Value $216m $225m 5% 20% Data on a Levered Firm with Perpetual Cash Flows Item Abbreviation Operating Free Cash Flow OFCF Cash flow from assets including interest tax shields CFFAL (levered) Growth rate of cash flow from assets, levered and unlevered g Weighted average cost of capital before tax WACCBeforeTax Weighted average cost of capital after tax WACCAfter Tax Cost of debt rD Cost of levered equity rEL Debt to assets ratio, where the asset value includes tax shields DIVL Number of shares Corporate tax rate tc What is the firm's current share price? 19.4% 10% 22.5% 20% n 100m 30% Select one: a. $15.6 b. $12.625 c. $12.6 d. $12.6 e. $11.4 Question 9a: There are two assets available in the world, shares and loans. Shares are higher risk and have expected returns of 10% pa while loans are lower risk and have expected returns of 5% pa. Shares and loans can be bought, sold and short sold. Ignore credit risk. A money market fund, pension fund and hedge fund each start with $1m of wealth. The money market fund invests $1m in loans. The pension fund invests $0.25m in loans and $0.75m in shares. A hedge fund short sells $1m of loans and invests $2m in shares. Which of the below statements is NOT correct? Select one: a. The money market fund has a liability-to-assets ratio of zero and an expected return of 5% pa. b. The pension fund has a liability-to-assets ratio of zero and an expected return of 8.75% pa. c. The hedge fund has a liability-to-assets ratio of 50% and an expected return of 20% pa. d. If the loans' total returns are 5% pa over the next year but the shares' total returns are lower than -47.5%, the hedge fund will be underwater, its net wealth will be negative. Question 12b: A firm owns $5m of trucks with a beta of 2 and $5m of cash with a beta of zero. The firm is funded by 60% debt and 40% equity. All figures above are current market values. The firm has 4 million shares on issue. The risk free rate is 2% pa and the market required return is 8% pa. The firm's loans have a coupon rate of 6% and a yield to maturity of 5% pa. Ignore taxes. Which of the following statements is NOT correct? The firm's: Select one: a. Assets are worth $10m, have a beta of 1 and required return of 8% pa. b. Debt is worth $6m and has a beta of 0.25. c. Equity is worth $4m and has a beta of 1.75. d. Equity required return is 12.5% pa. e. The share price is $1. Question 13c: A firm owns $5m of trucks with a beta of 2 and $5m of cash with a beta of zero. The firm is funded by 60% debt and 40% equity. All figures above are current market values. The firm has 4 million shares on issue. The risk free rate is 2% pa and the market required return is 8% pa. The firm's loans have a coupon rate of 6% and a yield to maturity of 5% pa. Ignore taxes. The same firm above then buys some under-priced new trucks for $3m that are actually worth $4m, funded by the firm's existing cash. Which of the following statements is NOT correct? All answer options are rounded to 6 decimal places. The firm's: Select one: a. Assets are worth $11m, have a beta of 1.5 and required return of 11% pa. b. Debt is worth $6m and has a beta of 0.5. c. Equity is worth $5m and has a beta of 3. d. Equity required return is 20% pa. e. The NPV of buying the new trucks is $1m. Question 14b: Define the following measures of profit and cash flow as is normal: NPAT = (Rev - COGS - FixedCosts - Depr IntExp)*(1-tc) = Net Profit After Tax NOPAT = (Rev COGS - FixedCosts - Depr)*(1-tc) = Net Operating Profit After Tax FFCF = NPAT + Depr CapEx ANWC + IntExp = Firm Free Cash Flow OFCF = NOPAT + Depr - CapEx - ANWC = Operating Free Cash Flow EFCF = Equity Free Cash Flow DebtCF = Cash Flow to Debt holders Which of the below statement lists the various cash flows in order from biggest to smallest for a firm with a market debt-to-assets ratio of 25%? Select one: a. EFCF, FFCF, OFCF, DebtCF. b. EFCF, OFCF, FFCF, DebtCF. c. FFCF, OFCF, EFCF, DebtCF. d. OFCF, FFCF, EFCF, DebtCF. e. OFCF, EFCF, FFCF, DebtCF. Value $216m $225m 5% 20% Data on a Levered Firm with Perpetual Cash Flows Item Abbreviation Operating Free Cash Flow OFCF Cash flow from assets including interest tax shields CFFAL (levered) Growth rate of cash flow from assets, levered and unlevered g Weighted average cost of capital before tax WACCBeforeTax Weighted average cost of capital after tax WACCAfter Tax Cost of debt rD Cost of levered equity rEL Debt to assets ratio, where the asset value includes tax shields DIVL Number of shares Corporate tax rate tc What is the firm's current share price? 