Fight Finance

A company issues a large amount of bonds to raise money for new projects of similar risk to the company's existing projects. The net present value (NPV) of the new projects is positive but small. Assume a classical tax system. Which statement is NOT correct?

A wholesale vitamin supplements store offers credit to its customers. Customers are given 30 days to pay for their goods, but if they pay within 5 days they will get a 1% discount.

What is the effective interest rate implicit in the discount being offered? Assume 365 days in a year and that all customers pay on either the 5th day or the 30th day. All of the below answer choices are given as effective annual interest rates.

A risky firm will last for one period only (t=0 to 1), then it will be liquidated. So it's assets will be sold and the debt holders and equity holders will be paid out in that order. The firm has the following quantities:

##V## = Market value of assets.

##E## = Market value of (levered) equity.

##D## = Market value of zero coupon bonds.

##F_1## = Total face value of zero coupon bonds which is promised to be paid in one year.

The risky corporate debt graph above contains bold labels a to e. Which of the following statements about those labels is NOT correct?

A stock will pay you a dividend of $10 tonight if you buy it today. Thereafter the annual dividend is expected to grow by 5% pa, so the next dividend after the $10 one tonight will be $10.50 in one year, then in two years it will be $11.025 and so on. The stock's required return is 10% pa.

What is the stock price today and what do you expect the stock price to be tomorrow, approximately?

A low-quality second-hand car can be bought now for $1,000 and will last for 1 year before it will be scrapped for nothing.

A high-quality second-hand car can be bought now for $4,900 and it will last for 5 years before it will be scrapped for nothing.

What is the equivalent annual cost of each car? Assume a discount rate of 10% pa, given as an effective annual rate.

The answer choices are given as the equivalent annual cost of the low-quality car and then the high quality car.

A trader buys one December futures contract on orange juice. Each contract is for the delivery of 10,000 pounds. The current futures price is $1.20 per pound. The initial margin is $5,000 per contract, and the maintenance margin is $4,000 per contract.

What is the smallest price change would that would lead to a margin call for the buyer?

To value a business's assets, the free cash flow of the firm (FCFF, also called CFFA) needs to be calculated. This requires figures from the firm's income statement and balance sheet. For what figures is the income statement needed? Note that the income statement is sometimes also called the profit and loss, P&L, or statement of financial performance.

A bank quotes an interest rate of 6% pa with quarterly compounding. Note that another way of stating this rate is that it is an annual percentage rate (APR) compounding discretely every 3 months.

Which of the following statements about this rate is NOT correct? All percentages are given to 6 decimal places. The equivalent:

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.

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?