Question 207 income and capital returns, bond pricing, coupon rate, no explanation
For a bond that pays fixed semi-annual coupons, how is the annual coupon rate defined, and how is the bond's annual income yield from time 0 to 1 defined mathematically?
Let: ##P_0## be the bond price now,
##F_T## be the bond's face value,
##T## be the bond's maturity in years,
##r_\text{total}## be the bond's total yield,
##r_\text{income}## be the bond's income yield,
##r_\text{capital}## be the bond's capital yield, and
##C_t## be the bond's coupon at time t in years. So ##C_{0.5}## is the coupon in 6 months, ##C_1## is the coupon in 1 year, and so on.
Find Piano Bar's Cash Flow From Assets (CFFA), also known as Free Cash Flow to the Firm (FCFF), over the year ending 30th June 2013.
Piano Bar | ||
Income Statement for | ||
year ending 30th June 2013 | ||
$m | ||
Sales | 310 | |
COGS | 185 | |
Operating expense | 20 | |
Depreciation | 15 | |
Interest expense | 10 | |
Income before tax | 80 | |
Tax at 30% | 24 | |
Net income | 56 | |
Piano Bar | ||
Balance Sheet | ||
as at 30th June | 2013 | 2012 |
$m | $m | |
Assets | ||
Current assets | 240 | 230 |
PPE | ||
Cost | 420 | 400 |
Accumul. depr. | 50 | 35 |
Carrying amount | 370 | 365 |
Total assets | 610 | 595 |
Liabilities | ||
Current liabilities | 180 | 190 |
Non-current liabilities | 290 | 265 |
Owners' equity | ||
Retained earnings | 90 | 90 |
Contributed equity | 50 | 50 |
Total L and OE | 610 | 595 |
Note: all figures are given in millions of dollars ($m).
A fairly priced stock has a beta that is the same as the market portfolio's beta. Treasury bonds yield 5% pa and the market portfolio's expected return is 10% pa. What is the expected return of the stock?
Question 382 Merton model of corporate debt, real option, option
In the Merton model of corporate debt, buying a levered company's shares is equivalent to:
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.
The standard deviation and variance of a stock's annual returns are calculated over a number of years. The units of the returns are percent per annum ##(\% pa)##.
What are the units of the standard deviation ##(\sigma)## and variance ##(\sigma^2)## of returns respectively?
Hint: Visit Wikipedia to understand the difference between percentage points ##(\text{pp})## and percent ##(\%)##.
The covariance and correlation of two stocks X and Y's annual returns are calculated over a number of years. The units of the returns are in percent per annum ##(\% pa)##.
What are the units of the covariance ##(\sigma_{X,Y})## and correlation ##(\rho_{X,Y})## of returns respectively?
Hint: Visit Wikipedia to understand the difference between percentage points ##(\text{pp})## and percent ##(\%)##.
Question 703 utility, risk aversion, utility function, gamble
Mr Blue, Miss Red and Mrs Green are people with different utility functions.
Each person has $500 of initial wealth. A coin toss game is offered to each person at a casino where the player can win or lose $500. Each player can flip a coin and if they flip heads, they receive $500. If they flip tails then they will lose $500. Which of the following statements is NOT correct?
You deposit money into a bank. Which of the following statements is NOT correct? You:
Use the below information to value a levered company with annual perpetual cash flows from assets that grow. The next cash flow will be generated in one year from now. Note that ‘k’ means kilo or 1,000. So the $30k is $30,000.
Data on a Levered Firm with Perpetual Cash Flows | ||
Item abbreviation | Value | Item full name |
##\text{OFCF}## | $30k | Operating free cash flow |
##g## | 1.5% pa | Growth rate of OFCF |
##r_\text{D}## | 4% pa | Cost of debt |
##r_\text{EL}## | 16.3% pa | Cost of levered equity |
##D/V_L## | 80% pa | Debt to assets ratio, where the asset value includes tax shields |
##t_c## | 30% | Corporate tax rate |
##n_\text{shares}## | 100k | Number of shares |
Which of the following statements is NOT correct?