Fight Finance

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.

(a) coupon rate = ##\dfrac{C_{0.5}+C_{1}}{F_T}##, ##r_\text{income, 0 to 1}=\dfrac{C_{0.5}(1+r_\text{total})^{0.5}+C_{1}}{P_0}##

(b) coupon rate = ##\dfrac{2 \times C_{0.5}}{F_T}##, ##r_\text{income, 0 to 1}=\dfrac{C_{0.5}(1+r_\text{capital})^{0.5}+C_{1}}{P_0}##

(c) coupon rate = ##\dfrac{2 \times C_{1}}{P_0}##, ##r_\text{income, 0 to 1}=\dfrac{C_{0.5}+C_{1}}{P_0}##

(d) coupon rate = ##\dfrac{2 \times C_{1}}{P_0}##, ##r_\text{income, 0 to 1}=\dfrac{2 \times C_{1}}{P_0}##

(e) coupon rate = ##\dfrac{2 \times C_{1}}{F_T}##, ##r_\text{income, 0 to 1}=\dfrac{C_{0.5}(1+r_\text{total})^{0.5}+C_{1}}{F_T}##

Question 214  rights issue

In late 2003 the listed bank ANZ announced a 2-for-11 rights issue to fund the takeover of New Zealand bank NBNZ. Below is the chronology of events:

• 23/10/2003. Share price closes at $18.30.

• 24/10/2003. 2-for-11 rights issue announced at a subscription price of $13. The proceeds of the rights issue will be used to acquire New Zealand bank NBNZ. Trading halt announced in morning before market opens.

• 28/10/2003. Trading halt lifted. Last (and only) day that shares trade cum-rights. Share price opens at $18.00 and closes at $18.14.

• 29/10/2003. Shares trade ex-rights.

All things remaining equal, what would you expect ANZ's stock price to open at on the first day that it trades ex-rights (29/10/2003)? Ignore the time value of money since time is negligibly short. Also ignore taxes.

(a) 17.3492

(b) 17.2308

(c) 14.8418

(d) 13.7908

(e) 13.7692

Question 367  CFFA, interest tax shield

There are many ways to calculate a firm's free cash flow (FFCF), also called cash flow from assets (CFFA). Some include the annual interest tax shield in the cash flow and some do not.

Which of the below FFCF formulas include the interest tax shield in the cash flow?

###(1) \quad FFCF=NI + Depr - CapEx -ΔNWC + IntExp### ###(2) \quad FFCF=NI + Depr - CapEx -ΔNWC + IntExp.(1-t_c)### ###(3) \quad FFCF=EBIT.(1-t_c )+ Depr- CapEx -ΔNWC+IntExp.t_c### ###(4) \quad FFCF=EBIT.(1-t_c) + Depr- CapEx -ΔNWC### ###(5) \quad FFCF=EBITDA.(1-t_c )+Depr.t_c- CapEx -ΔNWC+IntExp.t_c### ###(6) \quad FFCF=EBITDA.(1-t_c )+Depr.t_c- CapEx -ΔNWC### ###(7) \quad FFCF=EBIT-Tax + Depr - CapEx -ΔNWC### ###(8) \quad FFCF=EBIT-Tax + Depr - CapEx -ΔNWC-IntExp.t_c### ###(9) \quad FFCF=EBITDA-Tax - CapEx -ΔNWC### ###(10) \quad FFCF=EBITDA-Tax - CapEx -ΔNWC-IntExp.t_c###

The formulas for net income (NI also called earnings), EBIT and EBITDA are given below. Assume that depreciation and amortisation are both represented by 'Depr' and that 'FC' represents fixed costs such as rent.

###NI=(Rev - COGS - Depr - FC - IntExp).(1-t_c )### ###EBIT=Rev - COGS - FC-Depr### ###EBITDA=Rev - COGS - FC### ###Tax =(Rev - COGS - Depr - FC - IntExp).t_c= \dfrac{NI.t_c}{1-t_c}###

(a) 1, 3, 5, 7, 9.

(b) 2, 4, 6, 8, 10.

(c) 1, 4, 6, 8, 10.

(d) 2, 3, 5, 7, 9.

(e) 1, 3, 5, 8, 10.

Question 526  real and nominal returns and cash flows, inflation, no explanation

How can a nominal cash flow be precisely converted into a real cash flow?

