Fight Finance

(a) The internal rate of return (IRR) of buying a bond is equal to the bond's yield.

(b) The present value of a fairly priced bond's coupons and face value is equal to its price.

(c) If the required return of a bond falls, its price will fall.

(d) Fairly priced discount bonds' yield is more than the coupon rate, price is less than face value, and the NPV of buying them is zero.

(e) The NPV of buying a fairly priced bond is zero.

(a) The before-tax cost of debt is less than the before-tax cost of equity. Therefore debt is a cheaper form of financing than equity so companies should try to finance their projects with debt only.

(b) Debt makes a firm's equity more risky. Therefore the higher the amount of debt, the higher the cost of equity.

(c) The more debt a firm has, the higher its tax shields. Therefore firms should seek to have as much debt and as little equity as possible.

(d) The more debt, the lower the firm's after tax WACC. The after tax WACC is the discount rate that discounts the firm's cash flows, so the lower it is the more the firm is worth. Therefore firms should try to make their after tax WACC as low as possible by using as much debt as possible.

(e) The less debt, the lower the chance of bankruptcy. Therefore firms should try to pay off all of their debt so that they are financed by equity only.

(a) $10,000,000.00

(b) $8,021,978.02

(c) $976,772.86

(d) $975,935.83

(e) $100,000.00

(a) $127.50

(b) $171.14

(c) $173.33

(d) $174.56

(e) $354.06

(a) 0.002466, 0.014889, 0.03.

(b) 0.002485, 0.015, 0.030225.

(c) 0.004074, 0.024695, 0.05.

(d) 0.004124, 0.025, 0.050625.

(e) 0.004167, 0.025, 0.05.

(a) Buying the company's assets.

(b) Buying a call option on the company's assets.

(c) Buying a put option on the company's assets.

(d) Buying the company's assets and buying a call option on those assets.

(e) Buying the company's assets and buying a put option on those assets.

(a) Alice has $6,000 cash, owes $10,000 credit card debt due immediately and 100% owns a sole tradership business with assets worth $10,000 and liabilities of $3,000.

(b) Billy has $10,000 cash, owes $6,000 credit card debt due immediately and 100% owns a corporate business with assets worth $3,000 and liabilities of $10,000.

(c) Carla has $6,000 cash, owes $10,000 credit card debt due immediately and 100% owns a corporate business with assets worth $10,000 and liabilities of $3,000.

(d) Darren has $10,000 cash, owes $6,000 credit card debt due immediately and 100% owns a sole tradership business with assets worth $3,000 and liabilities of $10,000.

(e) Ernie has $1,000 cash, lent $3,000 to his friend, and doesn't have any personal debt or own any businesses.

If a stock's future expected continuously compounded annual returns are normally distributed, what will be bigger, the stock's or continuously compounded annual return? Or would you expect them to be ?

(a) The stability of the currency of Australia.

(b) The maintenance of full employment in Australia.

(c) The economic prosperity and welfare of the people of Australia.

(d) To meet an agreed medium-term inflation target.

(e) To balance the federal government budget over the business cycle.

(a) Betas of the Solar and Beach companies will only measure the companies’ sensitivity to the market portfolio risk factor, not the cloud coverage factor.

(b) Will under-estimate the Solar and Beach stocks’ systematic variance.

(c) Will under-estimate the Solar and Beach stocks’ diversifiable variance.

(d) Models will show positive correlations between the Solar and Beach stock’s residual (also called idiosyncratic or diversifiable) returns.