Fight Finance

(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) 300

(b) 283.1403

(c) 282.2849

(d) 257.4003

(e) 225.3944

(a) 750,000 and 750,000.

(b) 750,000 and 951,682.

(c) 750,000 and 987,396.

(d) 750,000 and 1,009,805.

(e) 750,000 and 1,024,807.

(a) Common equity in a listed public mining extraction company that will cease operations, wind up, and return all capital to shareholders in one year when its sole gold mine becomes depleted.

(b) Common equity in a small private owner-operated mining services company whose main asset is its sole tanker truck which delivers fuel to mines. The firm's shares are 100% owned by Bob, the driver of the tanker truck.

(c) Common equity in a large listed public company in the banking industry.

(d) Residential apartment real estate.

(e) Commercial warehouse real estate.

(a) $1,997.78 per month in the first year, with 3% annual increases.

(b) $2,083.33 per month in the first year, with 3% annual increases.

(c) $2,157.60 per month in the first year, with 3% annual increases.

(d) $2,171.49 per month in the first year, with 3% annual increases.

(e) $3,333.33 per month in the first year, with 0% annual increases.

(a) Investment decision.

(b) Financing decision.

(c) Working capital decision.

(d) Payout policy decision.

(e) Capital or labour decision.

(a) A long call option's payoff at maturity is equal to the maximum of zero or the underlying asset price at maturity minus the exercise price. ##f_\text{T,LC} = max(S_T - K, 0)##

(b) A long call option's profit is equal to the payoff at maturity less the initial option price. ##\pi_\text{LC} = max(S_T - K, 0) - c_0##

(c) The breakeven price is the underlying asset price at which a long option contract gives zero profit. When ##max(S_T - K, 0) - c_0 = 0##, then ##S_T = K+c_0##.

(d) A call option's break-even price is always more than its strike price.

(e) Call options should only be exercised at maturity if the underlying asset price is above the break-even price.

(a) ##f_{SC,T}=max⁡(S_T-X_T,0)##

(b) ##f_{SC,T}=max⁡(X_T-S_T,0)##

(c) ##f_{SC,T}=-max⁡(S_T-X_T,0)##

(d) ##f_{SC,T}=-max⁡(X_T-S_T,0)##

(e) ##f_{SC,T}=min⁡(X_T-S_T,0)##

(a)##Red \sim \mathcal{N}(\mu, \sigma^2)##,   ##Green \sim \mathcal{N}(\mu, \sigma^2)##   and   ##Blue \sim \mathcal{N}(\mu, \sigma^2)##

(b) ##Red \sim \mathcal{N}(\mu, \sigma^2)##,   ##Green \sim \mathcal{N}(\mu, \sigma^2)##   and   ##Blue \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##

(c) ##Red \sim \mathcal{N}(\mu, \sigma^2)##,   ##Green \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##   and   ##Blue \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##

(d) ##Red \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##,   ##Green \sim \mathcal{N}(\mu, \sigma^2)##   and   ##Blue \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##

(e) ##Red \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##,   ##Green \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##   and   ##Blue \sim \mathbf{ln} \mathcal{N}(\mu, \sigma^2)##

(a) Is the weighted average time that an asset’s cash flows are received, usually measured in years.

(b) Divided by (1+y) equals the modified duration, where y is the yield to maturity given as an effective annual rate and duration is measured in years.

(c) Of a zero-coupon bond is equal to the bond’s maturity.

(d) Of a fixed-coupon-paying bond will be less than the bond’s maturity.

(e) Of a portfolio is an arithmetic average of the Macaulay durations of the assets in the portfolio, weighted by their face values.