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Question 91  WACC, capital structure

A firm has a debt-to-assets ratio of 50%. The firm then issues a large amount of equity to raise money for new projects of similar systematic risk to the company's existing projects. Assume a classical tax system. Which statement is correct?



Question 350  CFFA

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

Sidebar Corp
Income Statement for
year ending 30th June 2013
  $m
Sales 405
COGS 100
Depreciation 34
Rent expense 22
Interest expense 39
Taxable Income 210
Taxes at 30% 63
Net income 147
 
Sidebar Corp
Balance Sheet
as at 30th June 2013 2012
  $m $m
Cash 0 0
Inventory 70 50
Trade debtors 11 16
Rent paid in advance 4 3
PPE 700 680
Total assets 785 749
 
Trade creditors 11 19
Bond liabilities 400 390
Contributed equity 220 220
Retained profits 154 120
Total L and OE 785 749
 

 

Note: All figures are given in millions of dollars ($m).

The cash flow from assets was:



Question 393  real option, option

A timing option is best modeled as a or option?


Question 652  future, continuously compounding rate

An equity index is currently at 5,200 points. The 6 month futures price is 5,300 points and the total required return is 6% pa with continuous compounding. Each index point is worth $25.

What is the implied dividend yield as a continuously compounded rate per annum?



Question 665  stock split

A company conducts a 10 for 3 stock split. What is the percentage increase in the stock price and the number of shares outstanding? The answers are given in the same order.



Question 691  continuously compounding rate, effective rate, continuously compounding rate conversion, no explanation

A bank quotes an interest rate of 6% pa with quarterly compounding. Note that another way of stating this rate is that it is an annual percentage rate (APR) compounding discretely every 3 months.

Which of the following statements about this rate is NOT correct? All percentages are given to 6 decimal places. The equivalent:



Question 718  arithmetic and geometric averages

The symbol ##\text{GDR}_{0\rightarrow 1}## represents a stock's gross discrete return per annum over the first year. ##\text{GDR}_{0\rightarrow 1} = P_1/P_0##. The subscript indicates the time period that the return is mentioned over. So for example, ##\text{AAGDR}_{1 \rightarrow 3}## is the arithmetic average GDR measured over the two year period from years 1 to 3, but it is expressed as a per annum rate.

Which of the below statements about the arithmetic and geometric average GDR is NOT correct?



Question 793  option, hedging, delta hedging, gamma hedging, gamma, Black-Scholes-Merton option pricing

A bank buys 1000 European put options on a $10 non-dividend paying stock at a strike of $12. The bank wishes to hedge this exposure. The bank can trade the underlying stocks and European call options with a strike price of 7 on the same stock with the same maturity. Details of the call and put options are given in the table below. Each call and put option is on a single stock.

European Options on a Non-dividend Paying Stock
Description Symbol Put Values Call Values
Spot price ($) ##S_0## 10 10
Strike price ($) ##K_T## 12 7
Risk free cont. comp. rate (pa) ##r## 0.05 0.05
Standard deviation of the stock's cont. comp. returns (pa) ##\sigma## 0.4 0.4
Option maturity (years) ##T## 1 1
Option price ($) ##p_0## or ##c_0## 2.495350486 3.601466138
##N[d_1]## ##\partial c/\partial S##   0.888138405
##N[d_2]## ##N[d_2]##   0.792946442
##-N[-d_1]## ##\partial p/\partial S## -0.552034778  
##N[-d_2]## ##N[-d_2]## 0.207053558  
Gamma ##\Gamma = \partial^2 c/\partial S^2## or ##\partial^2 p/\partial S^2## 0.098885989 0.047577422
Theta ##\Theta = \partial c/\partial T## or ##\partial p/\partial T## 0.348152078 0.672379961
 

 

Which of the following statements is NOT correct?



Question 906  effective rate, return types, net 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 effective annual return be? Note that an effective annual return is also called a net discrete return per annum. If the price now is ##P_0## and the price in one year is ##P_1## then the effective annul return over the next year is:

###r_\text{effective annual} = \dfrac{P_1 - P_0}{P_0} = \text{NDR}_\text{annual}###



Question 1004  CFFA, WACC, interest tax shield, DDM

Use the below information to value a mature levered company with growing annual perpetual cash flows and a constant debt-to-assets ratio. The next cash flow will be generated in one year from now, so a perpetuity can be used to value this firm. The firm's debt funding comprises annual fixed coupon bonds that all have the same seniority and coupon rate. When these bonds mature, new bonds will be re-issued, and so on in perpetuity. The yield curve is flat.

Data on a Levered Firm with Perpetual Cash Flows
Item abbreviation Value Item full name
##\text{OFCF}_1## $12.5m Operating free cash flow at time 1
##\text{FFCF}_1 \text{ or }\text{CFFA}_1## $14m Firm free cash flow or cash flow from assets at time 1
##\text{EFCF}_1## $11m Equity free cash flow at time 1
##\text{BondCoupons}_1## $1.2m Bond coupons paid to debt holders at time 1
##g## 2% pa Growth rate of OFCF, FFCF, EFCF and Debt cash flow
##\text{WACC}_\text{BeforeTax}## 9% pa Weighted average cost of capital before tax
##\text{WACC}_\text{AfterTax}## 8.25% pa Weighted average cost of capital after tax
##r_\text{D}## 5% pa Bond yield
##r_\text{EL}## 13% pa Cost or required return of levered equity
##D/V_L## 50% pa Debt to assets ratio, where the asset value includes tax shields
##n_\text{shares}## 1m Number of shares
##t_c## 30% Corporate tax rate
 

 

Which of the following statements is NOT correct?