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Question 77  interest tax shield

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 amount of the interest tax shield per year?



Question 174  profitability index

A project has the following cash flows:

Project Cash Flows
Time (yrs) Cash flow ($)
0 -400
1 200
2 250
 

What is the Profitability Index (PI) of the project? Assume that the cash flows shown in the table are paid all at once at the given point in time. The required return is 10% pa, given as an effective annual rate.



Question 297  implicit interest rate in wholesale credit

You just bought $100,000 worth of inventory from a wholesale supplier. You are given the option of paying within 5 days and receiving a 2% discount, or paying the full price within 60 days.

You actually don't have the cash to pay within 5 days, but you could borrow it from the bank (as an overdraft) at 10% pa, given as an effective annual rate.

In 60 days you will have enough money to pay the full cost without having to borrow from the bank.

What is the implicit interest rate charged by the wholesale supplier, given as an effective annual rate? Also, should you borrow from the bank in 5 days to pay the supplier and receive the discount? Or just pay the full price on the last possible date?

Assume that there are 365 days per year.



Question 416  real estate, market efficiency, income and capital returns, DDM, CAPM

A residential real estate investor believes that house prices will grow at a rate of 5% pa and that rents will grow by 2% pa forever.

All rates are given as nominal effective annual returns. Assume that:

  • His forecast is true.
  • Real estate is and always will be fairly priced and the capital asset pricing model (CAPM) is true.
  • Ignore all costs such as taxes, agent fees, maintenance and so on.
  • All rental income cash flow is paid out to the owner, so there is no re-investment and therefore no additions or improvements made to the property.
  • The non-monetary benefits of owning real estate and renting remain constant.

Which one of the following statements is NOT correct? Over time:



Question 481  Annuity

This annuity formula ##\dfrac{C_1}{r}\left(1-\dfrac{1}{(1+r)^3} \right)## is equivalent to which of the following formulas? Note the 3.

In the below formulas, ##C_t## is a cash flow at time t. All of the cash flows are equal, but paid at different times.



Question 559  variance, standard deviation, covariance, correlation

Which of the following statements about standard statistical mathematics notation is NOT correct?



Question 582  APR, effective rate, effective rate conversion

A credit card company advertises an interest rate of 18% pa, payable monthly. Which of the following statements about the interest rate is NOT correct? All rates are given to four decimal places.



Question 816  expected and historical returns

If future expected cash flows rise, and future required returns remain the same, then prices will , or remain the ?


Question 912  money market

Which of the following statements is NOT correct? Money market securities are:



Question 956  option, Black-Scholes-Merton option pricing, delta hedging, hedging

A bank sells a European call option on a non-dividend paying stock and delta hedges on a daily basis. Below is the result of their hedging, with columns representing consecutive days. Assume that there are 365 days per year and interest is paid daily in arrears.

Delta Hedging a Short Call using Stocks and Debt
 
Description Symbol Days to maturity (T in days)
    60 59 58 57 56 55
Spot price ($) S 10000 10125 9800 9675 10000 10000
Strike price ($) K 10000 10000 10000 10000 10000 10000
Risk free cont. comp. rate (pa) r 0.05 0.05 0.05 0.05 0.05 0.05
Standard deviation of the stock's cont. comp. returns (pa) σ 0.4 0.4 0.4 0.4 0.4 0.4
Option maturity (years) T 0.164384 0.161644 0.158904 0.156164 0.153425 0.150685
Delta N[d1] = dc/dS 0.552416 0.582351 0.501138 0.467885 0.550649 0.550197
Probability that S > K at maturity in risk neutral world N[d2] 0.487871 0.51878 0.437781 0.405685 0.488282 0.488387
Call option price ($) c 685.391158 750.26411 567.990995 501.487157 660.982878 ?
Stock investment value ($) N[d1]*S 5524.164129 5896.301781 4911.152036 4526.788065 5506.488143 ?
Borrowing which partly funds stock investment ($) N[d2]*K/e^(r*T) 4838.772971 5146.037671 4343.161041 4025.300909 4845.505265 ?
Interest expense from borrowing paid in arrears ($) r*N[d2]*K/e^(r*T) 0.662891 0.704985 0.594994 0.551449 ?
Gain on stock ($) N[d1]*(SNew - SOld) 69.052052 -189.264008 -62.642245 152.062648 ?
Gain on short call option ($) -1*(cNew - cOld) -64.872952 182.273114 66.503839 -159.495721 ?
Net gain ($) Gains - InterestExpense 3.516209 -7.695878 3.266599 -7.984522 ?
 
Gamma Γ = d^2c/dS^2 0.000244 0.00024 0.000255 0.00026 0.000253 0.000255
Theta θ = dc/dT 2196.873429 2227.881353 2182.174706 2151.539751 2266.589184 2285.1895
 

 

In the last column when there are 55 days left to maturity there are missing values. Which of the following statements about those missing values is NOT correct?