The equations for Net Income (NI, also known as Earnings or Net Profit After Tax) and Cash Flow From Assets (CFFA, also known as Free Cash Flow to the Firm) per year are:
###NI=(Rev-COGS-FC-Depr-IntExp).(1-t_c)###
###CFFA=NI+Depr-CapEx - \varDelta NWC+IntExp###
For a firm with debt, what is the formula for the present value of interest tax shields if the tax shields occur in perpetuity?
You may assume:
- the value of debt (D) is constant through time,
- The cost of debt and the yield on debt are equal and given by ##r_D##.
- the appropriate rate to discount interest tax shields is ##r_D##.
- ##\text{IntExp}=D.r_D##
The following table shows a sample of historical total returns of shares in two different companies A and B.
| Stock Returns | ||
| Total effective annual returns | ||
| Year | ##r_A## | ##r_B## |
| 2007 | 0.2 | 0.4 |
| 2008 | 0.04 | -0.2 |
| 2009 | -0.1 | -0.3 |
| 2010 | 0.18 | 0.5 |
What is the historical sample covariance (##\hat{\sigma}_{A,B}##) and correlation (##\rho_{A,B}##) of stock A and B's total effective annual returns?
A 30 year Japanese government bond was just issued at par with a yield of 1.7% pa. The fixed coupon payments are semi-annual. The bond has a face value of $100.
Six months later, just after the first coupon is paid, the yield of the bond increases to 2% pa. What is the bond's new price?
Question 335 foreign exchange rate, American and European terms
Investors expect Australia's central bank, the RBA, to reduce the policy rate at their next meeting due to fears that the economy is slowing. Then unexpectedly, the policy rate is actually kept unchanged.
What do you expect to happen to Australia's exchange rate?
Assets A, B, M and ##r_f## are shown on the graphs above. Asset M is the market portfolio and ##r_f## is the risk free yield on government bonds. Which of the below statements is NOT correct?
A company can invest funds in a five year project at LIBOR plus 50 basis points pa. The five-year swap rate is 4% pa. What fixed rate of interest can the company earn over the next five years by using the swap?
An investor bought a 5 year government bond with a 2% pa coupon rate at par. Coupons are paid semi-annually. The face value is $100.
Calculate the bond's new price 8 months later after yields have increased to 3% pa. Note that both yields are given as APR's compounding semi-annually. Assume that the yield curve was flat before the change in yields, and remained flat afterwards as well.
Question 875 omitted variable bias, systematic and idiosyncratic risk, CAPM, single factor model, two factor model
The Capital Asset Pricing Model (CAPM) and the Single Index Model (SIM) are single factor models whose only risk factor is the market portfolio’s return. Say a Solar electricity generator company and a Beach bathing chair renting company are influenced by two factors, the market portfolio return and cloud cover in the sky. When it's sunny and not cloudy, both the Solar and Beach companies’ stock prices do well. When there’s dense cloud cover and no sun, both do poorly. Assume that cloud coverage risk is a systematic risk that cannot be diversified and that cloud cover has zero correlation with the market portfolio’s returns.
Which of the following statements about these two stocks is NOT correct?
The CAPM and SIM:
Question 905 market capitalisation of equity, PE ratio, payout ratio
The below graph shows the computer software company Microsoft's stock price (MSFT) at the market close on the NASDAQ on Friday 1 June 2018.
Based on the screenshot above, which of the following statements about MSFT is NOT correct? MSFT's: