Fight Finance

Question 97  WACC, no explanation

A company has:

• 10 million common shares outstanding, each trading at a price of $90.
• 1 million preferred shares which have a face (or par) value of $100 and pay a constant dividend of 9% of par. They currently trade at a price of $120 each.
• Debentures that have a total face value of $60,000,000 and a yield to maturity of 6% per annum. They are publicly traded and their market price is equal to 90% of their face value.
• The risk-free rate is 5% and the market return is 10%.
• Market analysts estimate that the company's common stock has a beta of 1.2. The corporate tax rate is 30%.

What is the company's after-tax Weighted Average Cost of Capital (WACC)? Assume a classical tax system.

(a) 10.27%

(b) 10.39%

(c) 10.43%

(d) 11.47%

(e) 17.22%

Question 122  option

You have just sold an 'in the money' 6 month European put option on the mining company BHP at an exercise price of $40 for a premium of $3.

Which of the following statements best describes your situation?

(a) You have bought the right to buy a BHP share for $40 in 6 months.

(b) You have bought the right to sell a BHP share for $40 in 6 months.

(c) You have bought the obligation to sell a BHP share for $40 in 6 months.

(d) You have sold the right that allows your counterparty to buy a BHP share from you for $40 in 6 months. This means that you have the obligation to sell a BHP share to your counterparty for $40 in 6 months if he wants to buy it.

(e) You have sold the right that allows your counterparty to sell a BHP share to you for $40 in 6 months. This means that you have the obligation to buy a BHP share from your counterparty for $40 in 6 months if he wants to sell it.

Question 146  APR, effective rate

A three year corporate bond yields 12% pa with a coupon rate of 10% pa, paid semi-annually.

Find the effective six month yield, effective annual yield and the effective daily yield. Assume that each month has 30 days and that there are 360 days in a year.

All answers are given in the same order:

##r_\text{eff semi-annual}##, ##r_\text{eff yearly}##, ##r_\text{eff daily}##.

(a) 0.06, 0.1236, 0.000324.

(b) 0.058301, 0.12, 0.000315.

(c) 0.05, 0.1025, 0.000271.

(d) 0.05, 0.1, 0.000278.

(e) 0.048809, 0.1, 0.000265.

Question 223  CFFA, interest tax shield

Which one of the following will increase the Cash Flow From Assets in this year for a tax-paying firm, all else remaining constant?

(a) An increase in net capital spending.

(b) A decrease in the cash flow to creditors.

(c) An increase in interest expense.

(d) An increase in net working capital.

(e) A decrease in dividends paid.

Question 357  PE ratio, Multiples valuation

Which of the following investable assets are NOT suitable for valuation using PE multiples techniques?

(a) Common equity in a listed public mining extraction company that will cease operations, wind up, and return all capital to shareholders in one year when its sole gold mine becomes depleted.

(b) Common equity in a small private owner-operated mining services company whose main asset is its sole tanker truck which delivers fuel to mines. The firm's shares are 100% owned by Bob, the driver of the tanker truck.

(c) Common equity in a large listed public company in the banking industry.

(d) Residential apartment real estate.

(e) Commercial warehouse real estate.

Question 368  interest tax shield, CFFA

A method commonly seen in textbooks for calculating a levered firm's free cash flow (FFCF, or CFFA) is the following:

###\begin{aligned} FFCF &= (Rev - COGS - Depr - FC - IntExp)(1-t_c) + \\ &\space\space\space+ Depr - CapEx -\Delta NWC + IntExp(1-t_c) \\ \end{aligned}###

Does this annual FFCF or the annual interest tax shield?

Question 373  debt terminology

Which of the following statements is NOT correct? Lenders:

(a) Are long debt.

(b) Invest in debt.

(c) Are owed money.

(d) Provide debt funding.

(e) Have debt liabilities.

Question 438  option, no explanation

Two put options are exactly the same, but one matures in one year and the other matures in two years. Which option would you expect to have the higher price, the option which matures or , or should they have the price?

Question 845  accounting ratio, no explanation

Safe firms with low chances of bankruptcy will tend to have:

(a) Low current ratios.

(b) Low interest coverage ratios.

(c) High quick ratios.

(d) High debt-to-assets ratios.

(e) High amounts of leverage.

Question 902  Basel accord

Below is a table of the 'Risk-weights for residential mortgages' as shown in APRA Basel 3 Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk January 2013.

LVR (%)	Standard eligible mortgages		Non-standard eligible mortgages
	Risk-weight (no mortgage insurance) %	Risk-weight (with at least 40% of the mortgage insured by an acceptable LMI) %	Risk-weight (no mortgage insurance) %	Risk-weight (with at least 40% of the mortgage insured by an acceptable LMI) %
0 – 60	35	35	50	35
60.01 – 80	35	35	75	50
80.01 – 90	50	35	100	75
90.01 – 100	75	50	100	75
> 100.01	100	75	100	100

A bank is considering granting a home loan to a man to buy a house worth $1.25 million using his own funds and the loan. The loan would be standard with no lenders mortgage insurance (LMI) and an LVR of 80%.

What is the minimum regulatory capital that the bank requires to grant the home loan under the Basel 3 Accord? Ignore the capital conservation buffer.

(a) $20,000

(b) $28,000

(c) $35,000

(d) $40,000

(e) $50,000