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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 179  bond pricing, capital raising

A firm wishes to raise $20 million now. They will issue 8% pa semi-annual coupon bonds that will mature in 5 years and have a face value of $100 each. Bond yields are 6% pa, given as an APR compounding every 6 months, and the yield curve is flat.

How many bonds should the firm issue?



Question 435  option, no explanation

Will the price of a call option on equity or if the standard deviation of returns (risk) of the underlying shares becomes higher?


Question 491  capital budgeting, opportunity cost, sunk cost

A man is thinking about taking a day off from his casual painting job to relax.

He just woke up early in the morning and he's about to call his boss to say that he won't be coming in to work.

But he's thinking about the hours that he could work today (in the future) which are:



Question 496  NPV, IRR, pay back period

A firm is considering a business project which costs $10m now and is expected to pay a single cash flow of $12.1m in two years.

Assume that the initial $10m cost is funded using the firm's existing cash so no new equity or debt will be raised. The cost of capital is 10% pa.

Which of the following statements about net present value (NPV), internal rate of return (IRR) and payback period is NOT correct?



Question 608  debt terminology

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


Question 778  CML, systematic and idiosyncratic risk, portfolio risk, CAPM

The capital market line (CML) is shown in the graph below. The total standard deviation is denoted by σ and the expected return is μ. Assume that markets are efficient so all assets are fairly priced.

Image of CML graph

Which of the below statements is NOT correct?



Question 805  short selling

Short selling is a way to make money from falling prices. In what order must the following steps be completed to short-sell an asset? Let Tom, Dick and Harry be traders in the share market.

  • Step P: Purchase the asset from Harry.
  • Step G: Give the asset to Tom.
  • Step W: Wait and hope that the asset price falls.
  • Step B: Borrow the asset from Tom.
  • Step S: Sell the asset to Dick.

Select the statement with the correct order of steps.



Question 848  monetary policy, no explanation

Which of the following is NOT the Australian central bank’s responsibility?



Question 960  DDM, stock pricing

You are an equities analyst trying to value the equity of the Australian supermarket conglomerate Woolworths, with ticker WOW. In Australia, listed companies like Woolworths tend to pay dividends every 6 months. The payment around September is the final dividend and the payment around March is called the interim dividend. Both occur annually.

  • Today is mid-November 2018.
  • WOW's last final dividend of $0.50 was two months ago in mid-September 2018.
  • WOW's last interim dividend of $0.43 was eight months ago in mid-March 2018.
  • Judging by the dividend history and WOW's prospects, you judge that the growth rate in the dividends will be 3% pa forever.
  • Assume that WOW's total cost of equity is 6.5% pa. All rates are quoted as nominal effective rates.
  • The dividends are nominal cash flows and the inflation rate is 2.5% pa.

What should be the current share price of WOW?