Fight Finance

Question 223  CFFA, interest tax shield

Which one of the following will increase the Cash Flow From Assets in this year for a tax-paying firm, all else remaining constant?

(a) An increase in net capital spending.

(b) A decrease in the cash flow to creditors.

(c) An increase in interest expense.

(d) An increase in net working capital.

(e) A decrease in dividends paid.

Question 225  CFFA

A firm has forecast its Cash Flow From Assets (CFFA) for this year and management is worried that it is too low. Which one of the following actions will lead to a higher CFFA for this year (t=0 to 1)? Only consider cash flows this year. Do not consider cash flows after one year, or the change in the NPV of the firm. Consider each action in isolation.

(a) Buy less land, buildings and trucks than what was planned. Assume that this has no impact on revenue.

(b) Pay off more debt than was planned, to reduce the firm’s interest expense.

(c) Change the depreciation method used for tax purposes from diminishing value to straight line, so less depreciation occurs this year and more occurs in later years. Assume that the government’s tax department allow this.

(d) Buying more inventory than was planned, so there is an increase in net working capital. Assume that there is no increase in sales.

(e) Raising new equity through a rights issue. Assume that all of the money raised is spent on new capital assets such as land and trucks, but they will be fitted out and delivered in one year so no new cash will be earned from them.

Question 271  CAPM, option, risk, systematic risk, systematic and idiosyncratic risk

All things remaining equal, according to the capital asset pricing model, if the systematic variance of an asset increases, its required return will increase and its price will decrease.
If the idiosyncratic variance of an asset increases, its price will be unchanged.

What is the relationship between the price of a call or put option and the total, systematic and idiosyncratic variance of the underlying asset that the option is based on? Select the most correct answer.

Call and put option prices increase when the:

(a) Systematic variance of the underlying asset increases.

(b) Idiosyncratic variance of the underlying asset increases.

(c) Systematic, idiosyncratic or total variance of the underlying asset increases.

(d) Systematic variance of the underlying asset decreases.

(e) Systematic, idiosyncratic or total variance of the underlying asset decreases.

Question 328  bond pricing, APR

A 10 year Australian government bond was just issued at par with a yield of 3.9% pa. The fixed coupon payments are semi-annual. The bond has a face value of $1,000.

Six months later, just after the first coupon is paid, the yield of the bond decreases to 3.65% pa. What is the bond's new price?

(a) $1,000

(b) $1,019.9181

(c) $1,033.8330

(d) $1,052.7005

(e) $1,060.5226

Question 361  CFFA

Over the next year, the management of an unlevered company plans to:

• Make $5m in sales, $1.9m in net income and $2m in equity free cash flow (EFCF).
• Pay dividends of $1m.
• Complete a $1.3m share buy-back.

Assume that:

• All amounts are received and paid at the end of the year so you can ignore the time value of money.
• The firm has sufficient retained profits to legally pay the dividend and complete the buy back.
• The firm plans to run a very tight ship, with no excess cash above operating requirements currently or over the next year.

How much new equity financing will the company need? In other words, what is the value of new shares that will need to be issued?

(a) $2m

(b) $1m

(c) $0.4m

(d) $0.3m

(e) No new shares need to be issued, the firm will be sufficiently financed.

Question 408  leverage, portfolio beta, portfolio risk, real estate, CAPM

You just bought a house worth $1,000,000. You financed it with an $800,000 mortgage loan and a deposit of $200,000.

You estimate that:

• The house has a beta of 1;
• The mortgage loan has a beta of 0.2.

What is the beta of the equity (the $200,000 deposit) that you have in your house?

Also, if the risk free rate is 5% pa and the market portfolio's return is 10% pa, what is the expected return on equity in your house? Ignore taxes, assume that all cash flows (interest payments and rent) were paid and received at the end of the year, and all rates are effective annual rates.

(a) The beta of equity is 5 and the expected return on equity is 30% pa.

(b) The beta of equity is 4.2 and the expected return on equity is 26% pa.

(c) The beta of equity is 0.86 and the expected return on equity is 9.3% pa.

(d) The beta of equity is 1 and the expected return on equity is 10% pa.

(e) The beta of equity is 0.6 and the expected return on equity is 8% pa.

Question 474  PE ratio

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 backwards-looking price-earnings ratio?

(a)17.06

(b) 0.063

(c) 15.88

(d) 3.21

(e) 8.44

Question 614  debt terminology

You buy a house funded using a home loan. Have you or debt?

Question 794  option, Black-Scholes-Merton option pricing, option delta, no explanation

Which of the following quantities from the Black-Scholes-Merton option pricing formula gives the Delta of a European call option?

(a) ##N[d_1]##

(b) ##N[d_2]##

(c) ##−N[−d_1]##

(d) ##−N[−d_2]##

(e) ##N[−d_2]##

Where:

###d_1=\dfrac{\ln⁡[S_0/K]+(r+\sigma^2/2).T)}{\sigma.\sqrt{T}}### ###d_2=d_1-\sigma.\sqrt{T}=\dfrac{\ln⁡[S_0/K]+(r-\sigma^2/2).T)}{\sigma.\sqrt{T}}###

Question 950  future, backwardation

If futures prices are in backwardation, then futures prices (##F_{0,T}##) are than, than or to spot prices (##S_0##)?