Use the below information to value a levered company with constant annual perpetual cash flows from assets. The next cash flow will be generated in one year from now, so a perpetuity can be used to value this firm. Both the operating and firm free cash flows are constant (but not equal to each other).
| Data on a Levered Firm with Perpetual Cash Flows | ||
| Item abbreviation | Value | Item full name |
| ##\text{OFCF}## | $48.5m | Operating free cash flow |
| ##\text{FFCF or CFFA}## | $50m | Firm free cash flow or cash flow from assets |
| ##g## | 0% pa | Growth rate of OFCF and FFCF |
| ##\text{WACC}_\text{BeforeTax}## | 10% pa | Weighted average cost of capital before tax |
| ##\text{WACC}_\text{AfterTax}## | 9.7% pa | Weighted average cost of capital after tax |
| ##r_\text{D}## | 5% pa | Cost of debt |
| ##r_\text{EL}## | 11.25% pa | Cost of levered equity |
| ##D/V_L## | 20% pa | Debt to assets ratio, where the asset value includes tax shields |
| ##t_c## | 30% | Corporate tax rate |
What is the value of the levered firm including interest tax shields?
There are a number of ways that assets can be depreciated. Generally the government's tax office stipulates a certain method.
But if it didn't, what would be the ideal way to depreciate an asset from the perspective of a businesses owner?
Which one of the following will increase the Cash Flow From Assets in this year for a tax-paying firm, all else remaining constant?
One method for calculating a firm's free cash flow (FFCF, or CFFA) is to ignore interest expense. That is, pretend that interest expense ##(IntExp)## is zero:
###\begin{aligned} FFCF &= (Rev - COGS - Depr - FC - IntExp)(1-t_c) + Depr - CapEx -\Delta NWC + IntExp \\ &= (Rev - COGS - Depr - FC - 0)(1-t_c) + Depr - CapEx -\Delta NWC - 0\\ \end{aligned}###
The hardest and most important aspect of business project valuation is the estimation of the:
An old company's Firm Free Cash Flow (FFCF, same as CFFA) is forecast in the graph below.
To value the firm's assets, the terminal value needs to be calculated using the perpetuity with growth formula:
###V_{\text{terminal, }t-1} = \dfrac{FFCF_{\text{terminal, }t}}{r-g}###
Which point corresponds to the best time to calculate the terminal value?
A new company's Firm Free Cash Flow (FFCF, same as CFFA) is forecast in the graph below.
To value the firm's assets, the terminal value needs to be calculated using the perpetuity with growth formula:
###V_{\text{terminal, }t-1} = \dfrac{FFCF_{\text{terminal, }t}}{r-g}###
Which point corresponds to the best time to calculate the terminal value?
Question 935 real estate, NPV, perpetuity with growth, multi stage growth model, DDM
You're thinking of buying an investment property that costs $1,000,000. The property's rent revenue over the next year is expected to be $50,000 pa and rent expenses are $20,000 pa, so net rent cash flow is $30,000. Assume that net rent is paid annually in arrears, so this next expected net rent cash flow of $30,000 is paid one year from now.
The year after, net rent is expected to fall by 2% pa. So net rent at year 2 is expected to be $29,400 (=30,000*(1-0.02)^1).
The year after that, net rent is expected to rise by 1% pa. So net rent at year 3 is expected to be $29,694 (=30,000*(1-0.02)^1*(1+0.01)^1).
From year 3 onwards, net rent is expected to rise at 2.5% pa forever. So net rent at year 4 is expected to be $30,436.35 (=30,000*(1-0.02)^1*(1+0.01)^1*(1+0.025)^1).
Assume that the total required return on your investment property is 6% pa. Ignore taxes. All returns are given as effective annual rates.
What is the net present value (NPV) of buying the investment property?
Question 800 leverage, portfolio return, risk, portfolio risk, capital structure, no explanation
Which of the following assets would you expect to have the highest required rate of return? All values are current market values.
