Fight Finance

Question 74  WACC, capital structure, CAPM

A firm's weighted average cost of capital before tax (##r_\text{WACC before tax}##) would increase due to:

(a) The firm issuing more debt and using the proceeds to repurchase stock.

(b) The firm issuing more equity and using the proceeds to pay off debt holders.

(c) The firm's industry becoming more systematically risky, for example if it was a mining company whose performance became more sensitive to countries' GDP growth, so the correlation of the firm's returns with the market was higher.

(d) The firm's industry becoming less systematically risky, for example if it was a child care centre and the government announced higher subsidies for parents using child care centres, so the correlation of the firm's returns with the market was lower.

(e) None of the above.

Question 131  APR, effective rate

Calculate the effective annual rates of the following three APR's:

• A credit card offering an interest rate of 18% pa, compounding monthly.
• A bond offering a yield of 6% pa, compounding semi-annually.
• An annual dividend-paying stock offering a return of 10% pa compounding annually.

All answers are given in the same order:

##r_\text{credit card, eff yrly}##, ##r_\text{bond, eff yrly}##, ##r_\text{stock, eff yrly}##

(a) 0.1956, 0.0609, 0.1.

(b) 0.015, 0.09, 0.1.

(c) 0.1881, 0.0609, 0.1025.

(d) 0.1956, 0.0617, 0.1047.

(e) 6.2876, 0.1236, 0.1.

Question 206  CFFA, interest expense, interest tax shield

Interest expense (IntExp) is an important part of a company's income statement (or 'profit and loss' or 'statement of financial performance').

How does an accountant calculate the annual interest expense of a fixed-coupon bond that has a liquid secondary market? Select the most correct answer:

Annual interest expense is equal to:

(a) the bond's face value multiplied by its annual yield to maturity.

(b) the bond's face value multiplied by its annual coupon rate.

(c) the bond's market price at the start of the year multiplied by its annual yield to maturity.

(d) the bond's market price at the start of the year multiplied by its annual coupon rate.

(e) the future value of the actual cash payments of the bond over the year, grown to the end of the year, and grown by the bond's yield to maturity.

Question 304  option

Which one of the following is NOT usually considered an 'investable' asset for long-term wealth creation?

(a) Shares (ordinary and preference stocks).

(b) Real estate (land and buildings).

(c) Options (calls and puts).

(d) Human capital (education)

(e) Debt (bond and loan assets)

Question 371  interest tax shield, CFFA

One method for calculating a firm's free cash flow (FFCF, or CFFA) is to ignore interest expense. That is, pretend that interest expense ##(IntExp)## is zero:

###\begin{aligned} FFCF &= (Rev - COGS - Depr - FC - IntExp)(1-t_c) + Depr - CapEx -\Delta NWC + IntExp \\ &= (Rev - COGS - Depr - FC - 0)(1-t_c) + Depr - CapEx -\Delta NWC - 0\\ \end{aligned}###

Does this annual FFCF with zero interest expense or the annual interest tax shield?

Question 530  Annuity, annuity due, no explanation

You are promised 20 payments of $100, where the first payment is immediate (t=0) and the last is at the end of the 19th year (t=19). The effective annual discount rate is ##r##.

Which of the following equations does NOT give the correct present value of these 20 payments?

(a) ##V_0=\dfrac{\dfrac{100}{r} \left( 1- \dfrac{1}{(1+r)^{20}} \right) }{(1+r)^1} ##

(b) ##V_0=\dfrac{100}{r} \left( 1- \dfrac{1}{(1+r)^{20}} \right) (1+r)^1##

(c) ##V_0=\dfrac{100}{r} \left( 1- \dfrac{1}{(1+r)^{19}} \right) +100##

(d) ##V_0=\dfrac{100(1+r)^1}{r} \left( 1- \dfrac{1}{(1+r)^{20}} \right) ##

(e) ##V_0=100 \left( 1-(1+r)^{-19} \right) r^{-1}+100##

Question 635  continuously compounding rate

A $100 stock has a continuously compounded expected total return of 10% pa. Its dividend yield is 2% pa with continuous compounding. What do you expect its price to be in 2.5 years?

(a) $134.985881

(b) $128.402542

(c) $126.905871

(d) $122.140276

(e) $121.215844

Question 798  idiom, diversification, market efficiency, sunk cost, no explanation

The following quotes are most closely related to which financial concept?

• “Opportunity is missed by most people because it is dressed in overalls and looks like work” -Thomas Edison
• “The only place where success comes before work is in the dictionary” -Vidal Sassoon
• “The safest way to double your money is to fold it over and put it in your pocket” - Kin Hubbard

(a) The efficient markets hypothesis.

(b) Time value of money.

(c) Separation of the investment and financing decisions.

(d) Diversification.

(e) Sunk costs.

Question 840  gross domestic product

Calculate Australia’s GDP over the 2016 calendar year using the below table:

Australian Gross Domestic Product Components
A$ billion, 2016 Calendar Year from 1 Jan 2016 to 31 Dec 2016 inclusive
Consumption	Investment	Government spending	Exports	Imports
971	421	320	328	344

 

Source: ABS 5206.0 Australian National Accounts: National Income, Expenditure and Product. Table 3. Expenditure on Gross Domestic Product (GDP), Current prices.

Over the 2016 calendar year, Australia’s GDP was:

(a) $1376 billion

(b) $1696 billion

(c) $1728 billion

(d) $2040 billion

(e) $2384 billion

Question 865  option, Black-Scholes-Merton option pricing

A one year European-style call option has a strike price of $4.

The option's underlying stock currently trades at $5, pays no dividends and its standard deviation of continuously compounded returns is 47% pa.

The risk-free interest rate is 10% pa continuously compounded.

Use the Black-Scholes-Merton formula to calculate the option price. The call option price now is:

(a) $0.287263739

(b) $0.398141032

(c) $1.142227853

(d) $1.667914067

(e) $2.193600281