A firm can issue 3 year annual coupon bonds at a yield of 10% pa and a coupon rate of 8% pa.
The beta of its levered equity is 2. The market's expected return is 10% pa and 3 year government bonds yield 6% pa with a coupon rate of 4% pa.
The market value of equity is $1 million and the market value of debt is $1 million. The corporate tax rate is 30%.
What is the firm's after-tax WACC? Assume a classical tax system.
Question 327 bill pricing, simple interest rate, no explanation
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?
Which of the following investable assets are NOT suitable for valuation using PE multiples techniques?
A firm has 1 million shares which trade at a price of $30 each. The firm is expected to announce earnings of $3 million at the end of the year and pay an annual dividend of $1.50 per share.
What is the firm's (forward looking) price/earnings (PE) ratio?
Question 577 inflation, real and nominal returns and cash flows
What is the present value of a real payment of $500 in 2 years? The nominal discount rate is 7% pa and the inflation rate is 4% pa.
Question 598 future, tailing the hedge, cross hedging
The standard deviation of monthly changes in the spot price of lamb is $0.015 per pound. The standard deviation of monthly changes in the futures price of live cattle is $0.012 per pound. The correlation between the spot price of lamb and the futures price of cattle is 0.4.
It is now January. A lamb producer is committed to selling 1,000,000 pounds of lamb in May. The spot price of live cattle is $0.30 per pound and the June futures price is $0.32 per pound. The spot price of lamb is $0.60 per pound.
The producer wants to use the June live cattle futures contracts to hedge his risk. Each futures contract is for the delivery of 50,000 pounds of cattle.
How many live cattle futures should the lamb farmer sell to hedge his risk? Round your answer to the nearest whole number of contracts.
Which of the following is NOT a valid method for estimating the beta of a company's stock? Assume that markets are efficient, a long history of past data is available, the stock possesses idiosyncratic and market risk. The variances and standard deviations below denote total risks.
Question 772 interest tax shield, capital structure, leverage
A firm issues debt and uses the funds to buy back equity. Assume that there are no costs of financial distress or transactions costs. Which of the following statements about interest tax shields is NOT correct?
Question 786 fixed for floating interest rate swap, intermediated swap
The below table summarises the borrowing costs confronting two companies A and B.
| Bond Market Yields | ||||
| Fixed Yield to Maturity (%pa) | Floating Yield (%pa) | |||
| Firm A | 3 | L - 0.4 | ||
| Firm B | 5 | L + 1 | ||
Firm A wishes to borrow at a floating rate and Firm B wishes to borrow at a fixed rate. Design an intermediated swap (which means there will actually be two swaps) that nets a bank 0.1% and shares the remaining swap benefits between Firms A and B equally. Which of the following statements about the swap is NOT correct?