Fight Finance

Question 9  DDM, NPV

For a price of $129, Joanne will sell you a share which is expected to pay a $30 dividend in one year, and a $10 dividend every year after that forever. So the stock's dividends will be $30 at t=1, $10 at t=2, $10 at t=3, and $10 forever onwards.

The required return of the stock is 10% pa.

Would you like to the share or politely ?

Question 226  CFFA

Find World Bar's Cash Flow From Assets (CFFA), also known as Free Cash Flow to the Firm (FCFF), over the year ending 30th June 2013.

World Bar
Income Statement for
year ending 30th June 2013
	$m
Sales	300
COGS	150
Operating expense	50
Depreciation	40
Interest expense	10
Taxable income	50
Tax at 30%	15
Net income	35

World Bar
Balance Sheet
as at 30th June	2013	2012
	$m	$m
Assets
Current assets	200	230
PPE
Cost	400	400
Accumul. depr.	75	35
Carrying amount	325	365
Total assets	525	595
Liabilities
Current liabilities	150	205
Non-current liabilities	235	250
Owners' equity
Retained earnings	100	100
Contributed equity	40	40
Total L and OE	525	595

 

Note: all figures above and below are given in millions of dollars ($m).

(a) 145

(b) 100

(c) 90

(d) 60

(e) -20

Question 238  CFFA, leverage, interest tax shield

A company increases the proportion of debt funding it uses to finance its assets by issuing bonds and using the cash to repurchase stock, leaving assets unchanged.

Ignoring the costs of financial distress, which of the following statements is NOT correct:

(a) The company is increasing its debt-to-assets and debt-to-equity ratios. These are types of 'leverage' or 'gearing' ratios.

(b) The company will pay less tax to the government due to the benefit of interest tax shields.

(c) The company's net income, also known as earnings or net profit after tax, will fall.

(d) The company's expected levered firm free cash flow (FFCF or CFFA) will be higher due to tax shields.

(e) The company's expected levered equity free cash flow (EFCF) will not change.

Question 349  CFFA, depreciation tax shield

Which one of the following will decrease net income (NI) but increase cash flow from assets (CFFA) in this year for a tax-paying firm, all else remaining constant?

Remember:

###NI = (Rev-COGS-FC-Depr-IntExp).(1-t_c )### ###CFFA=NI+Depr-CapEx - \Delta NWC+IntExp###

(a) An increase in revenue (Rev).

(b) An increase in rent expense (part of fixed costs, FC).

(c) An increase in depreciation expense (Depr).

(d) An decrease in net working capital (ΔNWC).

(e) An increase in dividends.

Question 394  real option, option

According to option theory, it's rational for students to submit their assignments as or as possible?

Question 457  PE ratio, Multiples valuation

Which firms tend to have low forward-looking price-earnings (PE) ratios? Only consider firms with positive PE ratios.

(a) Highly liquid publically listed firms.

(b) Firms in a declining industry with very low or negative earnings growth.

(c) Firms expected to have temporarily low earnings over the next year, but with higher earnings later.

(d) Firms whose returns have a very low level of systematic risk.

(e) Firms whose assets include a very large proportion of cash.

Question 739  real and nominal returns and cash flows, inflation

There are a number of different formulas involving real and nominal returns and cash flows. Which one of the following formulas is NOT correct? All returns are effective annual rates. Note that the symbol ##\approx## means 'approximately equal to'.

(a) ##r_\text{real} \approx r_\text{nominal} - r_\text{inflation}##

(b) ##(1+r_\text{real})^t = \left( \dfrac{1+r_\text{nominal}}{1+r_\text{inflation}} \right)^t ##

(c) ##V_\text{t,real} = V_\text{t,nominal}.(1+r_\text{inflation})^t##

(d) ##V_\text{0} = \dfrac{V_\text{t,nominal}}{(1+r_\text{nominal})^t}##

(e) ##V_\text{0} = \dfrac{V_\text{t,real}}{(1+r_\text{real})^t}##

Question 750  PE ratio, Multiples valuation

Itau Unibanco is a major listed bank in Brazil with a market capitalisation of equity equal to BRL 85.744 billion, EPS of BRL 3.96 and 2.97 billion shares on issue.

Banco Bradesco is another major bank with total earnings of BRL 8.77 billion and 2.52 billion shares on issue.

Estimate Banco Bradesco's current share price using a price-earnings multiples approach assuming that Itau Unibanco is a comparable firm.

Note that BRL is the Brazilian Real, their currency. Figures sourced from Google Finance on the market close of the BVMF on 24 July 2015.

(a) BRL 28.87

(b) BRL 25.372

(c) BRL 22.1

(d) BRL 21.653

(e) BRL 21.528

Question 821  option, option profit, option payoff at maturity, no explanation

You just paid $4 for a 3 month European style call option on a stock currently priced at $47 with a strike price of $50. The stock’s next dividend will be $1 in 4 months’ time. Note that the dividend is paid after the option matures. Which of the below statements is NOT correct?

(a) You have the right to buy the underlying stock in 3 months’ time for a price of $50 if you want.

(b) If the dividend in 4 months were unexpectedly cancelled because the firm decided to re-invest its cash rather than pay it out then the 3 month call option price would be unaffected.

(c) If the stock price is $49 in 3 months then you wouldn’t exercise the ‘out of the money’ option.

(d) If the stock price is $51 in 3 months then you wouldn’t exercise or else you’ll incur a loss of $3.

(e) If the stock price is $57 in 3 months then you would exercise. Your profit would be $3 and payoff at maturity $7.

Question 847  monetary policy, fiscal policy

Below is the Australian federal government’s budget balance as a percent of GDP. Note that the columns to the right of the vertical black line were a forecast at the time. The x-axis shows financial years, so for example the 06/07 financial year represents the time period from 1 July 2006 to 30 June 2007.

Comparing the 2008/09 financial year to the previous one, the Australian federal government implemented:

(a) Expansionary fiscal policy.

(b) Contractionary fiscal policy.

(c) Expansionary monetary policy.

(d) Contractionary monetary policy.

(e) Neutral monetary policy.