Question 408 leverage, portfolio beta, portfolio risk, real estate, CAPM
You just bought a house worth $1,000,000. You financed it with an $800,000 mortgage loan and a deposit of $200,000.
You estimate that:
- The house has a beta of 1;
- The mortgage loan has a beta of 0.2.
What is the beta of the equity (the $200,000 deposit) that you have in your house?
Also, if the risk free rate is 5% pa and the market portfolio's return is 10% pa, what is the expected return on equity in your house? Ignore taxes, assume that all cash flows (interest payments and rent) were paid and received at the end of the year, and all rates are effective annual rates.
Question 802 negative gearing, leverage, capital structure, no explanation
Which of the following statements about ‘negative gearing’ is NOT correct?
An analyst is valuing a levered company whose owners insist on keeping a constant market debt to assets ratio into the future.
The analyst is wondering how asset values and other things in her model will change when she changes the forecast sales growth rate.
Which of the below values will increase as the forecast growth rate of sales increases, with the debt to assets ratio remaining constant?
Assume that the cost of debt (yield) remains constant and the company’s asset beta will also remain constant since any expansion (or downsize) will involve buying (or selling) more of the same assets.
The analyst should expect which value or ratio to increase when the forecast growth rate of sales increases and the debt to assets ratio remains unchanged? In other words, which of the following values will NOT remain constant?
Question 999 duration, duration of a perpetuity with growth, CAPM, DDM
A stock has a beta of 0.5. Its next dividend is expected to be $3, paid one year from now. Dividends are expected to be paid annually and grow by 2% pa forever. Treasury bonds yield 5% pa and the market portfolio's expected return is 10% pa. All returns are effective annual rates.
What is the Macaulay duration of the stock now?
Question 1000 duration, duration of a perpetuity with growth, needs refinement
An unlevered firm cuts its dividends and re-invests in zero-NPV projects with the same risk as its existing projects. This decreases the dividend yield, but increases the firm's equity's dividend growth rate and duration, while its total required return on equity remains unchanged. The equity can be valued as a perpetuity and the duration of a perpetuity is given below:
###D_\text{Macaulay} = \dfrac{1+r}{r-g}###What will be the effect on the stock's CAPM beta? Assume that there's no change in the risk free rate or market risk premium. The company's equity beta will:
A stock has a beta of 0.5. Its next dividend is expected to be $3, paid one year from now. Dividends are expected to be paid annually and grow by 2% pa forever. Treasury bonds yield 3% pa and the market risk premium (MRP) is 6% pa. All returns are effective annual rates.
Which of the following statements is NOT correct?
Question 871 duration, Macaulay duration, modified duration, portfolio duration
Which of the following statements about Macaulay duration is NOT correct? The Macaulay duration:
Question 872 duration, Macaulay duration, modified duration, portfolio duration
A fixed coupon bond’s modified duration is 20 years, and yields are currently 10% pa compounded annually. Which of the following statements about the bond is NOT correct?
Question 918 duration, Macaulay duration, modified duration, bond convexity
A fixed coupon bond’s modified duration is 10 years, and yields are currently 5% pa compounded annually. Which of the following statements about the bond is NOT correct?
Which form of production is included in the Gross Domestic Product (GDP) reported by the government statistics agency?
Question 1036 Minsky financial instability hypothesis, leverage
Hyman Minsky, author of 'The Financial Instability Hypothesis' (1992), wrote:
In particular, over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy with a sizeable body of speculative financial units is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to try to make position by selling out position. This is likely to lead to a collapse of asset values.
Which of the below statements explaining this quote is NOT correct?
