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Question 369  interest tax shield, CFFA

One formula for calculating a levered firm's free cash flow (FFCF, or CFFA) is to use earnings before interest and tax (EBIT).

###\begin{aligned} FFCF &= (EBIT)(1-t_c) + Depr - CapEx -\Delta NWC + IntExp.t_c \\ &= (Rev - COGS - Depr - FC)(1-t_c) + Depr - CapEx -\Delta NWC + IntExp.t_c \\ \end{aligned} \\###
Does this annual FFCF or the annual interest tax shield?


Question 681  no explanation

A trader sells one crude oil European style put option contract on the CME expiring in one year with an exercise price of $44 per barrel for a price of $6.64. The crude oil spot price is $40.33. If the trader doesn’t close out her contract before maturity, then at maturity she will have the:



Question 695  utility, risk aversion, utility function

Mr Blue, Miss Red and Mrs Green are people with different utility functions. Which of the statements about the 3 utility functions is NOT correct?

Utility curves



Question 702  utility, risk aversion, utility function, gamble

Mr Blue, Miss Red and Mrs Green are people with different utility functions.

Each person has $50 of initial wealth. A coin toss game is offered to each person at a casino where the player can win or lose $50. Each player can flip a coin and if they flip heads, they receive $50. If they flip tails then they will lose $50. Which of the following statements is NOT correct?

Utility curves



Question 724  return distribution, mean and median returns

If a stock's future expected continuously compounded annual returns are normally distributed, what will be bigger, the stock's or continuously compounded annual return? Or would you expect them to be ?


Question 804  CFFA, WACC, interest tax shield, DDM

Use the below information to value a levered company with annual perpetual cash flows from assets that grow. The next cash flow will be generated in one year from now. Note that ‘k’ means kilo or 1,000. So the $30k is $30,000.

Data on a Levered Firm with Perpetual Cash Flows
Item abbreviation Value Item full name
##\text{OFCF}## $30k Operating free cash flow
##g## 1.5% pa Growth rate of OFCF
##r_\text{D}## 4% pa Cost of debt
##r_\text{EL}## 16.3% pa Cost of levered equity
##D/V_L## 80% pa Debt to assets ratio, where the asset value includes tax shields
##t_c## 30% Corporate tax rate
##n_\text{shares}## 100k Number of shares
 

 

Which of the following statements is NOT correct?



Question 833  option, delta, theta, standard deviation, no explanation

Which of the following statements about an option (either a call or put) and its underlying stock is NOT correct?



Question 841  gross domestic product, government spending

The government spends money on:

  • Goods and services such as defence, police, schools, hospitals and roads; and
  • Transfer payments (also called welfare) such as the pension, dole, disability support and student support.

When calculating GDP (=C+I+G+X-M), the ‘government spending’ component (G) is supposed to include:



Question 930  arbitrage table, future, no explanation

A non-dividend paying stock has a current price of $20.

The risk free rate is 5% pa given as a continuously compounded rate.

A 2 year futures contract on the stock has a futures price of $24.

You suspect that the futures contract is mis-priced and would like to conduct a risk-free arbitrage that requires zero capital. Which of the following steps about arbitraging the situation is NOT correct?



Question 937  CAPM, SML

The market's expected total return is 10% pa and the risk free rate is 5% pa, both given as effective annual rates.

A stock has a beta of 0.7.

What do you think will be the stock's expected return over the next year, given as an effective annual rate?