Fight Finance

Question 31  DDM, perpetuity with growth, effective rate conversion

What is the NPV of the following series of cash flows when the discount rate is 5% given as an effective annual rate?

The first payment of $10 is in 4 years, followed by payments every 6 months forever after that which shrink by 2% every 6 months. That is, the growth rate every 6 months is actually negative 2%, given as an effective 6 month rate. So the payment at ## t=4.5 ## years will be ## 10(1-0.02)^1=9.80 ##, and so on.

(a) $188.62

(b) $184.07

(c) $120.43

(d) $117.53

(e) $8.07

Question 81  risk, correlation, diversification

Stock A and B's returns have a correlation of 0.3. Which statement is NOT correct?

(a) If stock A's return increases, stock B's return is also expected to increase.

(b) If stock A's return decreases, stock B's return is also expected to decrease.

(c) If stock A and B were combined in a portfolio, there would be no diversification at all since they are positively correlated.

(d) Stock A and B's returns have positive covariance.

(e) a and b.

Question 135  credit card, APR, no explanation

Your credit card shows a $600 debt liability. The interest rate is 24% pa, payable monthly. You can't pay any of the debt off, except in 6 months when it's your birthday and you'll receive $50 which you'll use to pay off the credit card. If that is your only repayment, how much will the credit card debt liability be one year from now?

(a) $688.32

(b) $704.64

(c) $710.95

(d) $760.95

(e) $817.25

Question 157  bill pricing, simple interest rate, no explanation

A 90-day Bank Accepted Bill has a face value of $1,000,000. The interest rate is 6% pa and there are 365 days in the year. What is its price?

(a) $13,369,963.37

(b) $6,400,000.00

(c) $985,735.05

(d) $985,421.17

(e) $156,250.00

Question 237  WACC, Miller and Modigliani, interest tax shield

Which of the following discount rates should be the highest for a levered company? Ignore the costs of financial distress.

(a) Cost of debt (##r_\text{D}##).

(b) Unlevered cost of equity (##r_\text{E, U}##).

(c) Levered cost of equity (##r_\text{E, L}##).

(d) Levered before-tax WACC (##r_\text{V, LxITS}##).

(e) Levered after-tax WACC (##r_\text{V, LwITS}##).

Question 356  NPV, Annuity

Your friend overheard that you need some cash and asks if you would like to borrow some money. She can lend you $5,000 now (t=0), and in return she wants you to pay her back $1,000 in two years (t=2) and every year after that for the next 5 years, so there will be 6 payments of $1,000 from t=2 to t=7 inclusive.

What is the net present value (NPV) of borrowing from your friend?

Assume that banks loan funds at interest rates of 10% pa, given as an effective annual rate.

(a) -$1,000

(b) $209.2132

(c) $644.7393

(d) $1,040.6721

(e) $1,400.611

Question 490  expected and historical returns, accounting ratio

Which of the following is NOT a synonym of 'required return'?

(a) total required yield

(b) cost of capital

(c) discount rate

(d) opportunity cost of capital

(e) accounting rate of return

Question 524  risk, expected and historical returns, bankruptcy or insolvency, capital structure, corporate financial decision theory, limited liability

Which of the following statements is NOT correct?

(a) Stocks are higher risk investments than debt.

(b) Stocks have higher expected returns than debt.

(c) Firms' past realised stock returns are always higher than their past realised debt returns.

(d) In the event of bankruptcy, stock holders are paid after debt holders are fully paid.

(e) Stock holders have a residual claim on the firm's assets.

Question 660  fully amortising loan, interest only loan, APR

How much more can you borrow using an interest-only loan compared to a 25-year fully amortising loan if interest rates are 6% pa compounding per month and are not expected to change? If it makes it easier, assume that you can afford to pay $2,000 per month on either loan. Express your answer as a proportional increase using the following formula:

###\text{Proportional Increase} = \dfrac{V_\text{0,interest only}}{V_\text{0,fully amortising}} - 1###

(a) 77.6034%

(b) 30.3779%

(c) 28.8603%

(d) 22.3966%

(e) 7.5304%

Question 812  rights issue

A firm is about to conduct a 2-for-7 rights issue with a subscription price of $10 per share. They haven’t announced the capital raising to the market yet and the share price is currently $13 per share. Assume that every shareholder will exercise their rights, the cash raised will simply be put in the bank, and the rights issue is completed so quickly that the time value of money can be ignored. Disregard signalling, taxes and agency-related effects.

Which of the following statements about the rights issue is NOT correct? After the rights issue is completed:

(a) The number of shares will rise by 2/7 or around 28.5714%.

(b) The share price will fall by 2/7 or around 28.5714%.

(c) If you don't take part in the rights issue and it's non-renounceable, you will lose around $0.6667 per share.

(d) The firm’s market capitalisation of equity will rise by 20/91 or around 21.9780%.

(e) The company will have more cash.