Question 1038 fire sale, leverage, no explanation
Listen to 'Lessons and Questions from the GFC' on 6 December 2018 by RBA Deputy Governor Guy Debelle from 17:58 to 20:08 or read the below transcript:
Guy Debelle talks about the GFC and says that the Australian government’s guarantee of wholesale debt and deposits on 12 October 2008 was "introduced to facilitate the flow of credit to the real economy at a reasonable price and, in some cases, alleviate the need for asset fire sales, which have the capacity to tip markets and the economy into a worse equilibrium... The crisis very much demonstrated the critical importance of keeping the lending flowing. The lesson is that countries that did that fared better than countries that didn't. That lesson is relevant to the situation today in Australia, where there is a risk that a reduced appetite to lend will overly curtail borrowing with consequent effects for the Australian economy." (Debelle, 2019)
When assets are sold in a fire sale, there’s usually a large increase in the:
Question 1051 monetary policy, equilibrium real interest rate, inequality, marginal propensity to consume, gross domestic product, bond pricing
Read the below quote for background, or skip it to answer the question immediately.
In his 31 August 2021 article 'The rich get richer and rates get lower', Robert Armstrong states that:
"Atif Mian, Ludwig Straub and Amir Sufi agree with partisans of the demographic view, such as the economists Charles Goodhart and Manoj Pradhan, that a key contributor to falling rates is higher savings.
Mian, Straub and Sufi disagree, however, about why there are ever more savings sloshing around. It is not because the huge baby-boom generation is getting older and saving more (a trend that will change direction soon, when they are all retired). Rather, it’s because a larger and larger slice of national income is going to the top decile of earners. Because a person can only consume so much, the wealthy few tend to save much of this income rather than spend it. This pushes rates down directly, when those savings are invested, driving asset prices up and yields down; and indirectly, by sapping aggregate demand.
Why doesn’t all the cash that the rich push into markets get converted, ultimately, into productive investment, either at home or abroad? Tricky question. For present purposes it is enough to note that this is not happening — the savings of the American rich reappear, instead, as debt, owed by the government or by lower-income US households. (In another paper, MS&S have pointed out that this means the high share of income going to the rich hurts aggregate demand in two ways: the rich have a lower marginal propensity to consume, and governments and the non-rich are forced to shift dollars from consumption to debt service. Economically speaking, high inequality is a real buzzkill.)
MS&S prefer the inequality explanation for two reasons. Using data from the Fed’s Survey of Consumer Finances (which goes back to 1950) they show that differences in savings rates are much greater within any given age cohort than across age cohorts. That is, savings are building up faster because the rich are getting richer, not because the baby boomers are getting older."
Which of the following statements about this quote is NOT correct?
Question 1014 book build, initial public offering, capital raising, demand schedule
A firm is floating its stock in an IPO and its underwriter has received the following bids, listed in order from highest to lowest share price:
| IPO Book Build Bids | ||
| Bidders | Share price | Number of shares |
| $/share | millions | |
| BidderA | 2.5 | 2 |
| BidderB | 2 | 1.5 |
| BidderC | 1.5 | 4 |
| BidderD | 1 | 3 |
| BidderE | 0.5 | 2 |
Suppose that the firm's owner wishes to raise $6 million to expand the business by selling new stock in the initial public offering (IPO). The owner currently holds 8 million stock which are not for sale. Which of the following statements is NOT correct?
Question 566 capital structure, capital raising, rights issue, on market repurchase, dividend, stock split, bonus issue
A company's share price fell by 20% and its number of shares rose by 25%. Assume that there are no taxes, no signalling effects and no transaction costs.
Which one of the following corporate events may have happened?
Question 625 dividend re-investment plan, capital raising
Which of the following statements about dividend re-investment plans (DRP's) is NOT correct?
Question 1010 lemons problem, asymmetric information, adverse selection, fungible
The ‘Lemons Problem’ is likely to more adversely affect the desirability of which type of investment?
Question 1012 moral hazard, principal agent problem, asymmetric information
When does the ‘principal-agent problem’ occur? Is it when:
I. The principal has conflicting incentives (moral hazard);
II. The agent has conflicting incentives (moral hazard);
III. The principal has incomplete information about the agent (asymmetric information); or
IV. The agent has incomplete information about the principal (asymmetric information)?
The principal-agent problem occurs when the following statements are true:
A levered firm has only 2 assets on its balance sheet with the below market values and CAPM betas. The risk free rate is 3% pa and the market risk premium is 5% pa. Assume that the CAPM is correct and all assets are fairly priced.
| Balance Sheet Market Values and Betas | ||
| Balance sheet item | Market value ($m) | Beta |
| Cash asset | 0.5 | 0 |
| Truck assets | 0.5 | 2 |
| Loan liabilities | 0.25 | 0.1 |
| Equity funding | ? | ? |
Which of the following statements is NOT correct?
A levered firm has only 2 assets on its balance sheet with the below market values and CAPM betas. The risk free rate is 3% pa and the market risk premium is 5% pa. Assume that the CAPM is correct and all assets are fairly priced.
| Balance Sheet Market Values and Betas | ||
| Balance sheet item | Market value ($m) | Beta |
| Cash asset | 0.5 | 0 |
| Truck assets | 0.5 | 2 |
| Loan liabilities | 0.25 | 0.1 |
| Equity funding | ? | ? |
The firm then pays off (retires) all of its loan liabilities using its cash. Ignore interest tax shields.
Which of the following statements is NOT correct? All answers are given to 6 decimal places. This event led to a:
Question 1053 bond pricing, monetary policy, supply and demand
In his 31 August 2021 article 'The rich get richer and rates get lower', Robert Armstrong states that: "Savings chase returns, so when there are more savings and the same number of places to put them, rates of return must fall" (Armstrong, 2021).
Another way of saying that "rates of return must fall" when there are more savings (loanable funds) invested into fixed coupon government and corporate bonds, is that increased:
Question 418 capital budgeting, NPV, interest tax shield, WACC, CFFA, CAPM
| Project Data | ||
| Project life | 1 year | |
| Initial investment in equipment | $8m | |
| Depreciation of equipment per year | $8m | |
| Expected sale price of equipment at end of project | 0 | |
| Unit sales per year | 4m | |
| Sale price per unit | $10 | |
| Variable cost per unit | $5 | |
| Fixed costs per year, paid at the end of each year | $2m | |
| Interest expense in first year (at t=1) | $0.562m | |
| Corporate tax rate | 30% | |
| Government treasury bond yield | 5% | |
| Bank loan debt yield | 9% | |
| Market portfolio return | 10% | |
| Covariance of levered equity returns with market | 0.32 | |
| Variance of market portfolio returns | 0.16 | |
| Firm's and project's debt-to-equity ratio | 50% | |
Notes
- Due to the project, current assets will increase by $6m now (t=0) and fall by $6m at the end (t=1). Current liabilities will not be affected.
Assumptions
- The debt-to-equity ratio will be kept constant throughout the life of the project. The amount of interest expense at the end of each period has been correctly calculated to maintain this constant debt-to-equity ratio.
- Millions are represented by 'm'.
- All cash flows occur at the start or end of the year as appropriate, not in the middle or throughout the year.
- All rates and cash flows are real. The inflation rate is 2% pa. All rates are given as effective annual rates.
- The project is undertaken by a firm, not an individual.
What is the net present value (NPV) of the project?
Question 525 income and capital returns, real and nominal returns and cash flows, inflation
Which of the following statements about cash in the form of notes and coins is NOT correct? Assume that inflation is positive.
Notes and coins:
Question 575 inflation, real and nominal returns and cash flows
You expect a nominal payment of $100 in 5 years. The real discount rate is 10% pa and the inflation rate is 3% pa. Which of the following statements is NOT correct?
Question 604 inflation, real and nominal returns and cash flows
Apples and oranges currently cost $1 each. Inflation is 5% pa, and apples and oranges are equally affected by this inflation rate. Note that when payments are not specified as real, as in this question, they're conventionally assumed to be nominal.
Which of the following statements is NOT correct?
Question 732 real and nominal returns and cash flows, inflation, income and capital returns
An investor bought a bond for $100 (at t=0) and one year later it paid its annual coupon of $1 (at t=1). Just after the coupon was paid, the bond price was $100.50 (at t=1). Inflation over the past year (from t=0 to t=1) was 3% pa, given as an effective annual rate.
Which of the following statements is NOT correct? The bond investment produced a:
Question 740 real and nominal returns and cash flows, DDM, inflation
Taking inflation into account when using the DDM can be hard. Which of the following formulas will NOT give a company's current stock price ##(P_0)##? Assume that the annual dividend was just paid ##(C_0)##, and the next dividend will be paid in one year ##(C_1)##.
Question 744 income and capital returns, real and nominal returns and cash flows, inflation
If someone says "my shares rose by 10% last year", what do you assume that they mean? The effective annual:
Question 1019 RBA cash rate, monetary policy, wealth effect
Former RBA Governor Phil Lowe says that when the RBA raise the cash rate, asset prices tend to:
Question 1021 Federal funds rate, monetary policy, quantitative easing, tapering
US Fed Chair Jerome Powell held a news conference following the 25-26 January 2022 FOMC meeting.
Nick Timiraos reporting for The Wall Street Journal asked: "Raising rates and reducing the balance sheet both restrain the economy, both tighten monetary policy. How should we think about the relationship between the two? For example, how much passive runoff is equal to every quarter percentage point increase in your benchmark rate?"
Jerome Powell replied: "So, again, we think of the balance sheet as moving in a predictable manner, sort of in the background, and that the active tool meeting to meeting is not -- both of them, it's the federal funds rate. There are rules of thumbs. I'm reluctant to land on one of them that equate this. And there's also an element of uncertainty around the balance sheet. I think we have a much better sense, frankly, of how rate increases affect financial conditions and, hence, economic conditions. Balance sheet is still a relatively new thing for the markets and for us, so we're less certain about that." (US Fed, 2022)
When Nick Timiraos mentioned 'reducing the balance sheet', he's referring to:
A firm conducts a two-for-one stock split. Which of the following consequences would NOT be expected?
To receive the dividend you must own the stock when the market closes on which date?
On which date would the stock price increase if the dividend and earnings are higher than expected?
"Buy low, sell high" is a well-known saying. It suggests that investors should buy low then sell high, in that order.
How would you re-phrase that saying to describe short selling?
Which of the following formulas for 'contributed equity' from the balance sheet is correct? Assume that now is time 1 and last year is time 0. Assume that book equity consists of contributed equity, retained profits and reserves only (BookEquity = ContributedEquity + RetainedProfits + Reserves).
The DuPont formula is:
###\dfrac{\text{Net Profit}}{\text{Sales}} \times \dfrac{\text{Sales}}{\text{Total Assets}} \times \dfrac{\text{Total Assets}}{\text{Owners' Equity}}###
Which of the following statements about the DuPont formula is NOT correct?
Question 983 corporate financial decision theory, DuPont formula, accounting ratio
A company manager is thinking about the firm's book assets-to-equity ratio, also called the 'equity multiplier' in the DuPont 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: DuPont 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}###Question 1068 Multiples valuation, price to revenue ratio, operating leverage
Read this excerpt from AFR journalist Sue Mitchell's article 'How online retailers Kogan, Adore and Cettire got it terribly wrong' from 1 September 2022:
In the six months ending June, sales and earnings at omni-channel retailers with physical and online stores rebounded, while sales growth at pure-play e-commerce retailers slowed sharply or, in the case of Kogan, went backwards, decimating profits as operating leverage unwound.
“Hindsight is a beautiful thing and [it] turns out we were wrong,” Kogan told investors after the company delivered a bottom-line loss of $35.5 million and a 69 per cent drop in underlying earnings to $18.9 million. Sales revenue fell 8 per cent, despite the acquisition of New Zealand e-tailer Mighty Ape.
