Here are the Net Income (NI) and Cash Flow From Assets (CFFA) equations:
###NI=(Rev-COGS-FC-Depr-IntExp).(1-t_c)###
###CFFA=NI+Depr-CapEx - \varDelta NWC+IntExp###
What is the formula for calculating annual interest expense (IntExp) which is used in the equations above?
Select one of the following answers. Note that D is the value of debt which is constant through time, and ##r_D## is the cost of debt.
A stock was bought for $8 and paid a dividend of $0.50 one year later (at t=1 year). Just after the dividend was paid, the stock price was $7 (at t=1 year).
What were the total, capital and dividend returns given as effective annual rates? The choices are given in the same order:
##r_\text{total}##, ##r_\text{capital}##, ##r_\text{dividend}##.
The following cash flows are expected:
- 10 yearly payments of $80, with the first payment in 3 years from now (first payment at t=3).
- 1 payment of $600 in 5 years and 6 months (t=5.5) from now.
What is the NPV of the cash flows if the discount rate is 10% given as an effective annual rate?
Which one of the following is NOT usually considered an 'investable' asset for long-term wealth creation?
Your firm's research scientists can begin an exciting new project at a cost of $10m now, after which there’s a:
- 70% chance that cash flows will be $1m per year forever, starting in 5 years (t=5). This is the A state of the world.
- 20% chance that cash flows will be $3m per year forever, starting in 5 years (t=5). This is the B state of the world.
- 10% chance of a major break through in which case the cash flows will be $20m per year forever starting in 5 years (t=5), or instead, the project can be expanded by investing another $10m (at t=5) which is expected to give cash flows of $60m per year forever, starting at year 9 (t=9). Note that the perpetual cash flows are either the $20m from year 4 onwards, or the $60m from year 9 onwards after the additional $10m year 5 investment, but not both. This is the C state of the world.
The firm's cost of capital is 10% pa.
What's the present value (at t=0) of the option to expand in year 5?
Question 433 Merton model of corporate debt, real option, option, no explanation
A risky firm will last for one period only (t=0 to 1), then it will be liquidated. So it's assets will be sold and the debt holders and equity holders will be paid out in that order. The firm has the following quantities:
##V## = Market value of assets.
##E## = Market value of (levered) equity.
##D## = Market value of zero coupon bonds.
##F_1## = Total face value of zero coupon bonds which is promised to be paid in one year.
What is the payoff to equity holders at maturity, assuming that they keep their shares until maturity?
Which firms tend to have low forward-looking price-earnings (PE) ratios? Only consider firms with positive PE ratios.
A 2-year futures contract on a stock paying a continuous dividend yield of 3% pa was bought when the underlying stock price was $10 and the risk free rate was 10% per annum with continuous compounding. Assume that investors are risk-neutral, so the stock's total required return is the risk free rate.
Find the forward price ##(F_2)## and value of the contract ##(V_0)## initially. Also find the value of the contract in 6 months ##(V_{0.5})## if the stock price rose to $12.
Question 877 arithmetic and geometric averages, utility, utility function
Gross discrete returns in different states of the world are presented in the table below. A gross discrete return is defined as ##P_1/P_0##, where ##P_0## is the price now and ##P_1## is the expected price in the future. An investor can purchase only a single asset, A, B, C or D. Assume that a portfolio of assets is not possible.
| Gross Discrete Returns | ||
| In Different States of the World | ||
| Investment | World states (probability) | |
| asset | Good (50%) | Bad (50%) |
| A | 2 | 0.5 |
| B | 1.1 | 0.9 |
| C | 1.1 | 0.95 |
| D | 1.01 | 1.01 |
Which of the following statements about the different assets is NOT correct? Asset: