A European bond paying annual coupons of 6% offers a yield of 10% pa.
Convert the yield into an effective monthly rate, an effective annual rate and an effective daily rate. Assume that there are 365 days in a year.
All answers are given in the same order:
### r_\text{eff, monthly} , r_\text{eff, yearly} , r_\text{eff, daily} ###
Question 104 CAPM, payout policy, capital structure, Miller and Modigliani, risk
Assume that there exists a perfect world with no transaction costs, no asymmetric information, no taxes, no agency costs, equal borrowing rates for corporations and individual investors, the ability to short the risk free asset, semi-strong form efficient markets, the CAPM holds, investors are rational and risk-averse and there are no other market frictions.
For a firm operating in this perfect world, which statement(s) are correct?
(i) When a firm changes its capital structure and/or payout policy, share holders' wealth is unaffected.
(ii) When the idiosyncratic risk of a firm's assets increases, share holders do not expect higher returns.
(iii) When the systematic risk of a firm's assets increases, share holders do not expect higher returns.
Select the most correct response:
A project has the following cash flows. Normally cash flows are assumed to happen at the given time. But here, assume that the cash flows are received smoothly over the year. So the $105 at time 2 is actually earned smoothly from t=1 to t=2:
| Project Cash Flows | |
| Time (yrs) | Cash flow ($) |
| 0 | -90 |
| 1 | 30 |
| 2 | 105 |
What is the payback period of the project in years?
Find Scubar Corporation's Cash Flow From Assets (CFFA), also known as Free Cash Flow to the Firm (FCFF), over the year ending 30th June 2013.
| Scubar Corp | ||
| Income Statement for | ||
| year ending 30th June 2013 | ||
| $m | ||
| Sales | 200 | |
| COGS | 60 | |
| Depreciation | 20 | |
| Rent expense | 11 | |
| Interest expense | 19 | |
| Taxable Income | 90 | |
| Taxes at 30% | 27 | |
| Net income | 63 | |
| Scubar Corp | ||
| Balance Sheet | ||
| as at 30th June | 2013 | 2012 |
| $m | $m | |
| Inventory | 60 | 50 |
| Trade debtors | 19 | 6 |
| Rent paid in advance | 3 | 2 |
| PPE | 420 | 400 |
| Total assets | 502 | 458 |
| Trade creditors | 10 | 8 |
| Bond liabilities | 200 | 190 |
| Contributed equity | 130 | 130 |
| Retained profits | 162 | 130 |
| Total L and OE | 502 | 458 |
Note: All figures are given in millions of dollars ($m).
The cash flow from assets was:
There are many different ways to value a firm's assets. Which of the following will NOT give the correct market value of a levered firm's assets ##(V_L)##? Assume that:
- The firm is financed by listed common stock and vanilla annual fixed coupon bonds, which are both traded in a liquid market.
- The bonds' yield is equal to the coupon rate, so the bonds are issued at par. The yield curve is flat and yields are not expected to change. When bonds mature they will be rolled over by issuing the same number of new bonds with the same expected yield and coupon rate, and so on forever.
- Tax rates on the dividends and capital gains received by investors are equal, and capital gains tax is paid every year, even on unrealised gains regardless of when the asset is sold.
- There is no re-investment of the firm's cash back into the business. All of the firm's excess cash flow is paid out as dividends so real growth is zero.
- The firm operates in a mature industry with zero real growth.
- All cash flows and rates in the below equations are real (not nominal) and are expected to be stable forever. Therefore the perpetuity equation with no growth is suitable for valuation.
Where:
###r_\text{WACC before tax} = r_D.\frac{D}{V_L} + r_{EL}.\frac{E_L}{V_L} = \text{Weighted average cost of capital before tax}### ###r_\text{WACC after tax} = r_D.(1-t_c).\frac{D}{V_L} + r_{EL}.\frac{E_L}{V_L} = \text{Weighted average cost of capital after tax}### ###NI_L=(Rev-COGS-FC-Depr-\mathbf{IntExp}).(1-t_c) = \text{Net Income Levered}### ###CFFA_L=NI_L+Depr-CapEx - \varDelta NWC+\mathbf{IntExp} = \text{Cash Flow From Assets Levered}### ###NI_U=(Rev-COGS-FC-Depr).(1-t_c) = \text{Net Income Unlevered}### ###CFFA_U=NI_U+Depr-CapEx - \varDelta NWC= \text{Cash Flow From Assets Unlevered}###Question 543 price gains and returns over time, IRR, NPV, income and capital returns, effective return
For an asset price to triple every 5 years, what must be the expected future capital return, given as an effective annual rate?
The 'time value of money' is most closely related to which of the following concepts?
Radio-Rentals.com offers the Apple iphone 5S smart phone for rent at $12.95 per week paid in advance on a 2 year contract. After renting the phone, you must return it to Radio-Rentals.
Kogan.com offers the Apple iphone 5S smart phone for sale at $699. You estimate that the phone will last for 3 years before it will break and be worthless.
Currently, the effective annual interest rate is 11.351%, the effective monthly interest rate 0.9% and the effective weekly interest rate is 0.207%. Assume that there are exactly 52 weeks per year and 12 months per year.
Find the equivalent annual cost of renting the phone and also buying the phone. The answers below are listed in the same order.
You just spent $1,000 on your credit card. The interest rate is 24% pa compounding monthly. Assume that your credit card account has no fees and no minimum monthly repayment.
If you can't make any interest or principal payments on your credit card debt over the next year, how much will you owe one year from now?
Question 921 utility, return distribution, log-normal distribution, arithmetic and geometric averages, no explanation
Who was the first theorist to propose the idea of ‘expected utility’?