Government bonds currently have a return of 5% pa. A stock has an expected return of 6% pa and the market return is 7% pa. What is the beta of the stock?
Find Trademark Corporation's Cash Flow From Assets (CFFA), also known as Free Cash Flow to the Firm (FCFF), over the year ending 30th June 2013.
Trademark Corp | ||
Income Statement for | ||
year ending 30th June 2013 | ||
$m | ||
Sales | 100 | |
COGS | 25 | |
Operating expense | 5 | |
Depreciation | 20 | |
Interest expense | 20 | |
Income before tax | 30 | |
Tax at 30% | 9 | |
Net income | 21 | |
Trademark Corp | ||
Balance Sheet | ||
as at 30th June | 2013 | 2012 |
$m | $m | |
Assets | ||
Current assets | 120 | 80 |
PPE | ||
Cost | 150 | 140 |
Accumul. depr. | 60 | 40 |
Carrying amount | 90 | 100 |
Total assets | 210 | 180 |
Liabilities | ||
Current liabilities | 75 | 65 |
Non-current liabilities | 75 | 55 |
Owners' equity | ||
Retained earnings | 10 | 10 |
Contributed equity | 50 | 50 |
Total L and OE | 210 | 180 |
Note: all figures are given in millions of dollars ($m).
A 2 year corporate bond yields 3% pa with a coupon rate of 5% pa, paid semi-annually.
Find the effective monthly rate, effective six month rate, and effective annual rate.
##r_\text{eff monthly}##, ##r_\text{eff 6 month}##, ##r_\text{eff annual}##.
When someone says that they're "buying American dollars" (USD), what type of asset are they probably buying? They're probably buying:
Question 370 capital budgeting, NPV, interest tax shield, WACC, CFFA
Project Data | ||
Project life | 2 yrs | |
Initial investment in equipment | $600k | |
Depreciation of equipment per year | $250k | |
Expected sale price of equipment at end of project | $200k | |
Revenue per job | $12k | |
Variable cost per job | $4k | |
Quantity of jobs per year | 120 | |
Fixed costs per year, paid at the end of each year | $100k | |
Interest expense in first year (at t=1) | $16.091k | |
Interest expense in second year (at t=2) | $9.711k | |
Tax rate | 30% | |
Government treasury bond yield | 5% | |
Bank loan debt yield | 6% | |
Levered cost of equity | 12.5% | |
Market portfolio return | 10% | |
Beta of assets | 1.24 | |
Beta of levered equity | 1.5 | |
Firm's and project's debt-to-equity ratio | 25% | |
Notes
- The project will require an immediate purchase of $50k of inventory, which will all be sold at cost when the project ends. Current liabilities are negligible so they can be ignored.
Assumptions
- The debt-to-equity ratio will be kept constant throughout the life of the project. The amount of interest expense at the end of each period has been correctly calculated to maintain this constant debt-to-equity ratio. Note that interest expense is different in each year.
- Thousands are represented by 'k' (kilo).
- All cash flows occur at the start or end of the year as appropriate, not in the middle or throughout the year.
- All rates and cash flows are nominal. The inflation rate is 2% pa.
- All rates are given as effective annual rates.
- The 50% capital gains tax discount is not available since the project is undertaken by a firm, not an individual.
What is the net present value (NPV) of the project?
A fairly valued share's current price is $4 and it has a total required return of 30%. Dividends are paid annually and next year's dividend is expected to be $1. After that, dividends are expected to grow by 5% pa in perpetuity. All rates are effective annual returns.
What is the expected dividend income paid at the end of the second year (t=2) and what is the expected capital gain from just after the first dividend (t=1) to just after the second dividend (t=2)? The answers are given in the same order, the dividend and then the capital gain.
Question 703 utility, risk aversion, utility function, gamble
Mr Blue, Miss Red and Mrs Green are people with different utility functions.
Each person has $500 of initial wealth. A coin toss game is offered to each person at a casino where the player can win or lose $500. Each player can flip a coin and if they flip heads, they receive $500. If they flip tails then they will lose $500. Which of the following statements is NOT correct?
To receive the dividend you must own the stock when the market closes on which date?