Fight Finance

(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.

(a) Discount the project's unlevered CFFA by the furniture manufacturing firms' 30% WACC after tax.

(b) Discount the project's unlevered CFFA by the company's 20% WACC after tax.

(c) Discount the project's levered CFFA by the company's 20% WACC after tax.

(d) Discount the project's levered CFFA by the furniture manufacturing firms' 30% WACC after tax.

(e) The methods outlined in answers (a) and (c) will give the same valuations, both are correct.

(a) 100% payout ratio and high expected growth in earnings and dividends.

(b) 100% payout ratio and negative expected growth in earnings and dividends.

(c) 100% payout ratio and no expected growth in earnings or dividends.

(d) 0% payout ratio and no expected growth in earnings or dividends.

(e) 0% payout ratio and negative expected growth in earnings and dividends.

(a) coupon rate = ##\dfrac{C_{0.5}+C_{1}}{F_T}##, ##r_\text{income, 0 to 1}=\dfrac{C_{0.5}(1+r_\text{total})^{0.5}+C_{1}}{P_0}##

(b) coupon rate = ##\dfrac{2 \times C_{0.5}}{F_T}##, ##r_\text{income, 0 to 1}=\dfrac{C_{0.5}(1+r_\text{capital})^{0.5}+C_{1}}{P_0}##

(c) coupon rate = ##\dfrac{2 \times C_{1}}{P_0}##, ##r_\text{income, 0 to 1}=\dfrac{C_{0.5}+C_{1}}{P_0}##

(d) coupon rate = ##\dfrac{2 \times C_{1}}{P_0}##, ##r_\text{income, 0 to 1}=\dfrac{2 \times C_{1}}{P_0}##

(e) coupon rate = ##\dfrac{2 \times C_{1}}{F_T}##, ##r_\text{income, 0 to 1}=\dfrac{C_{0.5}(1+r_\text{total})^{0.5}+C_{1}}{F_T}##

(a) Buy less land, buildings and trucks than what was planned. Assume that this has no impact on revenue.

(b) Pay off more debt than was planned, to reduce the firm’s interest expense.

(c) Change the depreciation method used for tax purposes from diminishing value to straight line, so less depreciation occurs this year and more occurs in later years. Assume that the government’s tax department allow this.

(d) Buying more inventory than was planned, so there is an increase in net working capital. Assume that there is no increase in sales.

(e) Raising new equity through a rights issue. Assume that all of the money raised is spent on new capital assets such as land and trucks, but they will be fitted out and delivered in one year so no new cash will be earned from them.

than $102, $102 or than $102?

(a) 0%

(b) 25%

(c) 50%

(d) 75%

(e) 100%

(b) Mrs Green would prefer to invest her wealth in a single stock rather than a well diversified portfolio of stocks, assuming that all stocks had the same total risk and return.

(c) The popularity of insurance only makes sense if people are similar to Mr Blue.

(d) CAPM theory only makes sense if people are similar to Miss Red.

(e) The popularity of casino gambling and lottery tickets only make sense if people are similar to Mrs Green.

(a) It's 'out of the money'.

(b) It will give a positive profit: ##-c_0 + max(S_T-K_T,0) > 0##.

(c) It will give a positive payoff at maturity: ##max(S_T-K_T,0) > 0##.

(d) The underlying asset price is below the option strike price: ##S_T < K_T##.

(e) The underlying asset price is above the break-even price.

(a) Adjusted closing prices add back dividends and reverse the effect of stock splits.

(b) Apple's effective annual total return between the market close on 2 January 2008 and 2 January 2009 was -0.534269 (=(24.22-11.28)/24.22).

(c) Sample variance of the S&P500's effective annual total returns over the 3 year period was 0.084452.

(d) Sample covariance of effective total annual returns between Apple and the S&P500 index over the 3 year period was 0.041131.

(e) Apple's equity beta of annual total returns over the 3 year period was 3.530767.