Fight Finance

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?

(a) ##IntExp.t_c##

(b) ##IntExp/t_c##

(c) ##IntExp.(1-t_c)##

(d) ##IntExp/(1-t_c)##

(e) ##IntExp.(t_c-1)##

Question 212  rights issue

In mid 2009 the listed mining company Rio Tinto announced a 21-for-40 renounceable rights issue. Below is the chronology of events:

• 04/06/2009. Share price opens at $69.00 and closes at $66.90.

• 05/06/2009. 21-for-40 rights issue announced at a subscription price of $28.29.

• 16/06/2009. Last day that shares trade cum-rights. Share price opens at $76.40 and closes at $75.50.

• 17/06/2009. Shares trade ex-rights. Rights trading commences.

All things remaining equal, what would you expect Rio Tinto's stock price to open at on the first day that it trades ex-rights (17/6/2009)? Ignore the time value of money since time is negligibly short. Also ignore taxes.

(a) $28.29

(b) $35.8625

(c) $44.5426

(d) $47.2100

(e) $59.2473

Question 235  SML, NPV, CAPM, risk

The security market line (SML) shows the relationship between beta and expected return.

Investment projects that plot on the SML would have:

(a) A positive NPV and should be accepted.

(b) A zero NPV.

(c) A negative NPV and should be rejected.

(d) A large amount of diversifiable risk.

(e) Zero diversifiable risk.

Question 308  risk, standard deviation, variance, no explanation

A stock's standard deviation of returns is expected to be:

• 0.09 per month for the first 5 months;
• 0.14 per month for the next 7 months.

What is the expected standard deviation of the stock per year ##(\sigma_\text{annual})##?

Assume that returns are independently and identically distributed (iid) and therefore have zero auto-correlation.

(a) ##\sigma_\text{annual} = 0.09 \times 5 + 0.14 \times 7##

(b) ##\sigma_\text{annual} = (0.09 \times 5 + 0.14 \times 7)^{1/2}##

(c) ##\sigma_\text{annual} = (0.09^2 \times 5 + 0.14^2 \times 7)^{1/2}##

(d) ##\sigma_\text{annual} = (1+0.09)^5\times (1+0.14)^7 - 1##

(e) ##\sigma_\text{annual} = \left( \dfrac{0.09^2 \times 5 + 0.14^2 \times 7}{12} \right)^{1/2}##

Question 343  CFFA, capital budgeting

An old company's Firm Free Cash Flow (FFCF, same as CFFA) is forecast in the graph below.

To value the firm's assets, the terminal value needs to be calculated using the perpetuity with growth formula:

###V_{\text{terminal, }t-1} = \dfrac{FFCF_{\text{terminal, }t}}{r-g}###

Which point corresponds to the best time to calculate the terminal value?

(a) Point A.

(b) Point B.

(c) Point C.

(d) Any of the points.

(e) None of the points.

Question 358  PE ratio, Multiples valuation

Estimate the Chinese bank ICBC's share price using a backward-looking price earnings (PE) multiples approach with the following assumptions and figures only. Note that the renminbi (RMB) is the Chinese currency, also known as the yuan (CNY).

• The 4 major Chinese banks ICBC, China Construction Bank (CCB), Bank of China (BOC) and Agricultural Bank of China (ABC) are comparable companies;
• ICBC 's historical earnings per share (EPS) is RMB 0.74;
• CCB's backward-looking PE ratio is 4.59;
• BOC 's backward-looking PE ratio is 4.78;
• ABC's backward-looking PE ratio is also 4.78;

Note: Figures sourced from Google Finance on 25 March 2014. Share prices are from the Shanghai stock exchange.

(a) RMB 6.4595

(b) RMB 6.3739

(c) RMB 6.3311

(d) RMB 3.4903

(e) RMB 3.3966

Question 359  CFFA

Which one of the following will have no effect on net income (NI) but decrease cash flow from assets (CFFA or FFCF) 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 - ΔNWC+IntExp###

(a) An increase in revenue (Rev).

(b) An increase in rent expense (a type of recurring fixed cost, FC).

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

(d) An increase in inventories (a current asset).

(e) An decrease in interest expense (IntExp).

Question 469  franking credit, personal tax on dividends, imputation tax system, no explanation

A firm pays a fully franked cash dividend of $70 to one of its Australian shareholders who has a personal marginal tax rate of 45%. The corporate tax rate is 30%.

What will be the shareholder's personal tax payable due to the dividend payment?

(a) $13.50

(b) $15.00

(c) $30.00

(d) $31.50

(e) $45.00

Question 602  foreign exchange rate, American and European terms

Chinese people usually quote the Chinese Yuan or Renminbi in RMB per 1 USD. For example, in October 2015 the Chinese Renminbi was 6.35 RMB per USD. Is this an or terms quote?

Question 949  future, contango

If futures prices are in contango, then futures prices (##F_{0,T}##) are than, than or to spot prices (##S_0##)?