# Fight Finance

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A wholesale building supplies business offers credit to its customers. Customers are given 60 days to pay for their goods, but if they pay within 7 days they will get a 2% discount.

What is the effective interest rate implicit in the discount being offered?

Assume 365 days in a year and that all customers pay on either the 7th day or the 60th day. All rates given below are effective annual rates.

A firm can issue 5 year annual coupon bonds at a yield of 8% pa and a coupon rate of 12% pa.

The beta of its levered equity is 1. Five year government bonds yield 5% pa with a coupon rate of 6% pa. The market's expected dividend return is 4% pa and its expected capital return is 6% pa.

The firm's debt-to-equity ratio is 2:1. The corporate tax rate is 30%.

What is the firm's after-tax WACC? Assume a classical tax system.

An 'interest rate' is the same thing as a 'yield'. or ?

You're the boss of an investment bank's equities research team. Your five analysts are each trying to find the expected total return over the next year of shares in a mining company. The mining firm:

• Is regarded as a mature company since it's quite stable in size and was floated around 30 years ago. It is not a high-growth company;
• Share price is very sensitive to changes in the price of the market portfolio, economic growth, the exchange rate and commodities prices. Due to this, its standard deviation of total returns is much higher than that of the market index;
• Experienced tough times in the last 10 years due to unexpected falls in commodity prices.
• Shares are traded in an active liquid market.
Your team of analysts present their findings, and everyone has different views. While there's no definitive true answer, whose calculation of the expected total return is the most plausible?

Assume that:

• The analysts' source data is correct and true, but their inferences might be wrong;
• All returns and yields are given as effective annual nominal rates.

Let the variance of returns for a share per month be $\sigma_\text{monthly}^2$.

What is the formula for the variance of the share's returns per year $(\sigma_\text{yearly}^2)$?

Assume that returns are independently and identically distributed (iid) so they have zero auto correlation, meaning that if the return was higher than average today, it does not indicate that the return tomorrow will be higher or lower than average.

Total cash flows can be broken into income and capital cash flows.

What is the name given to the cash flow generated from selling shares at a higher price than they were bought?

Which of the following statements about the capital and income returns of a 25 year fully amortising loan asset is correct?

Assume that the yield curve (which shows total returns over different maturities) is flat and is not expected to change.

Over the 25 years from issuance to maturity, a fully amortising loan's expected annual effective:

Question 749  Multiples valuation, PE ratio, price to revenue ratio, price to book ratio, NPV

A real estate agent says that the price of a house in Sydney Australia is approximately equal to the gross weekly rent times 1000.

What type of valuation method is the real estate agent using?

The market's expected total return is 10% pa and the risk free rate is 5% pa, both given as effective annual rates.

A stock has a beta of 0.7.

In the last 5 minutes, bad economic news was released showing a higher chance of recession. Over this time the share market fell by 2%. The risk free rate was unchanged. What do you think was the stock's historical return over the last 5 minutes, given as an effective 5 minute rate?

 Major City Apartment Prices One bedroom, one bathroom, around 55 square metre floor space, Dec 2018 City Advertised price Currency FX quote London, Great Britain 995,500 GBP 1.3 USD per GBP Paris, France 639,000 EUR 0.88 USD per EUR San Francisco, USA 859,000 USD 1 USD per USD Shanghai, China 6,300,000 RMB 6.9 RMB per USD Sydney, Australia 670,000 AUD 0.72 USD per AUD Tokyo, Japan 50,800,000 JPY 112 JPY per USD

Which city has the most expensive apartment, measured in United States Dollars (USD)? Pay attention to the FX quotes.