# Fight Finance

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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?

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:

A timing option is best modeled as a or option?

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? 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. 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: 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? 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:

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

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?