“Based on the data at the time, we predicted the trend would not stop or slow,” he said. “As the pandemic settled, e-commerce didn’t grow as expected, we were left with too much inventory and warehousing costs.”
Pure-plays are now prioritising profits over sales by culling staff and cutting back on investment – moves that could affect customer acquisition and sales.
Kogan, for example, is cutting marketing spend, reducing headcount, clearing excess and underperforming inventory to reduce warehouse costs, and raising the price of its loyalty program, Kogan First.
Kogan hopes to return to profitable growth this year, but the damage for shareholders has been done. The share price has plunged 86 per cent since pandemic-fuelled highs, dropping to $3.40 this week from a peak of $24.76 in September 2020.
Investors are now asking whether pulling back on investment will reduce addressable markets and questioning whether some pure-play online retailers will ever achieve scale.
Multiples for pure-plays have fallen to about 0.7 times revenue after reaching more than two times revenue at the height of the pandemic.
Which of the following statements about this quote is NOT correct? The pure-play online retailers:
Question 1069 Multiples valuation, venture capital, elasticity, DuPont formula, multi stage growth model
Read the below excerpt of AFR journalist Vesna Poljak's article 'What’s a start-up really worth' from 24 November 2020:
If Charlie Munger is right that earnings before interest, tax, depreciation and amortisation are “bullshit earnings”, and presenting adjusted EBITDA is “basic intellectual dishonesty”, someone should ask the 96-year-old Berkshire Hathaway vice-chairman what he thinks of revenue multiples.
It’s a necessary evil of this bull market that so many companies are now valued on multiples of their sales, as opposed to profits, typically because they don’t have any of the latter. It’s also impossible to ignore that real money investors are backing businesses at “multi-unicorn” valuations, meaning that capital is being allocated on an assumption lying somewhere between a considered ability to correctly recognise future growth, and magical thinking.
The idea is that, eventually, these businesses will arrive at a point where their constant reinvestment in sales and marketing, customer acquisition, and systems and process (all items that appear below the revenue line) will no longer be necessary, thereby allowing profits to suddenly crystallise.
Our baby unicorn is now a cloud-based workhorse with stunning margins, low operational costs, a market-dominant position and loyal customers totally insensitive to price increases.
Forecasts and evangelical founders are the natural enemies of a sound mind. “These businesses are very different compared to the typical mature business,” says PwC partner Richard Stewart. “They’re very heavily intangible-asset focused so traditional accounting doesn’t describe the performance of the business well.
“They’re also very risk intensive: it’s a bit like they’re climbing Everest, they’ve got halfway and there’s still a long way to the summit. The start-up sees how far they’ve come from base camp, the investor sees how far they have to go.”
EY partner Michael Fenech said that once upon a time, revenue multiples were used to value companies in very limited circumstances. “Now, revenue multiples have emerged as one of the primary valuation methodologies that people are using, which concerns people like myself.”
A robust valuation should be underpinned, wherever possible, by cash-flow forecasts, Fenech says. “So if we see companies relying on revenue multiples, our level of scepticism is often heightened and we start asking other questions.”
Which of the below statements is NOT correct?
Question 1070 Multiples valuation, duration, DuPont formula, WACC, mispriced asset
Adam Schwab wrote an article titled 'Why Atlassian is one of the world’s most overvalued businesses' on 15 August 2022. He stated that:
Atlassian is one of the world’s most overvalued businesses by almost any metric. Even though it loses money, Atlassian trades on a multiple of price to sales of a comical 25 times. Stern did a comparison of price-sales multiples in January 2022, noting that the multiple for the entire market was 2.88 and for software (this was before the bubble popped) was 16 times (Schwab, 2022)
Which of the following explanations is NOT correct? Atlassian's stock may be fairly priced if investors beleive that its expected future:
Which of the following formulas for the carrying or net amount of 'intangible assets' such as patents from the balance sheet is correct? Assume that now is time 1 and last year is time 0, and that 'IntangibleAssets' is a carrying value net of accumulated depreciation.
Question 1047 five Cs of credit, banking, debt terminology, Loan, credit risk, risk, leverage, financial distress
Which of the following is NOT one of the "five C's" of credit used by bankers?
An asset price suddenly increased by 10%. Multiplication by which of the following leverage ratios will give the proportional increase in equity or net wealth?
Over a short time period the equity capital return will equal the asset capital return multiplied by the:
Question 1032 inflation, percent of sales forecasting, no explanation
Investment bank Canaccord's Think Childcare (TNK) initiation of coverage states: "Building lease costs – Rent expense is the second largest cost and TNK reported rent/sales of 12.1%, within the industry range that we typically see as 12-14% of sales. TNK lease all their properties and do not intend to own property. Leases are generally long term with 10-15 year terms and additional options. Although terms vary across properties and landlords, rental increases are generally tied to the consumer price index (CPI)" (Canaccord, 2016).
Assuming that sales grow faster than the CPI, when Canaccord forecast TNK's building lease costs using the 'percent of sales' method, that proportion should:
Read these quotes from Adir Shiffman's 26 July 2021 article in the AFR 'Roll up, roll up and make a mint off Amazon sellers'.
"Amazon sellers outsource their warehousing and logistics to the tech giant in a model known as “fulfilled by Amazon”, or FBA. Joining FBA provides access to one of the world’s largest global warehousing operations and even a fleet of Boeing 747 cargo jets. Just as significantly, FBA sellers can much more easily qualify for Amazon’s Prime program, which guarantees free and fast shipping to members."
"Companies want to acquire and integrate a selection, or in business parlance, do a 'roll-up'."
"More than 100 companies are now racing to roll-up FBA sellers, and almost all have launched since 2017. At least a dozen of these boast war chests of more than $US100 million. The largest, Thrasio, was founded in 2018 and has raised more than $US1.7 billion. Thrasio targets businesses with high quality and differentiated products that generate $US1 to $US100 million in revenue annually" (Shiffman, 2021).
If Thrasio's total funds available to spend on the roll up is $1.7 billion, and it's buying targets at price-to-revenue multiples of 2, what's the largest number of firms with $50 million of annual revenue that it could buy?
A European call option will mature in ##T## years with a strike price of ##K## dollars. The underlying asset has a price of ##S## dollars.
What is an expression for the payoff at maturity ##(f_T)## in dollars from having written (being short) the call option?
Which of the following statements about option contracts is NOT correct? For every:
After doing extensive fundamental analysis of a company, you believe that their shares are overpriced and will soon fall significantly. The market believes that there will be no such fall.
Which of the following strategies is NOT a good idea, assuming that your prediction is true?
Which of the following statements about call options is NOT correct?
Question 584 option, option payoff at maturity, option profit
Which of the following statements about European call options on non-dividend paying stocks is NOT correct?
You operate a cattle farm that supplies hamburger meat to the big fast food chains. You buy a lot of grain to feed your cattle, and you sell the fully grown cattle on the livestock market.
You're afraid of adverse movements in grain and livestock prices. What options should you buy to hedge your exposures in the grain and cattle livestock markets?
Select the most correct response:
Question 271 CAPM, option, risk, systematic risk, systematic and idiosyncratic risk
All things remaining equal, according to the capital asset pricing model, if the systematic variance of an asset increases, its required return will increase and its price will decrease.
If the idiosyncratic variance of an asset increases, its price will be unchanged.
What is the relationship between the price of a call or put option and the total, systematic and idiosyncratic variance of the underlying asset that the option is based on? Select the most correct answer.
Call and put option prices increase when the:
A stock, a call, a put and a bond are available to trade. The call and put options' underlying asset is the stock they and have the same strike prices, ##K_T##.
You are currently long the stock. You want to hedge your long stock position without actually trading the stock. How would you do this?