to be deposited by the house seller into another bank.

Question 974  foreign exchange rate, monetary policy, no explanation

Suppose the market expects the Bank of Japan (BoJ) to increase their short term interest rate by 15 basis points at their next meeting. The current short term interest rate is -0.1% pa and the exchange rate is 100 JPY per USD.

As expected, the BoJ announce that they will increase short term interest rate by 15 basis points.

What do you expect to happen to Japan’s exchange rate on the day when the announcement is made? The Japanese Yen (JPY) is likely to:

(a) Remain at 100 JPY per USD.

(b) Appreciate against the USD to be, say, 101 JPY per USD.

(c) Appreciate against the USD to be, say, 99 JPY per USD.

(d) Depreciate against the USD to be, say, 101 JPY per USD.

(e) Depreciate against the USD to be, say, 99 JPY per USD.