Fight Finance

Question 85  WACC, CAPM

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) 13.18%

(b) 11.10%

(c) 12.50%

(d) 14.24%

(e) 15.00%

Question 434  Merton model of corporate debt, real option, option

A risky firm will last for one period only (t=0 to 1), then it will be liquidated. So it's assets will be sold and the debt holders and equity holders will be paid out in that order. The firm has the following quantities:

##V## = Market value of assets.

##E## = Market value of (levered) equity.

##D## = Market value of zero coupon bonds.

##F_1## = Total face value of zero coupon bonds which is promised to be paid in one year.

What is the payoff to debt holders at maturity, assuming that they keep their debt until maturity?

(a) ##\max(V_1 - F_1,0)##.

(b) ##\max(F_1, V_1)##.

(c) ##\max(F_1, 0)##.

(d) ##\min(F_1, V_1)##.

(e) ##\min(V_1-F_1, F_1)##.

Question 474  PE ratio

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 backwards-looking price-earnings ratio?

(a)17.06

(b) 0.063

(c) 15.88

(d) 3.21

(e) 8.44

Question 475  payout ratio, dividend, no explanation

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 approximate payout ratio over the 2014 financial year?

Note that the firm's interim and final dividends were $1.83 and $2.18 respectively over the 2014 financial year.

(a) 2.48%

(b) 4.85%

(c) 77.00%

(d) 129.93%

(e) 247.53%

Question 492  capital budgeting, opportunity cost, sunk cost

A man has taken a day off from his casual painting job to relax.

It's the end of the day and he's thinking about the hours that he could have spent working (in the past) which are now:

(a) A sunk cost.

(b) An opportunity cost.

(c) A negative side effect.

(d) A capital expense.

(e) A depreciation expense.

Question 536  idiom, bond pricing, capital structure, leverage

The expression 'my word is my bond' is often used in everyday language to make a serious promise.

Why do you think this expression uses the metaphor of a bond rather than a share?

(a) Because bonds are higher risk investments than shares.

(b) Because issuers must pay bond holders or face bankruptcy, while payments to shareholders are discretionary.

(c) Because bond holders are paid last in the event of bankruptcy, while shareholders are paid first.

(d) Because bonds always pay higher returns than shares.

(e) Because bonds are generally more liquid than shares.

Question 728  inflation, real and nominal returns and cash flows, income and capital returns, no explanation

Which of the following statements about gold is NOT correct? Assume that the gold price increases by inflation. Gold has a:

(a) Nil income cash flow.

(b) Real total return of zero.

(c) Real capital return equal to the inflation rate.

(d) Real income return of zero.

(e) Nominal income return of zero.

Question 790  mean and median returns, return distribution, arithmetic and geometric averages, continuously compounding rate, log-normal distribution, VaR, confidence interval

A risk manager has identified that their hedge fund’s continuously compounded portfolio returns are normally distributed with a mean of 10% pa and a standard deviation of 30% pa. The hedge fund’s portfolio is currently valued at $100 million. Assume that there is no estimation error in these figures and that the normal cumulative density function at 1.644853627 is 95%.

Which of the following statements is NOT correct? All answers are rounded to the nearest dollar.

(a) Future portfolio values have a log-normal distribution. The mean (expected or arithmetic average) portfolio value in one year is $115,603,957.

(b) The median (50th percentile) portfolio value in one year is $115,603,957.

(c) The 90% confidence interval of continuously compounded portfolio returns over the next year ##(r_{0 \rightarrow 1})## is ##-39.3456088\% < r_{0 \rightarrow 1} < 59.3456088\%##.

(d) The 90% confidence interval of portfolio values in one year ##(V_1)## is ##\$67,472,095 < V_1 < \$181,023,395##.

(e) The annual 95% relative VaR is $48,131,863 and the absolute VaR is $32,527,905.

Question 872  duration, Macaulay duration, modified duration, portfolio duration

A fixed coupon bond’s modified duration is 20 years, and yields are currently 10% pa compounded annually. Which of the following statements about the bond is NOT correct?

(a) The Macaulay duration of the bond is 22 years.

(b) If yields-to-maturity suddenly fell by 1 percentage point then bond prices would suddenly rise by 20% or more.

(c) If yields-to-maturity suddenly rose by 2 percentage points then bond prices would suddenly fall by 40% or less.

(d) If the bond is a zero-coupon bond then its maturity is 20 years.

(e) The modified-duration-price-change formula assumes parallel shifts in the yield curve.

Question 908  effective rate, return types, gross discrete return, return distribution, price gains and returns over time

For an asset's price to double from say $1 to $2 in one year, what must its gross discrete return (GDR) be? If the price now is ##P_0## and the price in one year is ##P_1## then the gross discrete return over the next year is:

###\text{GDR}_\text{annual} = \dfrac{P_1}{P_0}###

(a) 0%

(b) 30.102999566%

(c) 69.314718056%

(d) 100%

(e) 200%