Carlos and Edwin are brothers and they both love Holden Commodore cars.
Carlos likes to buy the latest Holden Commodore car for $40,000 every 4 years as soon as the new model is released. As soon as he buys the new car, he sells the old one on the second hand car market for $20,000. Carlos never has to bother with paying for repairs since his cars are brand new.
Edwin also likes Commodores, but prefers to buy 4-year old cars for $20,000 and keep them for 11 years until the end of their life (new ones last for 15 years in total but the 4-year old ones only last for another 11 years). Then he sells the old car for $2,000 and buys another 4-year old second hand car, and so on.
Every time Edwin buys a second hand 4 year old car he immediately has to spend $1,000 on repairs, and then $1,000 every year after that for the next 10 years. So there are 11 payments in total from when the second hand car is bought at t=0 to the last payment at t=10. One year later (t=11) the old car is at the end of its total 15 year life and can be scrapped for $2,000.
Assuming that Carlos and Edwin maintain their love of Commodores and keep up their habits of buying new ones and second hand ones respectively, how much larger is Carlos' equivalent annual cost of car ownership compared with Edwin's?
The real discount rate is 10% pa. All cash flows are real and are expected to remain constant. Inflation is forecast to be 3% pa. All rates are effective annual. Ignore capital gains tax and tax savings from depreciation since cars are tax-exempt for individuals.
A method commonly seen in textbooks for calculating a levered firm's free cash flow (FFCF, or CFFA) is the following:
###\begin{aligned} FFCF &= (Rev - COGS - Depr - FC - IntExp)(1-t_c) + \\ &\space\space\space+ Depr - CapEx -\Delta NWC + IntExp(1-t_c) \\ \end{aligned}###
Which of the following is the least useful method or model to calculate the value of a real option in a project?
Read the following financial statements and calculate the firm's free cash flow over the 2014 financial year.
| UBar Corp | ||
| Income Statement for | ||
| year ending 30th June 2014 | ||
| $m | ||
| Sales | 293 | |
| COGS | 200 | |
| Rent expense | 15 | |
| Gas expense | 8 | |
| Depreciation | 10 | |
| EBIT | 60 | |
| Interest expense | 0 | |
| Taxable income | 60 | |
| Taxes | 18 | |
| Net income | 42 | |
| UBar Corp | ||
| Balance Sheet | ||
| as at 30th June | 2014 | 2013 |
| $m | $m | |
| Assets | ||
| Cash | 30 | 29 |
| Accounts receivable | 5 | 7 |
| Pre-paid rent expense | 1 | 0 |
| Inventory | 50 | 46 |
| PPE | 290 | 300 |
| Total assets | 376 | 382 |
| Liabilities | ||
| Trade payables | 20 | 18 |
| Accrued gas expense | 3 | 2 |
| Non-current liabilities | 0 | 0 |
| Contributed equity | 212 | 212 |
| Retained profits | 136 | 150 |
| Asset revaluation reserve | 5 | 0 |
| Total L and OE | 376 | 382 |
Note: all figures are given in millions of dollars ($m).
The firm's free cash flow over the 2014 financial year was:
Assets A, B, M and ##r_f## are shown on the graphs above. Asset M is the market portfolio and ##r_f## is the risk free yield on government bonds. Which of the below statements is NOT correct?
Question 664 real and nominal returns and cash flows, inflation, no explanation
What is the present value of real payments of $100 every year forever, with the first payment in one year? The nominal discount rate is 7% pa and the inflation rate is 4% pa.
Short selling is a way to make money from falling prices. In what order must the following steps be completed to short-sell an asset? Let Tom, Dick and Harry be traders in the share market.
- Step P: Purchase the asset from Harry.
- Step G: Give the asset to Tom.
- Step W: Wait and hope that the asset price falls.
- Step B: Borrow the asset from Tom.
- Step S: Sell the asset to Dick.
Select the statement with the correct order of steps.
A 12 month European-style call option with a strike price of $11 is written on a dividend paying stock currently trading at $10. The dividend is paid annually and the next dividend is expected to be $0.40, paid in 9 months. The risk-free interest rate is 5% pa continuously compounded and the standard deviation of the stock’s continuously compounded returns is 30 percentage points pa. The stock's continuously compounded returns are normally distributed. Using the Black-Scholes-Merton option valuation model, determine which of the following statements is NOT correct.
Question 904 option, Black-Scholes-Merton option pricing, option on future on stock index
A six month European-style call option on six month S&P500 index futures has a strike price of 2800 points.
The six month futures price on the S&P500 index is currently at 2740.805274 points. The futures underlie the call option.
The S&P500 stock index currently trades at 2700 points. The stock index underlies the futures. The stock index's standard deviation of continuously compounded returns is 25% pa.
The risk-free interest rate is 5% pa continuously compounded.
Use the Black-Scholes-Merton formula to calculate the option price. The call option price now is: