A project to build a toll road will take 3 years to complete, costing three payments of $50 million, paid at the start of each year (at times 0, 1, and 2).
After completion, the toll road will yield a constant $10 million at the end of each year forever with no costs. So the first payment will be at t=4.
The required return of the project is 10% pa given as an effective nominal rate. All cash flows are nominal.
What is the payback period?
A project has the following cash flows:
| Project Cash Flows | |
| Time (yrs) | Cash flow ($) |
| 0 | -400 |
| 1 | 0 |
| 2 | 500 |
The required return on the project is 10%, given as an effective annual rate.
What is the Internal Rate of Return (IRR) of this project? The following choices are effective annual rates. Assume that the cash flows shown in the table are paid all at once at the given point in time.
A company's shares just paid their annual dividend of $2 each.
The stock price is now $40 (just after the dividend payment). The annual dividend is expected to grow by 3% every year forever. The assumptions of the dividend discount model are valid for this company.
What do you expect the effective annual dividend yield to be in 3 years (dividend yield from t=3 to t=4)?
When using the dividend discount model, care must be taken to avoid using a nominal dividend growth rate that exceeds the country's nominal GDP growth rate. Otherwise the firm is forecast to take over the country since it grows faster than the average business forever.
Suppose a firm's nominal dividend grows at 10% pa forever, and nominal GDP growth is 5% pa forever. The firm's total dividends are currently $1 billion (t=0). The country's GDP is currently $1,000 billion (t=0).
In approximately how many years will the company's total dividends be as large as the country's GDP?
You're thinking of starting a new cafe business, but you're not sure if it will be profitable.
You have to decide what type of cups, mugs and glasses you wish to buy. You can pay to have your cafe's name printed on them, or just buy the plain un-marked ones. For marketing reasons it's better to have the cafe name printed. But the plain un-marked cups, mugs and glasses maximise your:
Use the below information to value a levered company with constant annual perpetual cash flows from assets. The next cash flow will be generated in one year from now, so a perpetuity can be used to value this firm. Both the operating and firm free cash flows are constant (but not equal to each other).
| Data on a Levered Firm with Perpetual Cash Flows | ||
| Item abbreviation | Value | Item full name |
| ##\text{OFCF}## | $48.5m | Operating free cash flow |
| ##\text{FFCF or CFFA}## | $50m | Firm free cash flow or cash flow from assets |
| ##g## | 0% pa | Growth rate of OFCF and FFCF |
| ##\text{WACC}_\text{BeforeTax}## | 10% pa | Weighted average cost of capital before tax |
| ##\text{WACC}_\text{AfterTax}## | 9.7% pa | Weighted average cost of capital after tax |
| ##r_\text{D}## | 5% pa | Cost of debt |
| ##r_\text{EL}## | 11.25% pa | Cost of levered equity |
| ##D/V_L## | 20% pa | Debt to assets ratio, where the asset value includes tax shields |
| ##t_c## | 30% | Corporate tax rate |
What is the value of the levered firm including interest tax shields?
Question 809 Markowitz portfolio theory, CAPM, Jensens alpha, CML, systematic and idiosyncratic risk
A graph of assets’ expected returns ##(\mu)## versus standard deviations ##(\sigma)## is given in the graph below. The CML is the capital market line.
Which of the following statements about this graph, Markowitz portfolio theory and the Capital Asset Pricing Model (CAPM) theory is NOT correct?
Question 831 option, American option, no explanation
Which of the following statements about American-style options is NOT correct? American-style:
Question 903 option, Black-Scholes-Merton option pricing, option on stock index
A six month European-style call option on the S&P500 stock index has a strike price of 2800 points.
The underlying S&P500 stock index currently trades at 2700 points, has a continuously compounded dividend yield of 2% pa and a standard deviation of continuously compounded returns of 25% pa.
The risk-free interest rate is 5% pa continuously compounded.
Use the Black-Scholes-Merton formula to calculate the option price. The call option price now is: