Fight Finance

Question 58  NPV, inflation, real and nominal returns and cash flows, Annuity

A project to build a toll bridge will take two years to complete, costing three payments of $100 million at the start of each year for the next three years, that is at t=0, 1 and 2.

After completion, the toll bridge will yield a constant $50 million at the end of each year for the next 10 years. So the first payment will be at t=3 and the last at t=12. After the last payment at t=12, the bridge will be given to the government.

The required return of the project is 21% pa given as an effective annual nominal rate.

All cash flows are real and the expected inflation rate is 10% pa given as an effective annual rate. Ignore taxes.

The Net Present Value is:

(a) -$112,496,484

(b) -$32,260,693

(c) -$19,645,987

(d) $5,222,533

(e) $200,000,000

Question 142  DDM, income and capital returns

When using the dividend discount model to price a stock:

### p_{0} = \frac{d_1}{r - g} ###

The growth rate of dividends (g):

(a) Is the stock's required return.

(b) Is the stock's expected total return.

(c) Is the stock's expected dividend return.

(d) Is the stock's expected real yield.

(e) Should be less than the expected GDP growth rate of the country where the company does business.

Question 369  interest tax shield, CFFA

One formula for calculating a levered firm's free cash flow (FFCF, or CFFA) is to use earnings before interest and tax (EBIT).

###\begin{aligned} FFCF &= (EBIT)(1-t_c) + Depr - CapEx -\Delta NWC + IntExp.t_c \\ &= (Rev - COGS - Depr - FC)(1-t_c) + Depr - CapEx -\Delta NWC + IntExp.t_c \\ \end{aligned} \\###

Does this annual FFCF or the annual interest tax shield?

Question 387  real option, option

One of the reasons why firms may not begin projects with relatively small positive net present values (NPV's) is because they wish to maximise the value of their:

(a) Expansion option.

(b) Abandonment option.

(c) Timing (or delaying) option.

(d) Production (or switching) option.

(e) Underlying asset.

Question 490  expected and historical returns, accounting ratio

Which of the following is NOT a synonym of 'required return'?

(a) total required yield

(b) cost of capital

(c) discount rate

(d) opportunity cost of capital

(e) accounting rate of return

Question 491  capital budgeting, opportunity cost, sunk cost

A man is thinking about taking a day off from his casual painting job to relax.

He just woke up early in the morning and he's about to call his boss to say that he won't be coming in to work.

But he's thinking about the hours that he could work today (in the future) which are:

(a) A sunk cost.

(b) An opportunity cost.

(c) A negative side effect.

(d) A capital expense.

(e) A depreciation expense.

Question 549

An Apple iPhone 6 smart phone can be bought now for $999. An Android Samsung Galaxy 5 smart phone can be bought now for $599.

If the Samsung phone lasts for four years, approximately how long must the Apple phone last for to have the same equivalent annual cost?

Assume that both phones have equivalent features besides their lifetimes, that both are worthless once they've outlasted their life, the discount rate is 10% pa given as an effective annual rate, and there are no extra costs or benefits from either phone.

(a) 16 years

(b) 14 years

(c) 12 years

(d) 10 years

(e) 8 years

Question 776  market efficiency, systematic and idiosyncratic risk, beta, income and capital returns

Which of the following statements about returns is NOT correct? A stock's:

(a) Expected total return will equal its required total return if the stock is fairly priced.

(b) Expected total return will be less than its required total return if the stock is over-priced.

(c) Required total return should be higher than the risk free government bond yield if the stock has a positive beta.

(d) Required total return depends on its total variance, required capital return depends on systematic variance and the dividend yield depends on idiosyncratic variance.

(e) Expected capital return equals the expected total return less whatever the management decide that they will pay as an income return (which is the dividend yield).

Question 880  gold standard, no explanation

Under the Gold Standard (1876 to 1913), currencies were priced relative to:

(a) The United States Dollar, USD.

(b) The Greater British Pound, GBP.

(c) Gold.

(d) Silver.

(e) Rum.

Question 924  foreign exchange rate, forward foreign exchange rate, arbitrage, forward interest rate, no explanation

Suppose that the yield curve in the United States of America and Australia is flat and that the current:

• USD federal funds rate is 1% pa;
• AUD cash rate is 1.5% pa;
• Spot AUD exchange rate is 1 USD per AUD;
• One year forward AUD exchange rate is 0.97 USD per AUD.

You suspect that there’s an arbitrage opportunity.

Which one of the following statements about the potential arbitrage opportunity is NOT correct?

(a) Right now, borrow USD in America, convert it into AUD at the spot, lend it in Australia, lock in to buy USD and sell AUD forward one year. One year later, withdraw the AUD, convert it into USD and pay back the USD loan.

(b) American debt may be over-priced, sell it.

(c) Australian debt may be under-priced, buy it.

(d) The spot AUD may be under-priced compared to the USD, buy the AUD now.

(e) The forward AUD may be under-priced compared to the USD, lock in to buy the AUD in one year.