(a) ##C_\text{real, t}=C_\text{nominal,t}.(1+r_\text{inflation})^t##

(b) ##C_\text{real,t}=\dfrac{C_\text{nominal,t}}{(1+r_\text{inflation})^t} ##

(c) ##C_\text{real,t}=\dfrac{C_\text{nominal,t}}{r_\text{inflation}} ##

(d) ##C_\text{real,t}=C_\text{nominal,t}.r_\text{inflation} ##

(e) ##C_\text{real,t}=C_\text{nominal,t}.r_\text{inflation}.t##

Question 537  PE ratio, Multiples valuation, no explanation

Estimate the French bank Societe Generale's share price using a backward-looking price earnings (PE) multiples approach with the following assumptions and figures only. Note that EUR is the euro, the European monetary union's currency.

• The 4 major European banks Credit Agricole (ACA), Deutsche Bank AG (DBK), UniCredit (UCG) and Banco Santander (SAN) are comparable companies to Societe Generale (GLE);
• Societe Generale's (GLE's) historical earnings per share (EPS) is EUR 2.92;
• ACA's backward-looking PE ratio is 16.29 and historical EPS is EUR 0.84;
• DBK's backward-looking PE ratio is 25.01 and historical EPS is EUR 1.26;
• SAN's backward-looking PE ratio is 14.71 and historical EPS is EUR 0.47;
• UCG's backward-looking PE ratio is 15.78 and historical EPS is EUR 0.40;

Note: Figures sourced from Google Finance on 27 March 2015.

(a) EUR 209.6268

(b) EUR 52.4067

(c) EUR 8.6724

(d) EUR 3.9327

(e) EUR 2.1681

Question 597  future, continuously compounding rate

A stock is expected to pay a dividend of $5 per share in 1 month and $5 again in 7 months.

The stock price is $100, and the risk-free rate of interest is 10% per annum with continuous compounding. The yield curve is flat. Assume that investors are risk-neutral.

An investor has just taken a short position in a one year forward contract on the stock.

Find the forward price ##(F_1)## and value of the contract ##(V_0)## initially. Also find the value of the short futures contract in 6 months ##(V_\text{0.5, SF})## if the stock price fell to $90.

(a) ##F_1=110.5171, V_0=0, V_\text{0.5, SF}=14.7829##

(b) ##F_1=110.5171, V_0=0, V_\text{0.5, SF}=15.1271##

(c) ##F_1=99.8244, V_0=0, V_\text{0.5, SF}=14.7829##

(d) ##F_1=99.8244, V_0=0, V_\text{0.5, SF}=20.5171##

(e) ##F_1=99.8244, V_0=0, V_\text{0.5, SF}=9.9144##

Question 632  foreign exchange rate, no explanation

Below is a graph of the USD against the JPY and EUR from 1980 to 2015, compiled by the RBA. Select the correct statement about what occurred between 1980 and 2015. Note that in 1980 the euro was around 1.3 USD per EUR and the Yen was around 250 JPY per USD.

(a) The JPY and EUR both appreciated against the USD.

(b) The JPY and EUR both depreciated against the USD.

(c) The JPY appreciated against the USD while the EUR depreciated against the USD.

(d) The JPY depreciated against the USD while the EUR appreciated against the USD.

(e) The JPY and EUR both remained unchanged against the USD.

Question 639  option, option payoff at maturity, no explanation

Which of the below formulas gives the payoff ##(f)## at maturity ##(T)## from being short a put option? Let the underlying asset price at maturity be ##S_T## and the exercise price be ##X_T##.

(a) ##f_{SP,T}=max⁡(S_T-X_T,0)##

(b) ##f_{SP,T}=max⁡(X_T-S_T,0)##

(c) ##f_{SP,T}=-max⁡(S_T-X_T,0)##

(d) ##f_{SP,T}=-max⁡(X_T-S_T,0)##

(e) ##f_{SP,T}=min⁡(X_T-S_T,0)##

Question 735  debt terminology

You deposit money into a bank. Which of the following statements is NOT correct? You:

(a) Are a lender.

(b) Issued debt.

(c) Bought debt.

(d) Are a debt holder.

(e) Own a debt asset.

Question 743  price gains and returns over time, no explanation

How many years will it take for an asset's price to triple (increase from say $1 to $3) if it grows by 5% pa?

(a) 17.7643 years

(b) 22.5171 years

(c) 29.2722 years

(d) 40 years

(e) 60 years