For a price of $10.20 each, Renee will sell you 100 shares. Each share is expected to pay dividends in perpetuity, growing at a rate of 5% pa. The next dividend is one year away (t=1) and is expected to be $1 per share.

The required return of the stock is 15% pa.

The theory of fixed interest bond pricing is an application of the theory of Net Present Value (NPV). Also, a 'fairly priced' asset is not over- or under-priced. Buying or selling a fairly priced asset has an NPV of zero.

Considering this, which of the following statements is **NOT** correct?

A company runs a number of slaughterhouses which supply hamburger meat to McDonalds. The company is afraid that live cattle prices will increase over the next year, even though there is widespread belief in the market that they will be stable. What can the company do to hedge against the risk of increasing live cattle prices? Which statement(s) are correct?

(i) buy call options on live cattle.

(ii) buy put options on live cattle.

(iii) sell call options on live cattle.

Select the most correct response:

Find World Bar's Cash Flow From Assets (CFFA), also known as Free Cash Flow to the Firm (FCFF), over the year ending 30th June 2013.

World Bar | ||

Income Statement for | ||

year ending 30th June 2013 | ||

$m | ||

Sales | 300 | |

COGS | 150 | |

Operating expense | 50 | |

Depreciation | 40 | |

Interest expense | 10 | |

Taxable income | 50 | |

Tax at 30% | 15 | |

Net income | 35 | |

World Bar | ||

Balance Sheet | ||

as at 30th June | 2013 | 2012 |

$m | $m | |

Assets | ||

Current assets | 200 | 230 |

PPE | ||

Cost | 400 | 400 |

Accumul. depr. | 75 | 35 |

Carrying amount | 325 | 365 |

Total assets | 525 | 595 |

Liabilities | ||

Current liabilities | 150 | 205 |

Non-current liabilities | 235 | 250 |

Owners' equity | ||

Retained earnings | 100 | 100 |

Contributed equity | 40 | 40 |

Total L and OE | 525 | 595 |

Note: all figures above and below are given in millions of dollars ($m).

**Question 337** capital structure, interest tax shield, leverage, real and nominal returns and cash flows, multi stage growth model

A fast-growing firm is suitable for valuation using a multi-stage growth model.

It's **nominal** unlevered cash flow from assets (##CFFA_U##) at the end of this year (**t=1**) is expected to be $**1** million. After that it is expected to grow at a rate of:

**12**% pa for the next two years (from t=1 to 3),**5**% over the fourth year (from t=3 to 4), and**-1**% forever after that (from t=4 onwards). Note that this is a negative one percent growth rate.

Assume that:

- The nominal WACC
**after**tax is**9.5**% pa and is not expected to change. - The nominal WACC
**before**tax is**10**% pa and is not expected to change. - The firm has a target debt-to-
**equity**ratio that it plans to maintain. - The inflation rate is
**3**% pa. - All rates are given as
**nominal**effective annual rates.

What is the levered value of this fast growing firm's assets?

What is the correlation of a variable X with itself?

The corr(X, X) or ##\rho_{X,X}## equals:

**Question 852** gross domestic product growth, inflation, employment, no explanation

When the economy is booming (in an upswing), you tend to see:

**Question 978** comparative advantage in trade, production possibilities curve, no explanation

Arthur and Bindi are the only people on a remote island. Their production possibility curves are shown in the graph.

Assuming that Arthur and Bindi cooperate according to the principles of comparative advantage, what will be their combined production possibilities curve?

Assume that the market portfolio has a duration of **15** years and an individual stock has a duration of **20** years.

What can you say about the stock's beta with respect to the market portfolio? The stock's beta is likely to be: