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?

In mid 2009 the listed mining company Rio Tinto announced a 21-for-40 renounceable rights issue. Below is the chronology of events:

• 04/06/2009. Share price opens at $69.00 and closes at $66.90.

• 05/06/2009. 21-for-40 rights issue announced at a subscription price of $28.29.

• 16/06/2009. Last day that shares trade cum-rights. Share price opens at $76.40 and closes at $75.50.

• 17/06/2009. Shares trade ex-rights. Rights trading commences.

All things remaining equal, what would you expect Rio Tinto's stock price to open at on the first day that it trades ex-rights (17/6/2009)? Ignore the time value of money since time is negligibly short. Also ignore taxes.

On 27/09/13, three month Swiss government bills traded at a yield of -0.2%, given as a simple annual yield. That is, interest rates were negative.

If the face value of one of these 90 day bills is CHF1,000,000 (CHF represents Swiss Francs, the Swiss currency), what is the price of one of these bills?

Economic statistics released this morning were a surprise: they show a strong chance of consumer price inflation (CPI) reaching 5% pa over the next 2 years.

This is much higher than the previous forecast of 3% pa.

A vanilla fixed-coupon 2-year risk-free government bond was issued at par this morning, just before the economic news was released.

What is the expected change in bond price after the economic news this morning, and in the next 2 years? Assume that:

• Inflation remains at 5% over the next 2 years.
• Investors demand a constant real bond yield.
• The bond price falls by the (after-tax) value of the coupon the night before the ex-coupon date, as in real life.

The below screenshot of Commonwealth Bank of Australia's (CBA) details were taken from the Google Finance website on 7 Nov 2014. Some information has been deliberately blanked out.

What was CBA's market capitalisation of equity?

High risk firms in danger of bankruptcy tend to have:

You just entered into a fully amortising home loan with a principal of $600,000, a variable interest rate of 4.25% pa and a term of 25 years.

Immediately after settling the loan, the variable interest rate suddenly falls to 4% pa! You can't believe your luck. Despite this, you plan to continue paying the same home loan payments as you did before. How long will it now take to pay off your home loan?

Assume that the lower interest rate was granted immediately and that rates were and are now again expected to remain constant. Round your answer up to the nearest whole month.

The current gold price is $700, gold storage costs are 2% pa and the risk free rate is 10% pa, both with continuous compounding.

What should be the 3 year gold futures price?

Which of the following statements about returns is NOT correct? A stock's:

Suppose the yield curve in the USA and Germany is flat and the:

• USD federal funds rate at the Federal Reserve is 1% pa;
• EUR deposit facility at the European Central Bank is -0.4% pa (note the negative sign);
• Spot EUR exchange rate is 1 USD per EUR;
• One year forward EUR exchange rate is 1.011 USD per EUR.

You suspect that there’s an arbitrage opportunity. Which one of the following statements about the potential arbitrage opportunity is NOT correct?