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:

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.

**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:

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}###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?