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 $10 million at the end of each year forever with no costs. So the first payment will be at t=4.
The required return of the project is 10% pa given as an effective nominal rate. All cash flows are nominal.
What is the payback period?
Question 64 inflation, real and nominal returns and cash flows, APR, effective rate
In Germany, nominal yields on semi-annual coupon paying Government Bonds with 2 years until maturity are currently 0.04% pa.
The inflation rate is currently 1.4% pa, given as an APR compounding per quarter. The inflation rate is not expected to change over the next 2 years.
What is the real yield on these bonds, given as an APR compounding every 6 months?
A company runs a number of slaughterhouses which supply hamburger meat to McDonalds. The company is afraid that live cattle prices will increase over the next year, even though there is widespread belief in the market that they will be stable. What can the company do to hedge against the risk of increasing live cattle prices? Which statement(s) are correct?
(i) buy call options on live cattle.
(ii) buy put options on live cattle.
(iii) sell call options on live cattle.
Select the most correct response:
A stock is expected to pay the following dividends:
| Cash Flows of a Stock | ||||||
| Time (yrs) | 0 | 1 | 2 | 3 | 4 | ... |
| Dividend ($) | 0 | 6 | 12 | 18 | 20 | ... |
After year 4, the dividend will grow in perpetuity at 5% pa. The required return of the stock is 10% pa. Both the growth rate and required return are given as effective annual rates.
What will be the price of the stock in 7 years (t = 7), just after the dividend at that time has been paid?
You just started work at your new job which pays $48,000 per year.
The human resources department have given you the option of being paid at the end of every week or every month.
Assume that there are 4 weeks per month, 12 months per year and 48 weeks per year.
Bank interest rates are 12% pa given as an APR compounding per month.
What is the dollar gain over one year, as a net present value, of being paid every week rather than every month?
Read the following financial statements and calculate the firm's free cash flow over the 2014 financial year.
| UBar Corp | ||
| Income Statement for | ||
| year ending 30th June 2014 | ||
| $m | ||
| Sales | 293 | |
| COGS | 200 | |
| Rent expense | 15 | |
| Gas expense | 8 | |
| Depreciation | 10 | |
| EBIT | 60 | |
| Interest expense | 0 | |
| Taxable income | 60 | |
| Taxes | 18 | |
| Net income | 42 | |
| UBar Corp | ||
| Balance Sheet | ||
| as at 30th June | 2014 | 2013 |
| $m | $m | |
| Assets | ||
| Cash | 30 | 29 |
| Accounts receivable | 5 | 7 |
| Pre-paid rent expense | 1 | 0 |
| Inventory | 50 | 46 |
| PPE | 290 | 300 |
| Total assets | 376 | 382 |
| Liabilities | ||
| Trade payables | 20 | 18 |
| Accrued gas expense | 3 | 2 |
| Non-current liabilities | 0 | 0 |
| Contributed equity | 212 | 212 |
| Retained profits | 136 | 150 |
| Asset revaluation reserve | 5 | 0 |
| Total L and OE | 376 | 382 |
Note: all figures are given in millions of dollars ($m).
The firm's free cash flow over the 2014 financial year was:
Mr Blue, Miss Red and Mrs Green are people with different utility functions. Which of the statements about the 3 utility functions is NOT correct?
The following cash flows are expected:
- A perpetuity of yearly payments of $30, with the first payment in 5 years (first payment at t=5, which continues every year after that forever).
- One payment of $100 in 6 years and 3 months (t=6.25).
What is the NPV of the cash flows if the discount rate is 10% given as an effective annual rate?
Question 798 idiom, diversification, market efficiency, sunk cost, no explanation
The following quotes are most closely related to which financial concept?
- “Opportunity is missed by most people because it is dressed in overalls and looks like work” -Thomas Edison
- “The only place where success comes before work is in the dictionary” -Vidal Sassoon
- “The safest way to double your money is to fold it over and put it in your pocket” - Kin Hubbard
When does a European option's last-traded market price become a sunk cost?