Fight Finance

Question 66  CAPM, SML

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?

(a) -0.5

(b) 0

(c) 0.5

(d) 1

(e) 7

Question 173  CFFA

Find Candys Corporation's Cash Flow From Assets (CFFA), also known as Free Cash Flow to the Firm (FCFF), over the year ending 30th June 2013.

Candys Corp
Income Statement for
year ending 30th June 2013
	$m
Sales	200
COGS	50
Operating expense	10
Depreciation	20
Interest expense	10
Income before tax	110
Tax at 30%	33
Net income	77

Candys Corp
Balance Sheet
as at 30th June	2013	2012
	$m	$m
Assets
Current assets	220	180
PPE
Cost	300	340
Accumul. depr.	60	40
Carrying amount	240	300
Total assets	460	480
Liabilities
Current liabilities	175	190
Non-current liabilities	135	130
Owners' equity
Retained earnings	50	60
Contributed equity	100	100
Total L and OE	460	480

 

Note: all figures are given in millions of dollars ($m).

(a) 242

(b) 182

(c) 112

(d) 92

(e) 52

Question 296  CFFA, interest tax shield

Which one of the following will decrease net income (NI) but increase cash flow from assets (CFFA) in this year for a tax-paying firm, all else remaining constant?

Remember:

###NI=(Rev-COGS-FC-Depr-IntExp).(1-t_c )### ###CFFA=NI+Depr-CapEx - ΔNWC+IntExp###

(a) An increase in revenue (##Rev##).

(b) An decrease in revenue (##Rev##).

(c) An increase in rent expense (part of fixed costs, ##FC##).

(d) An increase in interest expense (##IntExp##).

(e) An increase in dividends.

Question 351  CFFA

Over the next year, the management of an unlevered company plans to:

• Achieve firm free cash flow (FFCF or CFFA) of $1m.
• Pay dividends of $1.8m
• Complete a $1.3m share buy-back.
• Spend $0.8m on new buildings without buying or selling any other fixed assets. This capital expenditure is included in the CFFA figure quoted above.

Assume that:

• All amounts are received and paid at the end of the year so you can ignore the time value of money.
• The firm has sufficient retained profits to pay the dividend and complete the buy back.
• The firm plans to run a very tight ship, with no excess cash above operating requirements currently or over the next year.

How much new equity financing will the company need? In other words, what is the value of new shares that will need to be issued?

(a) $2.1m

(b) $1.3m

(c) $0.8m

(d) $0.3m

(e) No new shares need to be issued, the firm will be sufficiently financed.

Question 410  CAPM, capital budgeting

The CAPM can be used to find a business's expected opportunity cost of capital:

###r_i=r_f+β_i (r_m-r_f)###

What should be used as the risk free rate ##r_f##?

(a) The current central bank policy rate (RBA overnight money market rate).

(b) The current 30 day federal government treasury bill rate.

(c) The average historical 30 day federal government treasury bill rate over the last 20 years.

(d) The current 30 year federal government treasury bond rate.

(e) The average historical 30 year federal government treasury bond rate over the last 20 years.

Question 435  option, no explanation

Will the price of a call option on equity or if the standard deviation of returns (risk) of the underlying shares becomes higher?

Question 727  inflation, real and nominal returns and cash flows

The Australian Federal Government lends money to domestic students to pay for their university education. This is known as the Higher Education Contribution Scheme (HECS). The nominal interest rate on the HECS loan is set equal to the consumer price index (CPI) inflation rate. The interest is capitalised every year, which means that the interest is added to the principal. The interest and principal does not need to be repaid by students until they finish study and begin working.

Which of the following statements about HECS loans is NOT correct?

(a) The real interest rate is zero.

(b) The nominal amount owing on the loan will increase at the inflation rate over time, if there are no extra payments or borrowings.

(c) The real amount owing on the loan in today's money will remain the same over time, if there are no extra payments or borrowings.

(d) The interest rate on the HECS loan advantages rich domestic students because they are able to pay off their debt sooner and avoid paying as much HECS interest.

(e) The interest rate on the HECS loan advantages all domestic students because the alternative of borrowing from the bank to pay for education would usually attract a higher interest rate.

Question 772  interest tax shield, capital structure, leverage

A firm issues debt and uses the funds to buy back equity. Assume that there are no costs of financial distress or transactions costs. Which of the following statements about interest tax shields is NOT correct?

(a) Higher debt leads to higher interest expense.

(b) Higher interest expense leads to lower profit before tax, following on from above.

(c) Lower profit before tax leads to lower tax payments, following on from above.

(d) Lower tax payments lead to higher cash flow from assets, following on from above.

(e) Lower profit after tax leads to a lower share price, following on from above.

Question 784  boot strapping zero coupon yield, forward interest rate, term structure of interest rates

Information about three risk free Government bonds is given in the table below.

Federal Treasury Bond Data
Maturity	Yield to maturity	Coupon rate	Face value	Price
(years)	(pa, compounding annually)	(pa, paid annually)	($)	($)
1	0%	2%	100	102
2	1%	2%	100	101.9703951
3	2%	2%	100	100

 

Based on the above government bonds' yields to maturity, which of the below statements about the spot zero rates and forward zero rates is NOT correct?

(a) The 1 year zero coupon spot yield per annum compounding annually is 0% pa.

(b) The 2 year zero coupon spot yield per annum compounding annually is 1.0100025% pa.

(c) The 3 year zero coupon spot yield per annum compounding annually is 2.0272812% pa.

(d) The 1 to 2 year zero coupon forward rate per annum compounding annually is 3.030206% pa.

(e) The 2 to 3 year zero coupon forward rate per annum compounding annually is 4.0926772% pa.

Question 892  foreign exchange reserve, foreign exchange rate, no explanation

The Chinese central bank has the largest amount of foreign currency reserves.

What could the large amounts of foreign exchange reserves held by the Chinese government be used for in a currency crisis? China's currency is called the Renminbi (RMB) or Yuan (CNY). In a Chinese currency crisis the Chinese government is likely to use its FX reserves to:

(a) Buy RMB.

(b) Buy USD.

(c) Buy EUR.

(d) Buy JPY.

(e) Sell RMB.