Over the next year, the management of an unlevered company plans to:
- Achieve firm free cash flow (FFCF or CFFA) of $1m.
- Pay dividends of $1.8m
- Complete a $1.3m share buy-back.
- Spend $0.8m on new buildings without buying or selling any other fixed assets. This capital expenditure is included in the CFFA figure quoted above.
Assume that:
- All amounts are received and paid at the end of the year so you can ignore the time value of money.
- The firm has sufficient retained profits to pay the dividend and complete the buy back.
- The firm plans to run a very tight ship, with no excess cash above operating requirements currently or over the next year.
How much new equity financing will the company need? In other words, what is the value of new shares that will need to be issued?
Find Ching-A-Lings Corporation's Cash Flow From Assets (CFFA), also known as Free Cash Flow to the Firm (FCFF), over the year ending 30th June 2013.
Ching-A-Lings Corp | ||
Income Statement for | ||
year ending 30th June 2013 | ||
$m | ||
Sales | 100 | |
COGS | 20 | |
Depreciation | 20 | |
Rent expense | 11 | |
Interest expense | 19 | |
Taxable Income | 30 | |
Taxes at 30% | 9 | |
Net income | 21 | |
Ching-A-Lings Corp | ||
Balance Sheet | ||
as at 30th June | 2013 | 2012 |
$m | $m | |
Inventory | 49 | 38 |
Trade debtors | 14 | 2 |
Rent paid in advance | 5 | 5 |
PPE | 400 | 400 |
Total assets | 468 | 445 |
Trade creditors | 4 | 10 |
Bond liabilities | 200 | 190 |
Contributed equity | 145 | 145 |
Retained profits | 119 | 100 |
Total L and OE | 468 | 445 |
Note: All figures are given in millions of dollars ($m).
The cash flow from assets was:
Question 383 Merton model of corporate debt, real option, option
In the Merton model of corporate debt, buying a levered company's debt is equivalent to buying the company's assets and:
A company advertises an investment costing $1,000 which they say is underpriced. They say that it has an expected total return of 15% pa, but a required return of only 10% pa. Assume that there are no dividend payments so the entire 15% total return is all capital return.
Assuming that the company's statements are correct, what is the NPV of buying the investment if the 15% return lasts for the next 100 years (t=0 to 100), then reverts to 10% pa after that time? Also, what is the NPV of the investment if the 15% return lasts forever?
In both cases, assume that the required return of 10% remains constant. All returns are given as effective annual rates.
The answer choices below are given in the same order (15% for 100 years, and 15% forever):
An equity index stands at 100 points and the one year equity futures price is 102.
The equity index is expected to have a dividend yield of 4% pa. Assume that investors are risk-neutral so their total required return on the shares is the same as the risk free Treasury bond yield which is 10% pa. Both are given as discrete effective annual rates.
Assuming that the equity index is fairly priced, an arbitrageur would recognise that the equity futures are:
An equity index stands at 100 points and the one year equity futures price is 107.
The equity index is expected to have a dividend yield of 3% pa. Assume that investors are risk-neutral so their total required return on the shares is the same as the risk free Treasury bond yield which is 10% pa. Both are given as discrete effective annual rates.
Assuming that the equity index is fairly priced, an arbitrageur would recognise that the equity futures are:
Which of the following quantities is commonly assumed to be normally distributed?
Question 821 option, option profit, option payoff at maturity, no explanation
You just paid $4 for a 3 month European style call option on a stock currently priced at $47 with a strike price of $50. The stock’s next dividend will be $1 in 4 months’ time. Note that the dividend is paid after the option matures. Which of the below statements is NOT correct?
The DuPont formula is:
###\dfrac{\text{Net Profit}}{\text{Sales}} \times \dfrac{\text{Sales}}{\text{Total Assets}} \times \dfrac{\text{Total Assets}}{\text{Owners' Equity}}###
Which of the following statements about the DuPont formula is NOT correct?
Question 884 monetary policy, impossible trinity, foreign exchange rate, no explanation
According to the impossible trinity, a currency can only have two of these three desirable traits: be fixed against the USD; convertible to and from USD for traders and investors so there are open goods, services and capital markets; and allow independent monetary policy set by the country’s central bank, independent of the US central bank.
Which of the following exchange rate regimes sacrifices fixing the exchange rate to the USD? In other words, which regime uses a floating exchange rate?