Visitor $0.00 Login or Register

Fight Finance

Courses Tags Random All Recent Scores

Question 23 bond pricing, premium par and discount bonds

Bonds X and Y are issued by the same US company. Both bonds yield 10% pa, and they have the same face value ($100), maturity, seniority, and payment frequency.

The only difference is that bond X and Y's coupon rates are 8 and 12% pa respectively. Which of the following statements is true?

Question 67 CFFA, interest tax shield

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.

Question 99 capital structure, interest tax shield, Miller and Modigliani, trade off theory of capital structure

A firm changes its capital structure by issuing a large amount of debt and using the funds to repurchase shares. Its assets are unchanged.

Assume that:

The firm and individual investors can borrow at the same rate and have the same tax rates.
The firm's debt and shares are fairly priced and the shares are repurchased at the market price, not at a premium.
There are no market frictions relating to debt such as asymmetric information or transaction costs.
Shareholders wealth is measured in terms of utiliity. Shareholders are wealth-maximising and risk-averse. They have a preferred level of overall leverage. Before the firm's capital restructure all shareholders were optimally levered.

According to Miller and Modigliani's theory, which statement is correct?

(a) The firm's share price and shareholder wealth will both decrease. This is because the firm will have more debt and therefore more risk so the discount rate applied to its cash flows will be higher, decreasing the value of the firm and therefore the value of the firm's equity and share price.

(b) The firm's share price and shareholder wealth will both increase. This is because the firm will have more debt which will amplify the returns of equity investors. This will mean that returns on equity can be much higher and investors will pay a premium for this, leading to an increase in the stock price.

(c) The firm's share price and shareholder wealth will both increase since it has more debt and therefore more tax shields.

(d) The firm's share price will increase due to the higher value of tax shields. But shareholder wealth will remain unchanged because capital structure is irrelevant when investors can use home-made leverage to create tax-shields themselves.

(e) The firm's share price and shareholder wealth will both increase. This is because the cost of debt is cheaper than equity, leading to a lower (before and after tax) WACC. This lower WACC will lead to a higher value of the firm and a higher share price.

Question 141 time calculation, APR, effective rate

You're trying to save enough money to buy your first car which costs $2,500. You can save $100 at the end of each month starting from now. You currently have no money at all. You just opened a bank account with an interest rate of 6% pa payable monthly.

How many months will it take to save enough money to buy the car? Assume that the price of the car will stay the same over time.

Question 422 takeover

Acquirer firm plans to launch a takeover of Target firm. The firms operate in different industries and the CEO's rationale for the merger is to increase diversification and thereby decrease risk. The deal is not expected to create any synergies. An 80% scrip and 20% cash offer will be made that pays the fair price for the target's shares. The cash will be paid out of the firms' cash holdings, no new debt or equity will be raised.

Firms Involved in the Takeover
	Acquirer	Target
Assets ($m)	6,000	700
Debt ($m)	4,800	400
Share price ($)	40	20
Number of shares (m)	30	15

Ignore transaction costs and fees. Assume that the firms' debt and equity are fairly priced, and that each firms' debts' risk, yield and values remain constant. The acquisition is planned to occur immediately, so ignore the time value of money.

Calculate the merged firm's share price and total number of shares after the takeover has been completed.

Question 595 future, continuously compounding rate

A 2-year futures contract on a stock paying a continuous dividend yield of 3% pa was bought when the underlying stock price was $10 and the risk free rate was 10% per annum with continuous compounding. Assume that investors are risk-neutral, so the stock's total required return is the risk free rate.

Find the forward price ##(F_2)## and value of the contract ##(V_0)## initially. Also find the value of the contract in 6 months ##(V_{0.5})## if the stock price rose to $12.

Question 800 leverage, portfolio return, risk, portfolio risk, capital structure, no explanation

Which of the following assets would you expect to have the highest required rate of return? All values are current market values.

Question 833 option, delta, theta, standard deviation, no explanation

Which of the following statements about an option (either a call or put) and its underlying stock is NOT correct?

(a) The option’s expected future continuously compounded returns are always more than or equal to the underlying stock’s expected future continuously compounded returns.

(b) The option’s standard deviation of dollar price changes is always less than or equal to the underlying stock’s standard deviation of dollar price changes.

(c) The option’s standard deviation of continuously compounded returns are always less than or equal to the underlying stock’s standard deviation of continuously compounded returns.

(d) As time elapses and the maturity date of an option approaches, its price will fall, all other things remaining equal.

(e) If the underlying stock’s price rises by $0.01, the call option’s price will rise by less than $0.01 and the put option’s price will fall by less than $0.01.

Question 930 arbitrage table, future, no explanation

A non-dividend paying stock has a current price of $20.

The risk free rate is 5% pa given as a continuously compounded rate.

A 2 year futures contract on the stock has a futures price of $24.

You suspect that the futures contract is mis-priced and would like to conduct a risk-free arbitrage that requires zero capital. Which of the following steps about arbitraging the situation is NOT correct?

Question 947 arbitrage table, option, no explanation

A non-dividend paying stock has a current price of $20.

The risk free rate is 5% pa given as a continuously compounded rate.

Options on the stock are currently priced at $5 for calls and $5.55 for puts where both options have a 2 year maturity and an exercise price of $24.

You suspect that the call option contract is mis-priced and would like to conduct a risk-free arbitrage that requires zero capital. Which of the following steps about arbitraging the situation is NOT correct?