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.
A two year Government bond has a face value of $100, a yield of 0.5% and a fixed coupon rate of 0.5%, paid semi-annually. What is its price?
The following cash flows are expected:
- 10 yearly payments of $80, with the first payment in 3 years from now (first payment at t=3).
- 1 payment of $600 in 5 years and 6 months (t=5.5) from now.
What is the NPV of the cash flows if the discount rate is 10% given as an effective annual rate?
There are a number of ways that assets can be depreciated. Generally the government's tax office stipulates a certain method.
But if it didn't, what would be the ideal way to depreciate an asset from the perspective of a businesses owner?
Three years ago Frederika bought a house for $400,000.
Now it's worth $600,000, based on recent similar sales in the area.
Frederika's residential property has an expected total return of 7% pa.
She rents her house out for $2,500 per month, paid in advance. Every 12 months she plans to increase the rental payments.
The present value of 12 months of rental payments is $29,089.48.
The future value of 12 months of rental payments one year ahead is $31,125.74.
What is the expected annual capital yield of the property?
One of the reasons why firms may not begin projects with relatively small positive net present values (NPV's) is because they wish to maximise the value of their:
The perpetuity with growth equation is:
###P_0=\dfrac{C_1}{r-g}###
Which of the following is NOT equal to the expected capital return as an effective annual rate?
A firm is considering a business project which costs $11m now and is expected to pay a constant $1m at the end of every year forever.
Assume that the initial $11m cost is funded using the firm's existing cash so no new equity or debt will be raised. The cost of capital is 10% pa.
Which of the following statements about net present value (NPV), internal rate of return (IRR) and payback period is NOT correct?
Question 732 real and nominal returns and cash flows, inflation, income and capital returns
An investor bought a bond for $100 (at t=0) and one year later it paid its annual coupon of $1 (at t=1). Just after the coupon was paid, the bond price was $100.50 (at t=1). Inflation over the past year (from t=0 to t=1) was 3% pa, given as an effective annual rate.
Which of the following statements is NOT correct? The bond investment produced a:
Question 772 interest tax shield, capital structure, leverage
A firm issues debt and uses the funds to buy back equity. Assume that there are no costs of financial distress or transactions costs. Which of the following statements about interest tax shields is NOT correct?