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:
Question 339 bond pricing, inflation, market efficiency, income and capital returns
Economic statistics released this morning were a surprise: they show a strong chance of consumer price inflation (CPI) reaching 5% pa over the next 2 years.
This is much higher than the previous forecast of 3% pa.
A vanilla fixed-coupon 2-year risk-free government bond was issued at par this morning, just before the economic news was released.
What is the expected change in bond price after the economic news this morning, and in the next 2 years? Assume that:
- Inflation remains at 5% over the next 2 years.
- Investors demand a constant real bond yield.
- The bond price falls by the (after-tax) value of the coupon the night before the ex-coupon date, as in real life.
Acquirer firm plans to launch a takeover of Target firm. The deal is expected to create a present value of synergies totaling $0.5 million, but investment bank fees and integration costs with a present value of $1.5 million is expected. A 10% cash and 90% scrip offer will be made that pays the fair price for the target's shares only. Assume that the Target and Acquirer agree to the deal. The cash will be paid out of the firms' cash holdings, no new debt or equity will be raised.
| Firms Involved in the Takeover | ||
| Acquirer | Target | |
| Assets ($m) | 60 | 10 |
| Debt ($m) | 20 | 2 |
| Share price ($) | 10 | 8 |
| Number of shares (m) | 4 | 1 |
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 444 investment decision, corporate financial decision theory
The investment decision primarily affects which part of a business?
The expression 'you have to spend money to make money' relates to which business decision?
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 740 real and nominal returns and cash flows, DDM, inflation
Taking inflation into account when using the DDM can be hard. Which of the following formulas will NOT give a company's current stock price ##(P_0)##? Assume that the annual dividend was just paid ##(C_0)##, and the next dividend will be paid in one year ##(C_1)##.
Question 899 comparative advantage in trade, production possibilities curve, no explanation
Adam and Bella are the only people on a remote island. Their production possibility curves are shown in the graph.
Assume that Adam and Bella cooperate according to the principle of comparative advantage.
Which of the following statements is NOT correct?
The required return of a building project is 10%, given as an effective annual rate. Assume that the cash flows shown in the table are paid all at once at the given point in time.
The building firm is just about to start the project and the client has signed the contract. Initially the firm will pay $100 to the sub-contractors to carry out the work and then will receive an $11 payment from the client in one year and $121 when the project is finished in 2 years. Ignore credit risk.
But the building company is considering selling the project to a competitor at different points in time and is pondering the minimum price that they should sell it for.
| Project Cash Flows | |
| Time (yrs) | Cash flow ($) |
| 0 | -100 |
| 1 | 11 |
| 2 | 121 |
Which of the below statements is NOT correct? The project is worth: