CORPFIN 1002 Business Finance Sample Final Exam
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CORPFIN 1002 Business Finance
Sample Final Exam
Section A – Multiple Choice Questions [30 Marks]
Please answer all multiple-choice questions for this section on a single page in the answer booklet provided. Entries made on this exam script will not be graded. There is only one correct answer per question. Each question in this section is worth 2 marks.
Question 1A
The effective annual rate (EAR) for a loan with a stated APR of 8% compounded monthly is closest to ________.
A. 8.30%
B. 9. 13%
C. 9.96%
D. 10.79%
Question 2A
Which of the following is a weakness of a sole proprietorship?
A. Unlimited life
B. Easy to form
C. Limited liability
D. Limited access to capital
Question 3A
Your estimate of the market risk premium is 10%. The risk-free rate of return is 5%, and JB Hi-Fi has a beta of 0.8. According to the Capital Asset Pricing Model (CAPM), what is its expected return?
A. 13.0%
B. 12.0%
C. 11. 1%
D. 10.5%
Question 4A
Von Bora Corporation (VBC) is expected to pay a $2.25 dividend at the end of this year. If you expect VBC's dividend to grow by 6.5% per year forever and VBC's equity cost of capital is 12.5%, then the value of a share of VBC is closest to:
A. $37.50
B. $40.00
C. $51.10
D. $35.40
Question 5A
Which of the following is not one of the five basic corporate finance functions?
A. Financial management
B. Capital budgeting
C. Risk management
D. Auditing
Question 6A
Which of the following situations can lead to IRR giving a different decision than NPV?
A. delayed investment
B. multiple IRRs
C. differences in project scale
D. All of the above can lead to IRR giving a different decision than NPV.
Question 7A
What is the coupon payment of a 15-year $10,000 bond with a 9% coupon rate with semi- annual payments?
A. $150.00
B. $450
C. $900.00
D. $1800.00
Question 8A
You are given two choices of investments, Investment A and Investment B. Both investments have the same future cash flows. Investment A has a discount rate of 4%, and Investment B has a discount rate of 5%. Which of the following is true?
A. The present value of cash flows in Investment A is higher than the present value of cash flows in Investment
B. The present value of cash flows in Investment A is lower than the present value of cash flows in Investment
C. The present value of cash flows in Investment A is equal to the present value of cash flows in Investment B.
D. No comparison can be made—we need to know the cash flows to calculate the present value.
Question 9A
You must know the discount rate of an investment project to compute its:
A. NPV, IRR and payback period
B. NPV and payback period
C. NPV
D. IRR and Payback period
Question 10A
Suppose you are given the following information.
|
Project A |
Project B |
Time 0 |
- 10 000 |
- 10 000 |
Time 1 |
5 000 |
4 000 |
Time 2 |
4 000 |
3 000 |
Time 3 |
3 000 |
10 000 |
If WiseGuy Ltd uses the payback period rule to choose projects, which of the projects (Project A or Project B) will rank highest?
A. Project A
B. Project B
C. Project A and Project B have the same ranking.
D. Cannot calculate a payback period without a discount rate.
Question 11A
The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 5 years. The bond certificate indicates that the stated coupon rate for this bond is 8. 1% and that the coupon payments are to be made semi-annually. Assuming the appropriate YTM on the Sisyphean bond is 10.6%, then this bond will trade at ________.
A. a premium
B. a discount
C. par
D. none of the above
Question 12A
A portfolio comprises Cochlear (beta of 1.5) and Westpac (beta of 0.75). The amount invested in Cochlear is $25 000 and in Westpac is $35 000. What is the beta of this portfolio?
A. 0.99
B. 0.96
C. 1.06
D. 1.15
Question 13A
An investment pays you $30,000 at the end of this year, and $15,000 at the end of each of the four following years. What is the present value (PV) of this investment, given that the interest rate is 5% per year?
A. $39,614
B. $63,382
C. $79,228
D. $95,074
Question 14A
A security returns 5%, 4%, 3% and 6% over four years. The standard deviation of returns of the security is:
A. 1.51%.
B. 1.00%.
C. 1.29%.
D. 1. 11%.
Question 15A
Which of the following is not a true capital-raising event for a company?
A. Primary market transaction
B. Secondary market transaction
C. Initial public offering
D. A corporate loan from a bank
Section B – Extended Questions [50 Marks]
Answer all FIVE questions to this section in the answer booklet provided. Each question in this section is worth 10 marks.
Question 1B
Warehouse Systems Enterprises (WSE) has designed a new inventory management system. Management must choose from three alternative courses of action. The firm can: (1) sell the design of the new system outright to a warehouse with payment over 3 years; (2) license the design to another warehouse for a period of 5 years, its likely product life; or (3) manufacture and market the equipment itself, an alternative with expected cash inflows for 6 years. The company has a cost of capital of 15%. The following table shows the cash flows associated with each alternative.
Alternative |
Sell |
License |
Manufacture |
Initial investment (CF0) |
-$230,000 |
-$230,000 |
-$440,000 |
Year (t) |
|
Cash inflows (CFt) |
|
1 |
$200,000 |
$250,000 |
$195,000 |
2 |
$240,000 |
$100,000 |
$195,000 |
3 |
$190,000 |
$90,000 |
$195,000 |
4 |
- |
$65,000 |
$195,000 |
5 |
- |
$55,000 |
$195,000 |
6 |
- |
- |
$195,000 |
Required:
a. Calculate the NPV of each alternative and rank them in order of acceptability based on the NPV alone.
b. Calculate the equivalent annual value of each alternative and rank them accordingly.
c. Which alternative should WSE accept? Why?
Question 2B
Capital structure information for Bavarian Brewhouse is provided below.
Debt (in millions) |
$25 |
Preferred shares (in millions) |
$ 5 |
Ordinary shares (in millions) |
$45 |
Total capital (in millions) |
$75 |
Cost of debt |
8% |
Annual preferred share dividend |
$ 2.50 |
Preferred share market price |
$16.13 |
Ordinary share beta |
0.85 |
Risk-free rate |
3.75% |
Expected return on market portfolio |
17.55% |
Required:
a. What is Bavarian Brewhouse’s cost of preferred shares?
b. What is Bavarian Brewhouse’s cost of ordinary equity?
c. If the company’s marginal tax rate equals 34%, what is Bavarian Brewhouse’s after- tax cost of debt?
d. If its marginal tax rate equals 34%, what is Bavarian Brewhouse’s after-tax WACC?
Question 3B
Consider the following information:
Economic State |
Probability of Economic State |
Rate of Return if State Occurs |
||
|
|
Stock A |
Stock B |
Stock C |
Boom |
65% |
0.06 |
0.16 |
0.33 |
Bust |
35% |
0.14 |
0.02 |
-0.06 |
Required:
a. What is the expected return on an equally invested portfolio of these three stocks?
b. What is the variance of a portfolio invested 20 percent in each A and B and 60 percent in C?
Question 4B
ABC Inc. is building a $25 million office building in North Melbourne and is financing $20 million of the construction with a commercial bank loan. This loan has a ten-year term and requires monthly repayments. The interest rate is 8% per annum compounded monthly.
Required:
Using the above information, please answer the following questions.
a. What is the monthly repayment?
b. How much of the first repayment is interest?
c. How much of the first repayment is principal?
d. How much will ABC Inc. owe on this loan after making monthly payments for three years?
e. What is the effective annual rate (EAR) of interest?
Question 5B
Aspen Australia Pty Ltd is a fast-growing drug company. The company forecasts that in the next 3 years, its growth rates will be 30 percent, 28 percent, and 24 percent, respectively. The company has just paid a cash dividend of $1.67. After 3 years, the company expects a more stable growth rate of 8 percent per year. Your required rate of return is 14 percent.
Required:
a. Calculate the dividends for the next 3 years, and find its present value.
b. Calculate the price of the share at the end of year 3 when the company settles to a constant growth rate.
c. What is the current price of the share?
2022-11-10