Question 22 NPV, perpetuity with growth, effective rate, effective rate conversion
What is the NPV of the following series of cash flows when the discount rate is 10% given as an effective annual rate?
The first payment of $90 is in 3 years, followed by payments every 6 months in perpetuity after that which shrink by 3% every 6 months. That is, the growth rate every 6 months is actually negative 3%, given as an effective 6 month rate. So the payment at ## t=3.5 ## years will be ## 90(1-0.03)^1=87.3 ##, and so on.
The following equation is the Dividend Discount Model, also known as the 'Gordon Growth Model' or the 'Perpetuity with growth' equation.
### P_{0} = \frac{C_1}{r_{\text{eff}} - g_{\text{eff}}} ###
What would you call the expression ## C_1/P_0 ##?
Here are the Net Income (NI) and Cash Flow From Assets (CFFA) equations:
###NI=(Rev-COGS-FC-Depr-IntExp).(1-t_c)###
###CFFA=NI+Depr-CapEx - \varDelta NWC+IntExp###
What is the formula for calculating annual interest expense (IntExp) which is used in the equations above?
Select one of the following answers. Note that D is the value of debt which is constant through time, and ##r_D## is the cost of debt.
The equations for Net Income (NI, also known as Earnings or Net Profit After Tax) and Cash Flow From Assets (CFFA, also known as Free Cash Flow to the Firm) per year are:
###NI=(Rev-COGS-FC-Depr-IntExp).(1-t_c)###
###CFFA=NI+Depr-CapEx - \varDelta NWC+IntExp###
For a firm with debt, what is the amount of the interest tax shield per year?
Which statement(s) are correct?
(i) All stocks that plot on the Security Market Line (SML) are fairly priced.
(ii) All stocks that plot above the Security Market Line (SML) are overpriced.
(iii) All fairly priced stocks that plot on the Capital Market Line (CML) have zero idiosyncratic risk.
Select the most correct response:
You want to buy an apartment worth $400,000. You have saved a deposit of $80,000. The bank has agreed to lend you the $320,000 as a fully amortising mortgage loan with a term of 30 years. The interest rate is 6% pa and is not expected to change. What will be your monthly payments?
Suppose you had $100 in a savings account and the interest rate was 2% per year.
After 5 years, how much do you think you would have in the account if you left the money to grow?
Question 461 book and market values, ROE, ROA, market efficiency
One year ago a pharmaceutical firm floated by selling its 1 million shares for $100 each. Its book and market values of equity were both $100m. Its debt totalled $50m. The required return on the firm's assets was 15%, equity 20% and debt 5% pa.
In the year since then, the firm:
- Earned net income of $29m.
- Paid dividends totaling $10m.
- Discovered a valuable new drug that will lead to a massive 1,000 times increase in the firm's net income in 10 years after the research is commercialised. News of the discovery was publicly announced. The firm's systematic risk remains unchanged.
Which of the following statements is NOT correct? All statements are about current figures, not figures one year ago.
Hint: Book return on assets (ROA) and book return on equity (ROE) are ratios that accountants like to use to measure a business's past performance.
###\text{ROA}= \dfrac{\text{Net income}}{\text{Book value of assets}}###
###\text{ROE}= \dfrac{\text{Net income}}{\text{Book value of equity}}###
The required return on assets ##r_V## is a return that financiers like to use to estimate a business's future required performance which compensates them for the firm's assets' risks. If the business were to achieve realised historical returns equal to its required returns, then investment into the business's assets would have been a zero-NPV decision, which is neither good nor bad but fair.
###r_\text{V, 0 to 1}= \dfrac{\text{Cash flow from assets}_\text{1}}{\text{Market value of assets}_\text{0}} = \dfrac{CFFA_\text{1}}{V_\text{0}}###
Similarly for equity and debt.
Mr Blue, Miss Red and Mrs Green are people with different utility functions. Which of the statements about the 3 utility functions is NOT correct?
Question 856 credit terms, no explanation
Your supplier’s credit terms are "1/10 net 30". Which of the following statements about these credit terms is NOT correct?
If you intend to buy an item from your supplier for a tag price of $100 and you: