Fight Finance

Question 72  CAPM, portfolio beta, portfolio risk

Portfolio Details
Stock	Expected return	Standard deviation	Correlation	Beta	Dollars invested
A	0.2	0.4	0.12	0.5	40
B	0.3	0.8		1.5	80

What is the beta of the above portfolio?

(a) 0.75

(b) 0.833333333

(c) 1

(d) 1.166666667

(e) 1.4

Question 79  CAPM, risk

Which statement is the most correct?

(a) The risk free rate has zero systematic risk and zero idiosyncratic risk.

(b) The market portfolio has zero idiosyncratic risk.

(c) The market portfolio has zero systematic risk.

(d) a and b are true.

(e) a and c are true.

Question 99  capital structure, interest tax shield, Miller and Modigliani, trade off theory of capital structure

A firm changes its capital structure by issuing a large amount of debt and using the funds to repurchase shares. Its assets are unchanged.

Assume that:

• The firm and individual investors can borrow at the same rate and have the same tax rates.
• The firm's debt and shares are fairly priced and the shares are repurchased at the market price, not at a premium.
• There are no market frictions relating to debt such as asymmetric information or transaction costs.
• Shareholders wealth is measured in terms of utiliity. Shareholders are wealth-maximising and risk-averse. They have a preferred level of overall leverage. Before the firm's capital restructure all shareholders were optimally levered.

According to Miller and Modigliani's theory, which statement is correct?

(a) The firm's share price and shareholder wealth will both decrease. This is because the firm will have more debt and therefore more risk so the discount rate applied to its cash flows will be higher, decreasing the value of the firm and therefore the value of the firm's equity and share price.

(b) The firm's share price and shareholder wealth will both increase. This is because the firm will have more debt which will amplify the returns of equity investors. This will mean that returns on equity can be much higher and investors will pay a premium for this, leading to an increase in the stock price.

(c) The firm's share price and shareholder wealth will both increase since it has more debt and therefore more tax shields.

(d) The firm's share price will increase due to the higher value of tax shields. But shareholder wealth will remain unchanged because capital structure is irrelevant when investors can use home-made leverage to create tax-shields themselves.

(e) The firm's share price and shareholder wealth will both increase. This is because the cost of debt is cheaper than equity, leading to a lower (before and after tax) WACC. This lower WACC will lead to a higher value of the firm and a higher share price.

Question 230  bond pricing, capital raising

A firm wishes to raise $10 million now. They will issue 6% pa semi-annual coupon bonds that will mature in 8 years and have a face value of $1,000 each. Bond yields are 10% pa, given as an APR compounding every 6 months, and the yield curve is flat.

How many bonds should the firm issue? All numbers are rounded up.

(a) 9,023 bonds

(b) 10,000 bonds

(c) 11,485 bonds

(d) 12,713 bonds

(e) 12,768 bonds

Question 349  CFFA, depreciation 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 - \Delta NWC+IntExp###

(a) An increase in revenue (Rev).

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

(c) An increase in depreciation expense (Depr).

(d) An decrease in net working capital (ΔNWC).

(e) An increase in dividends.

Question 444  investment decision, corporate financial decision theory

The investment decision primarily affects which part of a business?

(a) Assets.

(b) Liabilities and owner's equity.

(c) Current assets and current liabilities.

(d) Dividends and buy backs.

(e) Net income, also known as earnings or net profit after tax.

Question 485  capital budgeting, opportunity cost, sunk cost

A young lady is trying to decide if she should attend university or not.

The young lady's parents say that she must attend university because otherwise all of her hard work studying and attending school during her childhood was a waste.

What's the correct way to classify this item from a capital budgeting perspective when trying to decide whether to attend university?

The hard work studying at school in her childhood should be classified as:

(a) A sunk cost.

(b) An opportunity cost.

(c) A negative side effect.

(d) A positive side effect.

(e) A depreciation expense.

Question 521  NPV, Annuity

The following cash flows are expected:

• 10 yearly payments of $80, with the first payment in 6.5 years from now (first payment at t=6.5).
• A single payment of $500 in 4 years and 3 months (t=4.25) from now.

What is the NPV of the cash flows if the discount rate is 10% given as an effective annual rate?

(a) $573.977303

(b) $598.028469

(c) $624.484752

(d) $700.028893

(e) $736.685218

Question 607  debt terminology

You deposit cash into your bank account. Have you or your money?

Question 870  income and capital returns

An Apple (NASDAQ:AAPL) stock was purchased by an investor for $120 and one year later was sold for $150. A dividend of $4 was also collected at the end of the year just before the stock was sold.

Which of the following statements about the stock investment is NOT correct? Ignore taxes.

Over the year, the investor made a:

(a) Capital gain of $30

(b) Dividend income of $4.

(c) Capital return of 25%.

(d) Dividend yield of 2.6667%.

(e) Total return of 28.3333%.

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