MU - S2 2004 - Mid Semester Business Finance Exam Solutions

MU - S2 2004 - Mid Semester Business Finance Exam Solutions...

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MONASH UNIVERSITY DEPARTMENT OF ACCOUNTING AND FINANCE AFC2140 BUSINESS FINANCE MID-SEMESTER TEST – SOLUTIONS SECOND SEMESTER 2004 SURNAME (FAMILY NAME)_____________________________________________ GIVEN NAME(S)______________________________________________________ FACULTY AND YEAR__________________________________________________ ID NUMBER__________________________________________________________ TUTOR’S NAME______________________________________________________ TUTORIAL DAY AND TIME______________________________________________ INSTRUCTIONS: TIME ALLOWED: 60 MINUTES WRITING TIME (NIL READING TIME) CALCULATOR WITH NON FULL ALPHABETIC KEYBOARD ONLY MAY BE USED (IN ACCORDANCE WITH FACULTY POLICY) CLOSED BOOK TEST ANSWER ALL 3 QUESTIONS (AND IN THE SPACES PROVIDED) A FORMULA SHEET IS INCLUDED AT THE BACK (WHICH CAN BE DETACHED) OFFICE USE ONLY QUESTION MARK 1 2 3 TOTAL (OUT OF 50)
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This question consists of 15 multiple-choice questions. For each multiple- choice question, choose the one correct answer from the four alternatives given by circling the correct letter A, B, C, or D. Each multiple-choice question counts as 2 marks, giving a total of 30 marks for Question 1. The following abbreviations are used in the multiple-choice questions: ARR accounting rate of return IRR internal rate of return NPV net present value RRR required rate of return 1. If a firm that is subject to a 30 percent company tax rate disposes of assets that reduce its depreciation expense by $100,000 per annum, its after-tax cash flows will: ± A: increase by $30,000. ± B: decrease by $30,000. i.e. $100,000 × 0.30 more tax to pay ± C: be unchanged. ± D: increase by $70,000. 2. An investment project requires an initial outlay of $X and, using a RRR of r% per annum, promises a present value of $Y for cash flows over a two year period. All other things being equal, if the firm considering the project is financed entirely by equity, which of the following statements applying to the firm’s shareholders is incorrect? ± A: $X represents the amount of current wealth being sacrificed by shareholders and $Y represents the present value of their future expected wealth from investing in the project. ± B: If $Y minus $X is positive, then shareholder wealth can be expected to increase. ± C: Total shareholder wealth can be expected to change by $Y minus $X. ± D: If $Y minus $X is positive, then the project’s rate of return is less than r%. 3. A firm has estimated that a proposed project will have a single cash flow of $7,992.92 at the end of its fourth year. Assuming that this cash flow satisfies exactly the firm’s RRR of 18.89 percent per annum, the initial outlay will be: ± A: $4,431.20. ± B:
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MU - S2 2004 - Mid Semester Business Finance Exam Solutions...

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