A firm changes its capital structure by issuing a large amount of debt and using the funds to repurchase shares. Its assets are unchanged. Ignore interest tax shields.

According to the Capital Asset Pricing Model (CAPM), which statement is correct?

A project has the following cash flows. Normally cash flows are assumed to happen at the given time. But here, assume that the cash flows are received smoothly over the year. So the $250 at time 2 is actually earned smoothly from t=1 to t=2:

Project Cash Flows | |

Time (yrs) | Cash flow ($) |

0 | -400 |

1 | 200 |

2 | 250 |

What is the payback period of the project in years?

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:

One formula for calculating a levered firm's free cash flow (FFCF, or CFFA) is to use net operating profit after tax (NOPAT).

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

A firm wishes to raise $10 million now. They will issue 6% pa semi-annual coupon bonds that will mature in 3 years and have a face value of $100 each. Bond yields are 5% pa, given as an APR compounding every 6 months, and the yield curve is flat.

How many bonds should the firm issue?

Use the below information to value a levered company with annual perpetual cash flows from assets that grow. The next cash flow will be generated in one year from now. Note that ‘k’ means kilo or 1,000. So the $30k is $30,000.

Data on a Levered Firm with Perpetual Cash Flows | ||

Item abbreviation | Value | Item full name |

##\text{OFCF}## | $30k | Operating free cash flow |

##g## | 1.5% pa | Growth rate of OFCF |

##r_\text{D}## | 4% pa | Cost of debt |

##r_\text{EL}## | 16.3% pa | Cost of levered equity |

##D/V_L## | 80% pa | Debt to assets ratio, where the asset value includes tax shields |

##t_c## | 30% | Corporate tax rate |

##n_\text{shares}## | 100k | Number of shares |

Which of the following statements is **NOT** correct?

Below are some statements about European-style options on non-dividend paying stocks. Assume that the risk free rate is always positive. Which of these statements is **NOT** correct?

**Question 876** foreign exchange rate, forward foreign exchange rate, cross currency interest rate parity

Suppose the yield curve in the USA and Germany is flat and the:

- USD federal funds rate at the Federal Reserve is
**1**% pa; - EUR deposit facility at the European Central Bank is
**-0.4**% pa (note the negative sign); - Spot EUR exchange rate is
**1**USD per EUR; - One year forward EUR exchange rate is
**1.011**USD per EUR.

You suspect that there’s an arbitrage opportunity. Which one of the following statements about the potential arbitrage opportunity is **NOT** correct?

**Question 983** corporate financial decision theory, Du Pont formula, accounting ratio

A company manager is thinking about the firm's book assets-to-equity ratio, also called the 'equity multiplier' in the Du Pont formula:

###\text{Equity multiplier} = \dfrac{\text{Total Assets}}{\text{Owners' Equity}}###What's the name of the decision that the manager is thinking about? In other words, the assets-to-equity ratio is the main subject of what decision?

Note: Du Pont formula for analysing book return on equity:

###\begin{aligned} \text{ROE} &= \dfrac{\text{Net Profit}}{\text{Sales}} \times \dfrac{\text{Sales}}{\text{Total Assets}} \times \dfrac{\text{Total Assets}}{\text{Owners' Equity}} \\ &= \text{Net profit margin} \times \text{Total asset turnover} \times \text{Equity multiplier} \\ \end{aligned}###