Fight Finance

Question 42  interest only loan

You just signed up for a 30 year interest-only mortgage with monthly payments of $3,000 per month. The interest rate is 6% pa which is not expected to change.

How much did you borrow? After 15 years, just after the 180th payment at that time, how much will be owing on the mortgage? The interest rate is still 6% and is not expected to change. Remember that the mortgage is interest-only and that mortgage payments are paid in arrears (at the end of the month).

(a) $495,533.92, $349,640.96

(b) $500,374.84, $355,510.54

(c) $500,374.84, $250,187.42

(d) $600,000.00, $600,000.00

(e) $600,000.00, $300,000.00

Question 173  CFFA

Find Candys Corporation's Cash Flow From Assets (CFFA), also known as Free Cash Flow to the Firm (FCFF), over the year ending 30th June 2013.

Candys Corp
Income Statement for
year ending 30th June 2013
	$m
Sales	200
COGS	50
Operating expense	10
Depreciation	20
Interest expense	10
Income before tax	110
Tax at 30%	33
Net income	77

Candys Corp
Balance Sheet
as at 30th June	2013	2012
	$m	$m
Assets
Current assets	220	180
PPE
Cost	300	340
Accumul. depr.	60	40
Carrying amount	240	300
Total assets	460	480
Liabilities
Current liabilities	175	190
Non-current liabilities	135	130
Owners' equity
Retained earnings	50	60
Contributed equity	100	100
Total L and OE	460	480

 

Note: all figures are given in millions of dollars ($m).

(a) 242

(b) 182

(c) 112

(d) 92

(e) 52

Question 176  CFFA

Why is Capital Expenditure (CapEx) subtracted in the Cash Flow From Assets (CFFA) formula?

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

(a) CapEx is added in the Net Income (NI) equation so it needs subtracting in the CFFA equation.

(b) CapEx is a financing cash flow that needs to be ignored. Therefore it should be subtracted.

(c) CapEx is not a cash flow, it's a non-cash expense made up by accountants that needs to be subtracted.

(d) CapEx is subtracted to account for the net cash spent on capital assets.

(e) CapEx is subtracted because it's too hard to predict, therefore we exclude it.

Question 368  interest tax shield, CFFA

A method commonly seen in textbooks for calculating a levered firm's free cash flow (FFCF, or CFFA) is the following:

###\begin{aligned} FFCF &= (Rev - COGS - Depr - FC - IntExp)(1-t_c) + \\ &\space\space\space+ Depr - CapEx -\Delta NWC + IntExp(1-t_c) \\ \end{aligned}###

Does this annual FFCF or the annual interest tax shield?

Question 375  interest tax shield, CFFA

One formula for calculating a levered firm's free cash flow (FFCF, or CFFA) is to use net operating profit after tax (NOPAT).

###\begin{aligned} FFCF &= NOPAT + Depr - CapEx -\Delta NWC \\ &= (Rev - COGS - Depr - FC)(1-t_c) + Depr - CapEx -\Delta NWC \\ \end{aligned} \\###

Does this annual FFCF or the annual interest tax shield?

Question 384  option, real option

Which of the following is the least useful method or model to calculate the value of a real option in a project?

(a) Project value with the option less project value without the option.

(b) No-arbitrage binomial option pricing model.

(c) Risk-neutral binomial option pricing model.

(d) Gordon growth model.

(e) Black-Sholes option pricing model.

Question 576  inflation, real and nominal returns and cash flows

What is the present value of a nominal payment of $1,000 in 4 years? The nominal discount rate is 8% pa and the inflation rate is 2% pa.

(a) $795.62

(b) $792.0937

(c) $735.0299

(d) $731.7721

(e) $683.0135

Question 644  future, no explanation

A trader sells one crude oil futures contract on the CME expiring in one year with a locked-in futures price of $38.94 per barrel. The crude oil spot price is $40.33. If the trader doesn’t close out her contract before expiry then in one year she will have the:

(a) Obligation to buy the underlying oil at $38.94 per barrel.

(b) Obligation to sell the underlying oil at $38.94 per barrel.

(c) Right to buy the underlying oil at $38.94 per barrel if she wants.

(d) Right to sell the underlying oil at $38.94 per barrel if she wants.

(e) Obligation to buy the underlying oil $38.94 per barrel if the counter party chooses to sell it.

Question 661  systematic and idiosyncratic risk, CAPM

A stock's total standard deviation of returns is 20% pa. The market portfolio's total standard deviation of returns is 15% pa. The beta of the stock is 0.8.

What is the stock's diversifiable standard deviation?

(a) 16% pa

(b) 12% pa

(c) 8% pa

(d) 5% pa

(e) 4% pa

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:

(a) Gross government spending on goods and services only.

(b) Gross government spending on transfer payments only.

(c) Net government spending which is goods and services expenditure less tax revenue.

(d) Net government spending which is transfer payments expenditure less tax revenue.

(e) Net government spending which is total expenditure (goods and services plus transfer payments expenditure) less tax revenue.