Fight Finance

A company has:

• 140 million shares outstanding.
• The market price of one share is currently $2.
• The company's debentures are publicly traded and their market price is equal to 93% of the face value.
• The debentures have a total face value of $50,000,000 and the current yield to maturity of corporate debentures is 12% per annum.
• The risk-free rate is 8.50% and the market return is 13.7%.
• Market analysts estimated that the company's stock has a beta of 0.90.
• The corporate tax rate is 30%.

What is the company's after-tax weighted average cost of capital (WACC) in a classical tax system?

A wholesale shop offers credit to its customers. The customers are given 21 days to pay for their goods. But if they pay straight away (now) they get a 1% discount.

What is the effective interest rate given to customers who pay in 21 days? All rates given below are effective annual rates. Assume 365 days in a year.

Here's the Dividend Discount Model, used to price stocks:

### p_0=\frac{d_1}{r-g} ###

All rates are effective annual rates and the cash flows (##d_1##) are received every year. Note that the r and g terms in the above DDM could also be labelled: ###r = r_{\text{total, 0}\rightarrow\text{1yr, eff 1yr}}### ###g = r_{\text{capital, 0}\rightarrow\text{1yr, eff 1yr}}### Which of the following statements is NOT correct?

Two years ago Fred bought a house for $300,000.

Now it's worth $500,000, based on recent similar sales in the area.

Fred's residential property has an expected total return of 8% pa.

He rents his house out for $2,000 per month, paid in advance. Every 12 months he plans to increase the rental payments.

The present value of 12 months of rental payments is $23,173.86.

The future value of 12 months of rental payments one year ahead is $25,027.77.

What is the expected annual growth rate of the rental payments? In other words, by what percentage increase will Fred have to raise the monthly rent by each year to sustain the expected annual total return of 8%?

A European call option will mature in ##T## years with a strike price of ##K## dollars. The underlying asset has a price of ##S## dollars.

What is an expression for the payoff at maturity ##(f_T)## in dollars from having written (being short) the call option?

Technical traders:

A stock has a beta of 1.5. The market's expected total return is 10% pa and the risk free rate is 5% pa, both given as effective annual rates.

Over the last year, bad economic news was released showing a higher chance of recession. Over this time the share market fell by 1%. So ##r_{m} = (P_{0} - P_{-1})/P_{-1} = -0.01##, where the current time is zero and one year ago is time -1. The risk free rate was unchanged.

What do you think was the stock's historical return over the last year, given as an effective annual rate?

If someone says "my shares rose by 10% last year", what do you assume that they mean? The effective annual:

Which of the following statements about American-style options is NOT correct? American-style: