**Question 56** income and capital returns, bond pricing, premium par and discount bonds

Which of the following statements about risk free government bonds is **NOT** correct?

**Hint:** Total return can be broken into income and capital returns as follows:

###\begin{aligned} r_\text{total} &= \frac{c_1}{p_0} + \frac{p_1-p_0}{p_0} \\ &= r_\text{income} + r_\text{capital} \end{aligned} ###

The capital return is the growth rate of the price.

The income return is the periodic cash flow. For a bond this is the coupon payment.

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

Piano Bar | ||

Income Statement for | ||

year ending 30th June 2013 | ||

$m | ||

Sales | 310 | |

COGS | 185 | |

Operating expense | 20 | |

Depreciation | 15 | |

Interest expense | 10 | |

Income before tax | 80 | |

Tax at 30% | 24 | |

Net income | 56 | |

Piano Bar | ||

Balance Sheet | ||

as at 30th June | 2013 | 2012 |

$m | $m | |

Assets | ||

Current assets | 240 | 230 |

PPE | ||

Cost | 420 | 400 |

Accumul. depr. | 50 | 35 |

Carrying amount | 370 | 365 |

Total assets | 610 | 595 |

Liabilities | ||

Current liabilities | 180 | 190 |

Non-current liabilities | 290 | 265 |

Owners' equity | ||

Retained earnings | 90 | 90 |

Contributed equity | 50 | 50 |

Total L and OE | 610 | 595 |

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

Carlos and Edwin are brothers and they both love Holden Commodore cars.

Carlos likes to buy the latest Holden Commodore car for **$40,000** every **4** years as soon as the new model is released. As soon as he buys the new car, he sells the old one on the second hand car market for **$20,000**. Carlos never has to bother with paying for repairs since his cars are brand new.

Edwin also likes Commodores, but prefers to buy 4-year old cars for **$20,000** and keep them for **11** years until the end of their life (new ones last for 15 years in total but the 4-year old ones only last for another 11 years). Then he sells the old car for **$2,000** and buys another 4-year old second hand car, and so on.

Every time Edwin buys a second hand 4 year old car he **immediately** has to spend **$1,000** on repairs, and then $1,000 every year after that for the next 10 years. So there are **11** payments in total from when the second hand car is bought at t=0 to the last payment at t=10. One year later (t=11) the old car is at the end of its total 15 year life and can be scrapped for $2,000.

Assuming that Carlos and Edwin maintain their love of Commodores and keep up their habits of buying new ones and second hand ones respectively, how much **larger** is Carlos' **equivalent annual cost** of car ownership compared with Edwin's?

The real discount rate is **10%** pa. All cash flows are real and are expected to remain constant. Inflation is forecast to be **3**% pa. All rates are effective annual. Ignore capital gains tax and tax savings from depreciation since cars are tax-exempt for individuals.

**Question 308** risk, standard deviation, variance, no explanation

A stock's standard deviation of returns is expected to be:

- 0.09 per
**month**for the first 5 months; - 0.14 per
**month**for the next 7 months.

What is the expected standard deviation of the stock per **year** ##(\sigma_\text{annual})##?

Assume that returns are independently and identically distributed (iid) and therefore have zero auto-correlation.

Which of the following statements about book and market equity is **NOT** correct?

**Question 821** option, option profit, option payoff at maturity, no explanation

You just paid $**4** for a **3** month European style **call** option on a stock currently priced at $**47** with a strike price of $**50**. The stock’s next dividend will be $**1** in **4** months’ time. Note that the dividend is paid after the option matures. Which of the below statements is **NOT** correct?

A **one** year European-style **call** option has a strike price of $**4**.

The option's underlying stock currently trades at $**5**, pays no dividends and its standard deviation of continuously compounded returns is **47**% pa.

The risk-free interest rate is **10**% pa continuously compounded.

Use the Black-Scholes-Merton formula to calculate the option price. The call option price now is:

**Question 869** economic order quantity

A Queensland farmer grows strawberries in greenhouses and supplies Australian supermarkets all year round. The farmer must decide how often he should contract the truck driver to deliver his strawberries and how many boxes to send on each delivery. The farmer:

- Sells
**100,000**boxes of strawberries per year; - Incurs holding costs (refrigeration and spoilage) of $
**16**per box per year; and - Must pay the truck driver delivery fees at $
**0.20**per box plus a $**500**fixed fee per delivery.

Which of the following statements about the Economic Order Quantity is **NOT** correct?

**Question 986** initial public offering, capital raising, no explanation

In an initial public offering (IPO):

Which of the following statements is **NOT** correct? An **inverted** US government bond yield curve indicates that: