A share was bought for $20 (at t=0) and paid its annual dividend of $3 one year later (at t=1). Just after the dividend was paid, the share price was $16 (at t=1). What was the total return, capital return and income return? Calculate your answers as effective annual rates.
The choices are given in the same order: ## r_\text{total},r_\text{capital},r_\text{income} ##.
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.
A share was bought for $30 (at t=0) and paid its annual dividend of $6 one year later (at t=1).
Just after the dividend was paid, the share price fell to $27 (at t=1). What were the total, capital and income returns given as effective annual rates?
The choices are given in the same order:
##r_\text{total}## , ##r_\text{capital}## , ##r_\text{dividend}##.
There are many ways to calculate a firm's free cash flow (FFCF), also called cash flow from assets (CFFA). Some include the annual interest tax shield in the cash flow and some do not.
Which of the below FFCF formulas include the interest tax shield in the cash flow?
###(1) \quad FFCF=NI + Depr - CapEx -ΔNWC + IntExp### ###(2) \quad FFCF=NI + Depr - CapEx -ΔNWC + IntExp.(1-t_c)### ###(3) \quad FFCF=EBIT.(1-t_c )+ Depr- CapEx -ΔNWC+IntExp.t_c### ###(4) \quad FFCF=EBIT.(1-t_c) + Depr- CapEx -ΔNWC### ###(5) \quad FFCF=EBITDA.(1-t_c )+Depr.t_c- CapEx -ΔNWC+IntExp.t_c### ###(6) \quad FFCF=EBITDA.(1-t_c )+Depr.t_c- CapEx -ΔNWC### ###(7) \quad FFCF=EBIT-Tax + Depr - CapEx -ΔNWC### ###(8) \quad FFCF=EBIT-Tax + Depr - CapEx -ΔNWC-IntExp.t_c### ###(9) \quad FFCF=EBITDA-Tax - CapEx -ΔNWC### ###(10) \quad FFCF=EBITDA-Tax - CapEx -ΔNWC-IntExp.t_c###The formulas for net income (NI also called earnings), EBIT and EBITDA are given below. Assume that depreciation and amortisation are both represented by 'Depr' and that 'FC' represents fixed costs such as rent.
###NI=(Rev - COGS - Depr - FC - IntExp).(1-t_c )### ###EBIT=Rev - COGS - FC-Depr### ###EBITDA=Rev - COGS - FC### ###Tax =(Rev - COGS - Depr - FC - IntExp).t_c= \dfrac{NI.t_c}{1-t_c}###Question 419 capital budgeting, NPV, interest tax shield, WACC, CFFA, CAPM, no explanation
| Project Data | ||
| Project life | 1 year | |
| Initial investment in equipment | $6m | |
| Depreciation of equipment per year | $6m | |
| Expected sale price of equipment at end of project | 0 | |
| Unit sales per year | 9m | |
| Sale price per unit | $8 | |
| Variable cost per unit | $6 | |
| Fixed costs per year, paid at the end of each year | $1m | |
| Interest expense in first year (at t=1) | $0.53m | |
| Tax rate | 30% | |
| Government treasury bond yield | 5% | |
| Bank loan debt yield | 6% | |
| Market portfolio return | 10% | |
| Covariance of levered equity returns with market | 0.08 | |
| Variance of market portfolio returns | 0.16 | |
| Firm's and project's debt-to-assets ratio | 50% | |
Notes
- Due to the project, current assets will increase by $5m now (t=0) and fall by $5m at the end (t=1). Current liabilities will not be affected.
Assumptions
- The debt-to-assets ratio will be kept constant throughout the life of the project. The amount of interest expense at the end of each period has been correctly calculated to maintain this constant debt-to-equity ratio.
- Millions are represented by 'm'.
- All cash flows occur at the start or end of the year as appropriate, not in the middle or throughout the year.
- All rates and cash flows are real. The inflation rate is 2% pa.
- All rates are given as effective annual rates.
- The 50% capital gains tax discount is not available since the project is undertaken by a firm, not an individual.
What is the net present value (NPV) of the project?
The boss of WorkingForTheManCorp has a wicked (and unethical) idea. He plans to pay his poor workers one week late so that he can get more interest on his cash in the bank.
Every week he is supposed to pay his 1,000 employees $1,000 each. So $1 million is paid to employees every week.
The boss was just about to pay his employees today, until he thought of this idea so he will actually pay them one week (7 days) later for the work they did last week and every week in the future, forever.
Bank interest rates are 10% pa, given as a real effective annual rate. So ##r_\text{eff annual, real} = 0.1## and the real effective weekly rate is therefore ##r_\text{eff weekly, real} = (1+0.1)^{1/52}-1 = 0.001834569##
All rates and cash flows are real, the inflation rate is 3% pa and there are 52 weeks per year. The boss will always pay wages one week late. The business will operate forever with constant real wages and the same number of employees.
What is the net present value (NPV) of the boss's decision to pay later?
A company conducts a 2 for 3 rights issue at a subscription price of $8 when the pre-announcement stock price was $9. Assume that all investors use their rights to buy those extra shares.
What is the percentage increase in the stock price and the number of shares outstanding? The answers are given in the same order.
An investor bought a 5 year government bond with a 2% pa coupon rate at par. Coupons are paid semi-annually. The face value is $100.
Calculate the bond's new price 8 months later after yields have increased to 3% pa. Note that both yields are given as APR's compounding semi-annually. Assume that the yield curve was flat before the change in yields, and remained flat afterwards as well.
Question 905 market capitalisation of equity, PE ratio, payout ratio
The below graph shows the computer software company Microsoft's stock price (MSFT) at the market close on the NASDAQ on Friday 1 June 2018.
Based on the screenshot above, which of the following statements about MSFT is NOT correct? MSFT's: