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 company has:

- 140 million shares outstanding.
- The market price of one share is currently $2.
- The company's debentures are publicly traded and their market price is equal to 93% of the face value.
- The debentures have a total face value of $50,000,000 and the current yield to maturity of corporate debentures is 12% per annum.
- The risk-free rate is 8.50% and the market return is 13.7%.
- Market analysts estimated that the company's stock has a beta of 0.90.
- The corporate tax rate is 30%.

What is the company's after-tax weighted average cost of capital (WACC) in a classical tax system?

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).

You're advising your superstar client 40-cent who is weighing up buying a private jet or a luxury yacht. 40-cent is just as happy with either, but he wants to go with the more cost-effective option. These are the cash flows of the two options:

- The private jet can be bought for $6m now, which will cost $12,000 per month in fuel, piloting and airport costs, payable at the end of each month. The jet will last for
**12**years. - Or the luxury yacht can be bought for $4m now, which will cost $20,000 per month in fuel, crew and berthing costs, payable at the end of each month. The yacht will last for
**20**years.

What's unusual about 40-cent is that he is so famous that he will actually be able to sell his jet or yacht for the same price as it was bought since the next generation of superstar musicians will buy it from him as a status symbol.

Bank interest rates are 10% pa, given as an effective annual rate. You can assume that 40-cent will live for another 60 years and that when the jet or yacht's life is at an end, he will buy a new one with the same details as above.

Would you advise 40-cent to buy the or the ?

Note that the effective monthly rate is ##r_\text{eff monthly}=(1+0.1)^{1/12}-1=0.00797414##

A firm has forecast its Cash Flow From Assets (CFFA) for this year and management is worried that it is too low. Which one of the following actions will lead to a higher CFFA for this year (t=0 to 1)? Only consider cash flows this year. Do not consider cash flows after one year, or the change in the NPV of the firm. Consider each action in isolation.

**Question 405** DDM, income and capital returns, no explanation

The perpetuity with growth formula is:

###P_0= \dfrac{C_1}{r-g}###

Which of the following is **NOT** equal to the total required return (r)?

**Question 659** APR, effective rate, effective rate conversion, no explanation

A home loan company advertises an interest rate of 9% pa, payable monthly. Which of the following statements about the interest rate is **NOT** correct? All rates are given with an accuracy of 4 decimal places.

Telsa Motors advertises that its Model S electric car saves $**570** per month in fuel costs. Assume that Tesla cars last for **10** years, fuel and electricity costs remain the same, and savings are made at the end of each month with the first saving of $570 in one month from now.

The effective annual interest rate is **15.8**%, and the effective monthly interest rate is **1.23**%. What is the present value of the savings?

**Question 801** negative gearing, leverage, capital structure, no explanation

The following steps set out the process of ‘negative gearing’ an investment property in Australia. Which of these steps or statements is **NOT** correct? To successfully achieve negative gearing on an investment property:

A **90** day bank bill has a face value of $**100,000**.

Investor A bought the bill when it was first issued at a simple yield to maturity of **3**% pa and sold it **20** days later to Investor B who expected to earn a simple yield to maturity of **5**% pa. Investor B held it until maturity.

Which of the following statements is **NOT** correct?