You just borrowed $400,000 in the form of a 25 year interest-only mortgage with monthly payments of $3,000 per month. The interest rate is 9% pa which is not expected to change.
You actually plan to pay more than the required interest payment. You plan to pay $3,300 in mortgage payments every month, which your mortgage lender allows. These extra payments will reduce the principal and the minimum interest payment required each month.
At the maturity of the mortgage, what will be the principal? That is, after the last (300th) interest payment of $3,300 in 25 years, how much will be owing on the mortgage?
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).
Stocks in the United States usually pay quarterly dividends. For example, the software giant Microsoft paid a $0.23 dividend every quarter over the 2013 financial year and plans to pay a $0.28 dividend every quarter over the 2014 financial year.
Using the dividend discount model and net present value techniques, calculate the stock price of Microsoft assuming that:
- The time now is the beginning of July 2014. The next dividend of $0.28 will be received in 3 months (end of September 2014), with another 3 quarterly payments of $0.28 after this (end of December 2014, March 2015 and June 2015).
- The quarterly dividend will increase by 2.5% every year, but each quarterly dividend over the year will be equal. So each quarterly dividend paid in the financial year beginning in September 2015 will be $ 0.287 ##(=0.28×(1+0.025)^1)##, with the last at the end of June 2016. In the next financial year beginning in September 2016 each quarterly dividend will be $0.294175 ##(=0.28×(1+0.025)^2)##, with the last at the end of June 2017, and so on forever.
- The total required return on equity is 6% pa.
- The required return and growth rate are given as effective annual rates.
- Dividend payment dates and ex-dividend dates are at the same time.
- Remember that there are 4 quarters in a year and 3 months in a quarter.
What is the current stock price?
Question 575 inflation, real and nominal returns and cash flows
You expect a nominal payment of $100 in 5 years. The real discount rate is 10% pa and the inflation rate is 3% pa. Which of the following statements is NOT correct?
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?
Question 744 income and capital returns, real and nominal returns and cash flows, inflation
If someone says "my shares rose by 10% last year", what do you assume that they mean? The effective annual:
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 872 duration, Macaulay duration, modified duration, portfolio duration
A fixed coupon bond’s modified duration is 20 years, and yields are currently 10% pa compounded annually. Which of the following statements about the bond is NOT correct?