If a project's net present value (NPV) is zero, then its internal rate of return (IRR) will be:
The theory of fixed interest bond pricing is an application of the theory of Net Present Value (NPV). Also, a 'fairly priced' asset is not over- or under-priced. Buying or selling a fairly priced asset has an NPV of zero.
Considering this, which of the following statements is NOT correct?
A manufacturing company is considering a new project in the more risky services industry. The cash flows from assets (CFFA) are estimated for the new project, with interest expense excluded from the calculations. To get the levered value of the project, what should these unlevered cash flows be discounted by?
Assume that the manufacturing firm has a target debt-to-assets ratio that it sticks to.
Which statement(s) are correct?
(i) All stocks that plot on the Security Market Line (SML) are fairly priced.
(ii) All stocks that plot above the Security Market Line (SML) are overpriced.
(iii) All fairly priced stocks that plot on the Capital Market Line (CML) have zero idiosyncratic risk.
Select the most correct response:
Your friend just bought a house for $1,000,000. He financed it using a $900,000 mortgage loan and a deposit of $100,000.
In the context of residential housing and mortgages, the 'equity' or 'net wealth' tied up in a house is the value of the house less the value of the mortgage loan. Assuming that your friend's only asset is his house, his net wealth is $100,000.
If house prices suddenly fall by 15%, what would be your friend's percentage change in net wealth?
Assume that:
- No income (rent) was received from the house during the short time over which house prices fell.
- Your friend will not declare bankruptcy, he will always pay off his debts.
Acquirer firm plans to launch a takeover of Target firm. The deal is expected to create a present value of synergies totaling $105 million. A scrip offer will be made that pays the fair price for the target's shares plus 75% of the total synergy value.
| Firms Involved in the Takeover | ||
| Acquirer | Target | |
| Assets ($m) | 6,000 | 700 |
| Debt ($m) | 4,800 | 400 |
| Share price ($) | 40 | 20 |
| Number of shares (m) | 30 | 15 |
Ignore transaction costs and fees. Assume that the firms' debt and equity are fairly priced, and that each firms' debts' risk, yield and values remain constant. The acquisition is planned to occur immediately, so ignore the time value of money.
Calculate the merged firm's share price and total number of shares after the takeover has been completed.
Below are some statements about loans and bonds. The first descriptive sentence is correct. But one of the second sentences about the loans' or bonds' prices is not correct. Which statement is NOT correct? Assume that interest rates are positive.
Note that coupons or interest payments are the periodic payments made throughout a bond or loan's life. The face or par value of a bond or loan is the amount paid at the end when the debt matures.
Below is a graph of the USD against the JPY and EUR from 1980 to 2015, compiled by the RBA. Select the correct statement about what occurred between 1980 and 2015. Note that in 1980 the euro was around 1.3 USD per EUR and the Yen was around 250 JPY per USD.
Question 760 time calculation, interest only loan, no explanation
Five years ago (##t=-5## years) you entered into an interest-only home loan with a principal of $500,000, an interest rate of 4.5% pa compounding monthly with a term of 25 years.
Then interest rates suddenly fall to 3% pa (##t=0##), but you continue to pay the same monthly home loan payments as you did before. Will your home loan be paid off by the end of its remaining term? If so, in how many years from now? Measure the time taken to pay off the home loan from the current time which is 5 years after the home loan was first entered into.
Assume that the lower interest rate was given to you immediately after the loan repayment at the end of year 5, which was the 60th payment since the loan was granted. Also assume that rates were and are expected to remain constant.
A Brazilian lady wishes to convert 1 million Brazilian Real (BRL) into Chinese Renminbi (RMB, also called the Yuan or CNY). The exchange rate is 3.42 BRL per USD and 6.27 RMB per USD. How much is the BRL 1 million worth in RMB?