A retail furniture company buys furniture wholesale and distributes it through its retail stores. The owner believes that she has some good ideas for making stylish new furniture. She is considering a project to buy a factory and employ workers to manufacture the new furniture she's designed. Furniture manufacturing has more systematic risk than furniture retailing.
Her furniture retailing firm's after-tax WACC is 20%. Furniture manufacturing firms have an after-tax WACC of 30%. Both firms are optimally geared. Assume a classical tax system.
Which method(s) will give the correct valuation of the new furniture-making project? Select the most correct answer.
You want to buy an apartment worth $400,000. You have saved a deposit of $80,000. The bank has agreed to lend you the $320,000 as a fully amortising mortgage loan with a term of 30 years. The interest rate is 6% pa and is not expected to change. What will be your monthly payments?
A project's NPV is positive. Select the most correct statement:
A pharmaceutical firm has just discovered a valuable new drug. So far the news has been kept a secret.
The net present value of making and commercialising the drug is $200 million, but $600 million of bonds will need to be issued to fund the project and buy the necessary plant and equipment.
The firm will release the news of the discovery and bond raising to shareholders simultaneously in the same announcement. The bonds will be issued shortly after.
Once the announcement is made and the bonds are issued, what is the expected increase in the value of the firm's assets (ΔV), market capitalisation of debt (ΔD) and market cap of equity (ΔE)?
The triangle symbol is the Greek letter capital delta which means change or increase in mathematics.
Ignore the benefit of interest tax shields from having more debt.
Remember: ##ΔV = ΔD+ΔE##
Total cash flows can be broken into income and capital cash flows.
What is the name given to the cash flow generated from selling shares at a higher price than they were bought?
A man just sold a call option to his counterparty, a lady. The man has just now:
In the dividend discount model (DDM), share prices fall when dividends are paid. Let the high price before the fall be called the peak, and the low price after the fall be called the trough.
###P_0=\dfrac{C_1}{r-g}###
Which of the following statements about the DDM is NOT correct?
Question 858 indirect security, intermediated finance, no explanation
Which of the following transactions involves an ‘indirect security’ using a ‘financial intermediary’?
Question 882 Asian currency crisis, foreign exchange rate, original sin, no explanation
In the 1997 Asian currency crisis, the businesses most vulnerable to bankruptcy were those that: