Fight Finance

Question 27  bill pricing, simple interest rate

A 180-day Bank Accepted Bill has a face value of $1,000,000. The interest rate is 8% pa and there are 365 days in the year. What is its price now?

(a) $15,400,000.00

(b) $8,371,559.63

(c) $962,757.81

(d) $962,045.33

(e) $64,935.06

Question 75  WACC, CAPM

A company has:

• 50 million shares outstanding.
• The market price of one share is currently $6.
• The risk-free rate is 5% and the market return is 10%.
• Market analysts believe that the company's ordinary shares have a beta of 2.
• The company has 1 million preferred stock which have a face (or par) value of $100 and pay a constant dividend of 10% of par. They currently trade for $80 each.
• The company's debentures are publicly traded and their market price is equal to 90% of their face value.
• The debentures have a total face value of $60,000,000 and the current yield to maturity of corporate debentures is 10% per annum. The corporate tax rate is 30%.

What is the company's after-tax weighted average cost of capital (WACC)? Assume a classical tax system.

(a) 11.75%

(b) 11.82%

(c) 13.54%

(d) 13.78%

(e) 20.84%

Question 88  WACC, CAPM

A firm can issue 3 year annual coupon bonds at a yield of 10% pa and a coupon rate of 8% pa.

The beta of its levered equity is 2. The market's expected return is 10% pa and 3 year government bonds yield 6% pa with a coupon rate of 4% pa.

The market value of equity is $1 million and the market value of debt is $1 million. The corporate tax rate is 30%.

What is the firm's after-tax WACC? Assume a classical tax system.

(a) 8.40%

(b) 10.50%

(c) 10.80%

(d) 12.00%

(e) 21.00%

Question 103  option

Below are 4 option graphs. Note that the y-axis is payoff at maturity (T). What options do they depict? List them in the order that they are numbered.

(a) 1: short call, 2: long call, 3: short put, 4: long put.

(b) 1: long call, 2: long put, 3: short call, 4: short put.

(c) 1: short put, 2: long put, 3: short call, 4: long call.

(d) 1: long put, 2: short put, 3: long call, 4: short call.

(e) 1: long put, 2: short call, 3: short put, 4: long call.

Question 280  equivalent annual cash flow

You own a nice suit which you wear once per week on nights out. You bought it one year ago for $600. In your experience, suits used once per week last for 6 years. So you expect yours to last for another 5 years.

Your younger brother said that retro is back in style so he wants to wants to borrow your suit once a week when he goes out. With the increased use, your suit will only last for another 4 years rather than 5.

What is the present value of the cost of letting your brother use your current suit for the next 4 years?

Assume: that bank interest rates are 10% pa, given as an effective annual rate; you will buy a new suit when your current one wears out and your brother will not use the new one; your brother will only use your current suit so he will only use it for the next four years; and the price of a new suit never changes.

(a) 108.1063

(b) 98.2785

(c) 94.095

(d) 85.5409

(e) 68.3013

Question 290  APR, effective rate, debt terminology

Which of the below statements about effective rates and annualised percentage rates (APR's) is NOT correct?

(a) An effective annual rate could be called: "a yearly rate compounding per year".

(b) An APR compounding monthly could be called: "a yearly rate compounding per month".

(c) An effective monthly rate could be called: "a yearly rate compounding per month".

(d) An APR compounding daily could be called: "a yearly rate compounding per day".

(e) An effective 2-year rate could be called: "a 2-year rate compounding every 2 years".

Question 536  idiom, bond pricing, capital structure, leverage

The expression 'my word is my bond' is often used in everyday language to make a serious promise.

Why do you think this expression uses the metaphor of a bond rather than a share?

(a) Because bonds are higher risk investments than shares.

(b) Because issuers must pay bond holders or face bankruptcy, while payments to shareholders are discretionary.

(c) Because bond holders are paid last in the event of bankruptcy, while shareholders are paid first.

(d) Because bonds always pay higher returns than shares.

(e) Because bonds are generally more liquid than shares.

Question 606  foreign exchange rate, American and European terms

Which of the following FX quotes (current in October 2015) is given in American terms?

(a) 1.55 USD per GBP

(b) 120.61 JPY per USD

(c) 6.32 RMB per USD

(d) 1 USD = 1.31 CAD

(e) 0.99 CHF = 1 USD

Question 827  future, basis risk, no explanation

You intend to use futures on oil to hedge the risk of purchasing oil. There is no cross-hedging risk. Oil pays no dividends but it’s costly to store. Which of the following statements about basis risk in this scenario is NOT correct?

(a) Basis risk makes hedges more risky.

(b) Basis risk can only lead to worse than expected effective dollar prices.

(c) Basis risk only occurs when the future is closed out early, before it matures.

(d) ‘The basis’ is defined as the underlying spot price less the futures price quote ##(S_t - F_{t,T})##.

(e) The futures price of oil will tend to be higher than the spot price due to storage costs, so the basis will tend to be positive for hedgers who long futures contracts.

Question 1000  duration, duration of a perpetuity with growth, needs refinement

An unlevered firm cuts its dividends and re-invests in zero-NPV projects with the same risk as its existing projects. This decreases the dividend yield, but increases the firm's equity's dividend growth rate and duration, while its total required return on equity remains unchanged. The equity can be valued as a perpetuity and the duration of a perpetuity is given below:

###D_\text{Macaulay} = \dfrac{1+r}{r-g}###

What will be the effect on the stock's CAPM beta? Assume that there's no change in the risk free rate or market risk premium. The company's equity beta will:

(a) Increase.

(b) Decrease.

(c) Remain unchanged.

(d) Not enough information is provided to answer the question.