The required return of a project is 10%, given as an effective annual rate. Assume that the cash flows shown in the table are paid all at once at the given point in time.
What is the Net Present Value (NPV) of the project?
| Project Cash Flows | |
| Time (yrs) | Cash flow ($) |
| 0 | -100 |
| 1 | 0 |
| 2 | 121 |
Question 143 bond pricing, zero coupon bond, term structure of interest rates, forward interest rate
An Australian company just issued two bonds:
- A 6-month zero coupon bond at a yield of 6% pa, and
- A 12 month zero coupon bond at a yield of 7% pa.
What is the company's forward rate from 6 to 12 months? Give your answer as an APR compounding every 6 months, which is how the above bond yields are quoted.
A stock is expected to pay the following dividends:
| Cash Flows of a Stock | ||||||
| Time (yrs) | 0 | 1 | 2 | 3 | 4 | ... |
| Dividend ($) | 8 | 8 | 8 | 20 | 8 | ... |
After year 4, the dividend will grow in perpetuity at 4% pa. The required return on the stock is 10% pa. Both the growth rate and required return are given as effective annual rates. Note that the $8 dividend at time zero is about to be paid tonight.
What will be the price of the stock in 5 years (t = 5), just after the dividend at that time has been paid?
Question 398 financial distress, capital raising, leverage, capital structure, NPV
A levered firm has zero-coupon bonds which mature in one year and have a combined face value of $9.9m.
Investors are risk-neutral and therefore all debt and equity holders demand the same required return of 10% pa.
In one year the firm's assets will be worth:
- $13.2m with probability 0.5 in the good state of the world, or
- $6.6m with probability 0.5 in the bad state of the world.
A new project presents itself which requires an investment of $2m and will provide a certain cash flow of $3.3m in one year.
The firm doesn't have any excess cash to make the initial $2m investment, but the funds can be raised from shareholders through a fairly priced rights issue. Ignore all transaction costs.
Should shareholders vote to proceed with the project and equity raising? What will be the gain in shareholder wealth if they decide to proceed?
A large proportion of a levered firm's assets is cash held at the bank. The firm is financed with half equity and half debt.
Which of the following statements about this firm's enterprise value (EV) and total asset value (V) is NOT correct?
A credit card company advertises an interest rate of 18% pa, payable monthly. Which of the following statements about the interest rate is NOT correct? All rates are given to four decimal places.
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?
An effective monthly return of 1% ##(r_\text{eff monthly})## is equivalent to an effective annual return ##(r_\text{eff annual})## of:
Which derivatives position has the possibility of unlimited potential gains?