Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: daixieit

S2 Mock Exam Question Paper

Questions

PMP Accounting & Finance

PART 1: KNOWLEDGE-BASED SHORT ANSWER QUESTIONS [Total 25 marks]

This part consists of SIXTEEN (16) questions. Answer ALL questions in this part.

MULTIPLE CHOICE: Choose the one alternative that best completes the statement or answers the question.

1) An investment of £50,000 now is expected to generate equal annual cash flows

to perpetuity of £7,500 per annum, commencing at the end of the year.

If the annual discount rate is 4.5%, what is the net present value of the investment

(to the nearest £10)? (2 marks)

A) £8,320

B) £166,670

C) £116,670

D) £13,330

Your Answer ______________

2) Investors of Waffle Plc expect to receive a dividend of £6 per share at the end of

year one, a dividend of £9 per share at the end of year two and sell the share for

£136 per share at the end of year two. If the required rate of return on the stock is

20%, what is the current value of the share? (2 marks)

A) £100.10

B) £105.69

C) £110.00

D) £120.29

Your Answer ______________

The following information relates to questions 3 and 4:

The following data has been obtained from Match Plc:

Balance sheet extract                                                                         £000

Ordinary share capital (nominal value £1)                                   1,500

Preference share capital (nominal value £1)                                    250

7% Debentures (irredeemable, nominal value £100)                   1,000

Bank loan                                                                                              200

Other information

Tax rate                                                                                                 25%

Current market price of ordinary share                                        £2.30

Current market price of preference share                                     £0.98

Current market price of 7% debentures                                           £97

Interest paid on preference shares                                                     3%

Interest on bank loan                                                                        4.5%

Estimated cost of equity                                                                    12%

3) What is the total market value of Match Plc’s capital? (2 marks)

A) £4,910,000

B) £3,940,000

C) £4,865,000

D) £5,110,000

Your Answer ______________

4) What is the company’s Weighted Average Cost of Capital? (2 marks)

A) 12%

B) 9.55%

C) 9.88%

D) 8.66%

Your Answer ______________

5) Financial management is mainly concerned with? (1 mark)

A) All aspects of acquiring and utilizing financial resources for firms activities

B) Arrangement of funds

C) Efficient management of every business

D) Profit maximization

Your Answer ______________

6) The underwriter has to take up______. (1 mark)

A) The fixed portions of the issue capital

B) The unsubscribed part of the agreed portion

C) The agreed portion or can refuse if

D) The unfixed portions of the issue capital

Your Answer ______________

7) Which of the following is the goal of financial management? (1 mark)

A) Maximise the wealth of equity shareholders

B) Maximise the wealth of preference shareholders

C) Maximise the wealth of debenture holders

D) All of the above

Your Answer ______________

8) Which of the following is capital market line? (1 mark)

A) Capital allocation line of a market portfolio

B) Capital allocation line of a risk-free asset

C) Both A and B

D) None of the above

Your Answer ______________

9) Which of the following are financial assets? (1 mark)

A) Bonds

B) Machines

C) Stocks

D) A and C

Your Answer ______________

10) In capital budgeting, the positive net present value results in? (1 mark)

A) Negative economic value added

B) Positive economic value added

C) Zero economic value added

D) Percent economic value added

Your Answer ______________

11) The accounting rate of return is measured as follows: (1 mark)

A) Average annual profit expressed as a percentage of the total funds invested in the project.

B) Average annual profit expressed as a percentage of the average funds invested in the project.

C) Total profits expressed as a percentage of the average funds invested in the project.

D) Total profits expressed as a percentage of the total funds invested in the project.

Your Answer ______________

12) Keen Ltd is considering undertaking a project that would yield annual profits (after depreciation) of £68,000 for 5 years. The initial outlay of the project would be £800,000 and the project's assets would have a residual value of £50,000 at the end of the project.

What would be the accounting rate of return for this project? (2 marks)

A) 16%

B) 8.5%

C) 8.0%

D) 9.1%

Your Answer ______________

13) What is the present value of £520,000 expected to be received in three years' time, if the business concerned requires a return of 10% on sums invested? Answers are given to the nearest £'000. (2 marks)

A) £692k

B) £432k

C) £473k

D) £390k

Your Answer ______________

14) Seagate Ltd is considering a project, which will involve the following cash inflows and (out)flows:

	£’000
Initial Outlay	(400)
After One Year	40
After Two Years	300
After Three Years	300

What will be the NPV (net present value) of this project if a discount rate of 15% is used? (2 marks)

A) +£60.8k

B) -£60.8k

C) +£240k

D) +460.8k

Your Answer ______________

15) Premier Ltd is about to undertake a project and has computed the NPV of the project using a variety of discount rates:

Discount rate used	NPV
10%	+£130k
15%	+£50k
20%	-£50k

What is the approximate IRR of this project? (2 marks)

A) 20%

B) 17.5%

C) 15%

D) 22.5%

Your Answer ______________

16)A company has a share ß of 1.4 and has 30% risk-free debt in its capital structure. Its asset ß will be: (2 marks)

A) 0.42

B) 0.98

C) 1.2

D) 1.4

Your Answer ______________

PART 2: Answer ALL THREE questions in this part. Each question carries 25 marks.

QUESTION 1) Total Marks: 25

a) Leica Co. is about to pay a £0.50 dividend on each ordinary share. Its earnings per share was £1.50. Net asset per share is £6. The current share price is £4.50 per share. What is the cost of Equity? (6 Marks)

b) A share in Hasselblad Co. has an equity beta of 1.3. It has a debt-to-equity ratio of 20%. The market premium is 8% and the risk-free rate is 3%. Hasselblad Co. pays 30% corporation tax. What is the cost of equity for Hasselblad Co.? (3 Marks)

c) The equity beta of Fuji Co. is 0.9 and the company has issued 10 million ordinary shares. The market value for each ordinary share is £7.50. The company is also financed by 7% bonds with a nominal value of £100 per bond, and the after-tax cost of debt is 4.4%. The bonds have a total nominal value of £14 million. Interest on the bonds has just been paid and the current market value of each bond is £107.14. The risk-free rate of return is 4% per year and the average return on the stock is 11% per year. The corporation tax is at a rate of 20% per year.

i) What is the cost of equity of Fuji Co.? (2 Marks)

ii) What is the WACC of Fuji Co.? (8 Marks)

d) Define the following:

i) Market Rish Premium. (2 Marks)

ii) Systematic Risk. Is it avoidable? (4 Marks)

QUESTION 2) Total Marks: 25

a) The stock market provides an annual return of 8.4%. A risky project costs £35,000 but provides £20,000 cash flow for two years. Would you invest in the project? (3 marks)

b) Assume in order to undertake this project the firm needs to undertake project 2 that costs £12,000 but provides a one-year cash flow of £13,500 and project 3 that costs £8,000 but provides three years of cash flow of £3,000.

Will the firm still take on the project and how much will firm value and increase? (4 marks)

c) Using the information below and assuming corporation tax is 20%

i) calculate the average net income of the company over the three years. Assume straight line depreciation of £50,000. (2 mark)

Table 1: Financial information about Firm Alpha

£’000	Year 1	Year 2	Year 3
Revenue	185	105	75
Expense	35	35	35
Pre-tax cash	150	70	40
Depreciation	50	50	50
Pre-tax profit	100	20	-10
Tax	20	4	-2
Net income	80	16	-8

ii) Assume the initial investment cost was £150,000 and the project requires an AAR of 35% or more

to go ahead. What is average investment and does the project go ahead? (5 marks)

d) James Blunt is packing up his twitter account and will be making a comeback tour and can choose to market minimally or go full out. His expected payoffs are in the table below.

i) Calculate the IRR of both types of marketing and which option should he go for if the NPV is 10%? (6 marks)

Table 2: Marketing for James Blunt’s comeback tour

Marketing Type	C0	C1
Minimun	-5	10
Maximun	-40	70

ii) His tour manager is unconvinced and states that regardless of the answer he must go for the project with the greater IRR. Using incremental IRR and NPV convince the tour manager otherwise. (5 marks)

QUESTION 3) Total Marks: 25

Answer the short essay questions:

a) Explain the difference in the two main measures of risk: the standard deviation and the beta. (5 marks)

b) Define diversification. What are the benefits to diversification? Will diversification always lead to greater expected portfolio returns? (5 marks)

c) What is the possible range for a correlation coefficient? For purposes of diversification, what type of correlation coefficient among asset returns is preferred by investors? Explain why. (5 marks)

d) Since total risk is greater than systematic risk, should standard deviation be always greater than beta? Is it possible for a stock to have high total risk but low systematic risk? (5 marks)

e) What is the equation for the Security Market Line? Define each term. If an asset has a beta of 2.0, what type of return should it realize compared to the market portfolio? (5 marks)