Fight Finance

Question 78  WACC, capital structure

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) The debt-to-assets (D/V) ratio will increase.

(b) The debt-to-equity ratio (D/E) will increase.

(c) Firm value is likely to have increased due to the higher amount of interest tax shields, assuming that there will not be any costs of financial distress.

(d) The company's after-tax WACC is likely to have decreased.

(e) The company's before-tax WACC is likely to have decreased.

Question 157  bill pricing, simple interest rate, no explanation

A 90-day Bank Accepted Bill has a face value of $1,000,000. The interest rate is 6% pa and there are 365 days in the year. What is its price?

(a) $13,369,963.37

(b) $6,400,000.00

(c) $985,735.05

(d) $985,421.17

(e) $156,250.00

Question 177  implicit interest rate in wholesale credit

A furniture distributor offers credit to its customers. Customers are given 25 days to pay for their goods, but if they pay immediately 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 either immediately or on the 25th day. All rates given below are effective annual rates.

(a) 0.0004

(b) 0.1301

(c) 0.1365

(d) 0.1460

(e) 0.1580

Question 341  Multiples valuation, PE ratio

Estimate Microsoft's (MSFT) share price using a price earnings (PE) multiples approach with the following assumptions and figures only:

• Apple, Google and Microsoft are comparable companies,
• Apple's (AAPL) share price is $526.24 and historical EPS is $40.32.
• Google's (GOOG) share price is $1,215.65 and historical EPS is $36.23.
• Micrsoft's (MSFT) historical earnings per share (EPS) is $2.71.

Source: Google Finance 28 Feb 2014.

(a) $63.15

(b) $61.67

(c) $30.83

(d) $28.25

(e) $8.60

Question 428  takeover

In a takeover deal where the offer is 100% scrip (shares), the merged firm's number of shares will be equal to the acquirer firm's original number of shares. or ?

Question 516  corporate financial decision theory

Which of the following decisions relates to the current assets and current liabilities of the firm?

(a) Investment decision.

(b) Financing decision.

(c) Working capital decision.

(d) Payout policy decision.

(e) Capital or labour decision.

Question 574  inflation, real and nominal returns and cash flows, NPV

What is the present value of a nominal payment of $100 in 5 years? The real discount rate is 10% pa and the inflation rate is 3% pa.

(a) $71.2986

(b) $62.0921

(c) $61.5028

(d) $54.276

(e) $53.5612

Question 660  fully amortising loan, interest only loan, APR

How much more can you borrow using an interest-only loan compared to a 25-year fully amortising loan if interest rates are 6% pa compounding per month and are not expected to change? If it makes it easier, assume that you can afford to pay $2,000 per month on either loan. Express your answer as a proportional increase using the following formula:

###\text{Proportional Increase} = \dfrac{V_\text{0,interest only}}{V_\text{0,fully amortising}} - 1###

(a) 77.6034%

(b) 30.3779%

(c) 28.8603%

(d) 22.3966%

(e) 7.5304%

Question 824  option, no explanation

A put option written on a risky non-dividend paying stock will mature in one month. As is normal, assume that the option's exercise price is non-zero and positive ##(K>0)## and the stock has limited liability ##(S>0)##.

Which of the following statements is NOT correct? The put option's:

(a) Price must be greater than zero (p>0).

(b) Price can be greater than its exercise price (p>K).

(c) Price can be greater than the underlying asset's price (p>S).

(d) Exercise price can be greater than the underlying asset's price (K>S).

(e) Profit must be less than the payoff at maturity from the long trader’s perspective.

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##)?