Stock A has a beta of 0.5 and stock B has a beta of 1. Which statement is **NOT** correct?

The equations for Net Income (NI, also known as Earnings or Net Profit After Tax) and Cash Flow From Assets (CFFA, also known as Free Cash Flow to the Firm) per year are:

###NI=(Rev-COGS-FC-Depr-IntExp).(1-t_c)###

###CFFA=NI+Depr-CapEx - \varDelta NWC+IntExp###

For a firm with debt, what is the formula for the present value of interest tax shields if the tax shields occur in perpetuity?

You may assume:

- the value of debt (D) is constant through time,
- The cost of debt and the yield on debt are equal and given by ##r_D##.
- the appropriate rate to discount interest tax shields is ##r_D##.
- ##\text{IntExp}=D.r_D##

Suppose you had $100 in a savings account and the interest rate was 2% per year.

After 5 years, how much do you think you would have in the account if you left the money to grow?

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

Scubar Corp | ||

Income Statement for | ||

year ending 30th June 2013 | ||

$m | ||

Sales | 200 | |

COGS | 60 | |

Depreciation | 20 | |

Rent expense | 11 | |

Interest expense | 19 | |

Taxable Income | 90 | |

Taxes at 30% | 27 | |

Net income | 63 | |

Scubar Corp | ||

Balance Sheet | ||

as at 30th June | 2013 | 2012 |

$m | $m | |

Inventory | 60 | 50 |

Trade debtors | 19 | 6 |

Rent paid in advance | 3 | 2 |

PPE | 420 | 400 |

Total assets | 502 | 458 |

Trade creditors | 10 | 8 |

Bond liabilities | 200 | 190 |

Contributed equity | 130 | 130 |

Retained profits | 162 | 130 |

Total L and OE | 502 | 458 |

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

The cash flow from assets was:

Acquirer firm plans to launch a takeover of Target firm. The deal is expected to create a present value of synergies totaling $**105** million. A **cash** offer will be made that pays the fair price for the target's shares plus **75**% of the total synergy value. The cash will be paid out of the firm's cash holdings, no new debt or equity will be raised.

Firms Involved in the Takeover | ||

Acquirer | Target | |

Assets ($m) | 6,000 | 700 |

Debt ($m) | 4,800 | 400 |

Share price ($) | 40 | 20 |

Number of shares (m) | 30 | 15 |

Ignore transaction costs and fees. Assume that the firms' debt and equity are fairly priced, and that each firms' debts' risk, yield and values remain constant. The acquisition is planned to occur immediately, so ignore the time value of money.

Calculate the merged firm's share price and total number of shares after the takeover has been completed.

Acquirer firm plans to launch a takeover of Target firm. The deal is expected to create a present value of synergies totaling $**0.5** million, but investment bank fees and integration costs with a present value of $**1.5** million is expected. A **10**% **cash** and **90**% **scrip** offer will be made that pays the fair price for the target's shares only. Assume that the Target and Acquirer agree to the deal. The cash will be paid out of the firms' cash holdings, no new debt or equity will be raised.

Firms Involved in the Takeover | ||

Acquirer | Target | |

Assets ($m) | 60 | 10 |

Debt ($m) | 20 | 2 |

Share price ($) | 10 | 8 |

Number of shares (m) | 4 | 1 |

Assume that the firms' debt and equity are fairly priced, and that each firms' debts' risk, yield and values remain constant. The acquisition is planned to occur immediately, so ignore the time value of money.

Calculate the merged firm's share price and total number of shares after the takeover has been completed.

**Question 529** DDM, real and nominal returns and cash flows, inflation, real estate, no explanation

If housing rents are constrained from growing more than the maximum target inflation rate, and houses can be priced as a perpetuity of growing net rental cash flows, then what is the implication for house prices, all things remaining equal? Select the **most correct** answer.

*Background:* Since 1990, many central banks across the world have become 'inflation targeters'. They have adopted a policy of trying to keep inflation in a predictable narrow range, with the hope of encouraging long-term lending to fund more investment and maintain higher GDP growth.

Australia's central bank, the Reserve Bank of Australia (RBA), has specifically stated their inflation target range is between 2 and 3% pa.

Some Australian residential property market commentators suggest that because rental costs comprise a large part of the Australian consumer price index (CPI), rent costs across the nation cannot significantly exceed the maximum inflation target range of 3% pa without the prices of other goods growing by less than the target range for long periods, which is unlikely.

**Question 637** option, option payoff at maturity, no explanation

Which of the below formulas gives the payoff ##(f)## at maturity ##(T)## from being **short** a **call** option? Let the underlying asset price at maturity be ##S_T## and the exercise price be ##X_T##.

**Question 829** option, future, delta, gamma, theta, no explanation

Below are some statements about futures and European-style options on non-dividend paying stocks. Assume that the risk free rate is always positive. Which of these statements is **NOT** correct? All other things remaining equal:

**Question 935** real estate, NPV, perpetuity with growth, multi stage growth model, DDM

You're thinking of buying an investment property that costs $1,000,000. The property's rent revenue over the next year is expected to be $50,000 pa and rent expenses are $20,000 pa, so net rent cash flow is $30,000. Assume that net rent is paid annually in arrears, so this next expected net rent cash flow of $**30,000** is paid one year from now.

The year after, net rent is expected to fall by 2% pa. So net rent at year 2 is expected to be $**29,400** (=30,000*(1-0.02)^1).

The year after that, net rent is expected to rise by 1% pa. So net rent at year 3 is expected to be $**29,694** (=30,000*(1-0.02)^1*(1+0.01)^1).

From year 3 onwards, net rent is expected to rise at **2.5**% pa **forever**. So net rent at year 4 is expected to be $**30,436.35** (=30,000*(1-0.02)^1*(1+0.01)^1*(1+0.025)^1).

Assume that the total required return on your investment property is **6**% pa. Ignore taxes. All returns are given as effective annual rates.

What is the net present value (NPV) of buying the investment property?