19.4% 10% 22.5% 20% n 100m 30% Select one: a. $15.6 b. $12.625 c. $12.6 d. $12.6 e. $11.4 Question 9a: There are two assets available in the world, shares and loans. Shares are higher risk and have expected returns of 10% pa while loans are lower risk and have expected returns of 5% pa. Shares and loans can be bought, sold and short sold. Ignore credit risk. A money market fund, pension fund and hedge fund each start with $1m of wealth. The money market fund invests $1m in loans. The pension fund invests $0.25m in loans and $0.75m in shares. A hedge fund short sells $1m of loans and invests $2m in shares. Which of the below statements is NOT correct? Select one: a. The money market fund has a liability-to-assets ratio of zero and an expected return of 5% pa. b. The pension fund has a liability-to-assets ratio of zero and an expected return of 8.75% pa. c. The hedge fund has a liability-to-assets ratio of 50% and an expected return of 20% pa. d. If the loans' total returns are 5% pa over the next year but the shares' total returns are lower than -47.5%, the hedge fund will be underwater, its net wealth will be negative. Question 12b: A firm owns $5m of trucks with a beta of 2 and $5m of cash with a beta of zero. The firm is funded by 60% debt and 40% equity. All figures above are current market values. The firm has 4 million shares on issue. The risk free rate is 2% pa and the market required return is 8% pa. The firm's loans have a coupon rate of 6% and a yield to maturity of 5% pa. Ignore taxes. Which of the following statements is NOT correct? The firm's: Select one: a. Assets are worth $10m, have a beta of 1 and required return of 8% pa. b. Debt is worth $6m and has a beta of 0.25. c. Equity is worth $4m and has a beta of 1.75. d. Equity required return is 12.5% pa. e. The share price is $1. Question 13c: A firm owns $5m of trucks with a beta of 2 and $5m of cash with a beta of zero. The firm is funded by 60% debt and 40% equity. All figures above are current market values. The firm has 4 million shares on issue. The risk free rate is 2% pa and the market required return is 8% pa. The firm's loans have a coupon rate of 6% and a yield to maturity of 5% pa. Ignore taxes. The same firm above then buys some under-priced new trucks for $3m that are actually worth $4m, funded by the firm's existing cash. Which of the following statements is NOT correct? All answer options are rounded to 6 decimal places. The firm's: Select one: a. Assets are worth $11m, have a beta of 1.5 and required return of 11% pa. b. Debt is worth $6m and has a beta of 0.5. c. Equity is worth $5m and has a beta of 3. d. Equity required return is 20% pa. e. The NPV of buying the new trucks is $1m. Question 14b: Define the following measures of profit and cash flow as is normal: NPAT = (Rev - COGS - FixedCosts - Depr IntExp)*(1-tc) = Net Profit After Tax NOPAT = (Rev COGS - FixedCosts - Depr)*(1-tc) = Net Operating Profit After Tax FFCF = NPAT + Depr CapEx ANWC + IntExp = Firm Free Cash Flow OFCF = NOPAT + Depr - CapEx - ANWC = Operating Free Cash Flow EFCF = Equity Free Cash Flow DebtCF = Cash Flow to Debt holders Which of the below statement lists the various cash flows in order from biggest to smallest for a firm with a market debt-to-assets ratio of 25%? Select one: a. EFCF, FFCF, OFCF, DebtCF. b. EFCF, OFCF, FFCF, DebtCF. c. FFCF, OFCF, EFCF, DebtCF. d. OFCF, FFCF, EFCF, DebtCF. e. OFCF, EFCF, FFCF, DebtCF