Fight Finance

(a) The firm's share price and shareholder wealth will both decrease. This is because the firm will have more debt and therefore more risk so the discount rate applied to its cash flows will be higher, decreasing the value of the firm and therefore the value of the firm's equity and share price.

(b) The firm's share price and shareholder wealth will both increase. This is because the firm will have more debt which will amplify the returns of equity investors. This will mean that returns on equity can be much higher and investors will pay a premium for this, leading to an increase in the stock price.

(c) The firm's share price and shareholder wealth will both increase since it has more debt and therefore more tax shields.

(d) The firm's share price will increase due to the higher value of tax shields. But shareholder wealth will remain unchanged because capital structure is irrelevant when investors can use home-made leverage to create tax-shields themselves.

(e) The firm's share price and shareholder wealth will both increase. This is because the cost of debt is cheaper than equity, leading to a lower (before and after tax) WACC. This lower WACC will lead to a higher value of the firm and a higher share price.

(a) $94.6187

(b) $90.1062

(c) $72.592

(d) $70.3185

(e) $53.1754

(a) $114.7202

(b) $114.8775

(c) $122.9398

(d) $126.628

(e) $174.3874

(a) $913,907.4174

(b) $925,925.9259

(c) $974,611.7471

(d) $987,020.0108

(e) $987,428.5591

(a) Bonds X and Y are premium bonds.

(b) Bonds X and Y are discount bonds.

(c) Bond X is a discount bond but bond Y is a premium bond.

(d) Bond X is a premium bond but bond Y is a discount bond.

(e) Bonds X and Y are par bonds.

(a) Refund the corporate tax paid by companies to their individual shareholders. Therefore they prevent the double-taxation of dividends at the corporate and personal level.

(b) Are distributed to shareholders together with cash dividends.

(c) Are also called imputation credits.

(d) Are worthless to individuals who earn less than the tax-free threshold because they have a zero marginal personal tax rate.

(e) Are worthless to individual shareholders who are foreigners for tax purposes.

(a) DRP's are voluntary, shareholders only participate if they choose.

(b) DRP's increase the number of shares.

(c) The number of shares issued to a shareholder participating in a DRP is usually calculated as their total dividends owed, divided by the allocation share price which is usually close to the current market share price.

(d) DRP's do not incur brokerage costs for the shareholder. This is unlike the case where the shareholder uses the cash dividend to buy more shares herself.

(e) If all shareholders participated in a company's DRP, the company would not pay any dividends and the firm's share price would not fall due to the cash dividend or the DRP.

(a) Buyers of call options are required to pay an initial margin at the start.

(b) Call options are a zero-sum game in the sense that the winner gains at the expense of the loser.

(c) Buyers of call options have to pay the option price at the start.

(d) Buyers of call options do not care about the credit risk of the original call option seller since the contract is novated by the exchange.

(e) Speculators who sell call options hope that the underlying asset price falls.

(a) Nominal income return of 1% pa ##\left( =\dfrac{1}{100} \right)##.

(b) Nominal capital return of 0.5% pa ##\left( =\dfrac{100.5-100}{100} \right)##.

(c) Nominal total return of 1.5% pa ##\left( =\dfrac{100.5-100+1}{100} \right)##.

(d) Real income return of 0.9708738% pa##\left( =\dfrac{ 1/(1+0.03)^1}{100} \right)##.

(e) Real capital return of 0.4854369% pa ##\left( =\dfrac{ (100.5-100)/(1+0.03)^1}{100} \right) ##.

(a) The cash cycle is typically measured in days.

(b) The lower the cash cycle, the better.

(c) The cash cycle represents the time that money is invested or ‘tied up’ in inventory.

(d) Companies should avoid negative cash cycles.

(e) The cash cycle is the time between the inventory payment date to the supplier and cash receipt date from the customer.