Fight Finance

Question 37  IRR

If a project's net present value (NPV) is zero, then its internal rate of return (IRR) will be:

(a) Positive infinity (##+\infty##)

(b) Zero (0).

(c) Less than the project's required return.

(d) More than the project's required return.

(e) Equal to the project's required return.

Question 95  interest tax shield

The equations for Net Income (NI, also known as Earnings or Net Profit After Tax) and Cash Flow From Assets (CFFA, also known as Free Cash Flow to the Firm) per year are:

###NI=(Rev-COGS-FC-Depr-IntExp).(1-t_c)###

###CFFA=NI+Depr-CapEx - \varDelta NWC+IntExp###

For a firm with debt, what is the formula for the present value of interest tax shields if the tax shields occur in perpetuity?

You may assume:

• the value of debt (D) is constant through time,
• The cost of debt and the yield on debt are equal and given by ##r_D##.
• the appropriate rate to discount interest tax shields is ##r_D##.
• ##\text{IntExp}=D.r_D##

(a) ##D.t_c##

(b) ##D.r_D/t_c ##

(c) ##D.r_D.(1-t_c)##

(d) ##D.r_D/(1-t_c)##

(e) ##D.r_D.(t_c-1)##

Question 221  credit risk

You're considering making an investment in a particular company. They have preference shares, ordinary shares, senior debt and junior debt.

Which is the safest investment? Which has the highest expected returns?

(a) Junior debt is the safest. Preference shares have the highest expected returns.

(b) Preference shares are the safest. Ordinary shares have the highest expected returns.

(c) Senior debt is the safest. Ordinary shares have the highest expected returns.

(d) Junior debt is the safest. Ordinary shares have the highest expected returns.

(e) Senior debt is the safest. Junior debt have the highest expected returns.

Question 258  bill pricing, simple interest rate

A 60-day Bank Accepted Bill has a face value of $1,000,000. The interest rate is 8% pa and there are 365 days in the year. What is its price now?

(a) $913,907.4174

(b) $925,925.9259

(c) $974,611.7471

(d) $987,020.0108

(e) $987,428.5591

Question 361  CFFA

Over the next year, the management of an unlevered company plans to:

• Make $5m in sales, $1.9m in net income and $2m in equity free cash flow (EFCF).
• Pay dividends of $1m.
• Complete a $1.3m share buy-back.

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 legally 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?

(a) $2m

(b) $1m

(c) $0.4m

(d) $0.3m

(e) No new shares need to be issued, the firm will be sufficiently financed.

Question 372  debt terminology

Which of the following statements is NOT correct? Borrowers:

(a) Receive cash at the start and promise to pay cash in the future, as set out in the debt contract.

(b) Are debtors.

(c) Owe money.

(d) Are funded by debt.

(e) Buy debt.

Question 579  price gains and returns over time, time calculation, effective rate

How many years will it take for an asset's price to double if the price grows by 10% pa?

(a) 1.8182 years

(b) 3.3219 years

(c) 7.2725 years

(d) 11.5267 years

(e) 13.7504 years

Question 635  continuously compounding rate

A $100 stock has a continuously compounded expected total return of 10% pa. Its dividend yield is 2% pa with continuous compounding. What do you expect its price to be in 2.5 years?

(a) $134.985881

(b) $128.402542

(c) $126.905871

(d) $122.140276

(e) $121.215844

Question 754  fully amortising loan, interest only loan

How much more can you borrow using an interest-only loan compared to a 25-year fully amortising loan if interest rates are 4% 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) 63.1508%

(b) 60.0299%

(c) 58.3511%

(d) 36.8492%

(e) 11.5269%

Question 954  option, at the money option

If a put option is at-the-money, then the spot price (##S_0##) is than, than or to the put option's strike price (##K_T##)?