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Exam with solutions - . SURNAME: FIRST NAME/S: SiD NUMBER:...

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Unformatted text preview: . SURNAME: FIRST NAME/S: SiD NUMBER: ‘1‘”: - Discipline of Finance FINC 2011 ' ' CORPORATE FINANCE | Format: 20 multiple choice questions each worth one mark MASTER COPY Mid-Semester Exam I Semester One 2011 Thursday 31 March 2011 [Time Allowed: 45 minutes Instructions: Circle the most correct answer on the answer sheet for each question. Only one answer should be circled'for each question. Clearly indicate which answer is _ chosen. _ Authorised Material: 1. Calculator 2.. Blue or black pen I '3. Liquid paper ' 4; Student ID Card No other material is permitted within the exam room. Page I ‘ 1. Which of the following securities should be priced using the perpetuity equation? a) A semi-annual coupon bond b) A constant dividendpaying ordinary share _ c) An annual coupon bond ' 7 d) An individual's stiperannuation plan ._.. Ema _ e) Acarloan contract 6)"? 2. Suppose the current Commonwealth Bond yield is 8% p.a. compounded semi—annually. Which of the folloWing bondsshould have the highest price? a). A zero-coupon bond, $100 face value, 3 years until maturity. _ b) An 8% p.a. semi-annual coupon bond, $100 face value, 10 years until maturity. 7 c) An 6% p.a. annual coupon bond, $100 face value, 20 years until maturity. d) An 8% p.a. semi-annual coupon bond, $100 face value, 5 years until maturity. e) A 10% p.a. annualcoupon bond, $100 face value, 7 years'until maturity. Cow???“ vb , 3. Bishop Industries is planning on issuing $100 million in corporate bonds and will use the funds to purchase. a new manufacturing plant for $60 million and to repurchase $40 million in equity ' ' from existing shareholders. Which of the-following-best describes the type/s of decisions that these transactions involve? ' a) Financing decisions only 7 b) Financing and investment decisions _c) Financing and dividend decisions - d) Investment, financing and dividend decisions (3) Investment and dividend decisions 96K 4 exFiMQ‘LWY . 4. Which of the following refers to the problem of managers acting in their oWn self-interest rather thanin the interests of shareholders? ' a) ' The equity problem _ b) The agency problem - c) Fisher’s problem gel-F v GYF {WW-407 . d) The capital problem . , - e) Gordon’s problem ' "5.1 What simple interest rate per year will give the same value at the end of 4 years as 6.5% p.a. continudusly compounded? ' r - a) 7.42% g 0.069%) _. - b) 6.50% “‘03 , l c) 5.95% ' -- . d) 6.72% ' ' -. .- 6]» e) 7.16% 0.07%; ' Page 2 6. Louis de Bourbon has just received a large inheritance of $12 million. He plans on investing the ' money in the stock market for 3 years where he is expecting to get a return of 12% pa. compounded quarterly. At the end of three years he plans on selling all his stocks and then dep03iting to money in a BankEast Ltd term deposit for 5 years. The BankEast term deposit is expected to pay interest of 7% pa. compounded daily. How much money will Mr de Bourbon have in 8 years time? _ ' 7 .lZ we a) $23,64_5,810.37 _,_, I +0 > _ C b) $25,877,654.78 R!“ 12,09 i “T, x {4’ ' c) $22,144,346.99 d) $24,278,197.35 _ , - . I e) $26,458,825.74 “$297 273’, 197.35’ 05;, 365%? 35c; Questions 7 to 9 relate to the following information. - OX group pays dividends to its shareholders twice a year; in October and April each year. The October dividend 0f $0.55 was paid today. The next dividend is due 'in April next year. The dividend ' is expected to grow by 3% pa compounded semi-annually forever. Shareholders in OX group 7 require a return of 14% pa. compounded annually. ' ' ' 7 How much should one share ofOX worth today? J, . #5 ( I q”)? u—I _' a) $10.15 - ' ' LI ’ 'l a 0.067707 13) $10.59 ‘ ' c) __$10.28 0.59005) _‘ - i .‘ d $10.00 ' .- <_————-—--‘—""'""' Z V e; $10.44 1'90 ' o.06770?—0.015’ . 515/03? 8. How much should one share in OX cost in exactly 21/2 years time? . ‘ g, a). $10.46 - 7 ‘ {g ' b) $10.91 172a)! : Q’S§(l O D c) $10.68 7 - - . d) $11.09 ' - 0.007707 flows“ 9) $11.41 _ - :_- '_ 9. if an investor bought shares in OX today and then sold them in exactly 21/2 years time, what per cent return p.a. compounded annualiy would the investor receive? . 2 a) 3.000% . - “3.; f b) 3.028% . _ r: ___.z ~| c) 3.097% 10.9? d) 3.251% , e) 3.509% ' _—_- orogozg 10. Mr Fox Mulder has just borrowed $40,000 to purchase a new car from BankEast Ltd. BankEast charges 11.50% p.a. compounded weekly on car loans. How much must Mr Mulder pay each ' week to repay the loan over 4 years? - (3.050 -- ' a) $240.13. ' Ell: 3—2”? 0.6021115 b) $250.60 7 ' _ ‘ m. - _ Egg: - _ Pv’ : ' e) $231.84' - . - ' -203 40(000 , A L-(;.QOZZIIS') J 0.0022”? Page 3 Questions 11 and 12 relate to the following-information. Massive Dynamic is seeking to raise additional debt financing through the issue of $100 million worth of 14% p.a. semi-annual coupon carporate bonds. The bonds have a face value of $100 and will mature in 10 years. The current yield on'corporate bonds is 10.90% p.a. 11. mm bonds are isSued at their current value, how many bonds must Massive Dynamic issue to raise the desired amount of capital? - - “1‘5 too _ {D : 7&1-0054’5) jcr W 0 ‘ 20’ a) 829,660 images b) 845,070 é 0‘05“ ) C) 912,656 _ : 7 H3 " . d)-843,169 _ 7 ' . go .. p r e) 1’196’469 No. -: (00,000,060/Hg‘60 3 12. Suppose that in exactly 2 years time the yield on corporate bonds is 11.40% p.a.. How much will the price of each bond have changed relative to the original issuing price? a) Decreased by $5.19 [7 a _ ' FL 0.05.7) {‘5 I 100. f6 b) Decreased-by $4.20 '2. ‘ ________—.—— + ([057) _ 'c) Decreased by $6.90 - 0.057 . . - d) Decreased by $2.88 : $“ 3.4,] . e)'Decreased by$3.32 D51? .: “34‘_ “$60 ;_ ,Svfey ' ' 13. BroylesConstruction Ltd (BRC) pays an annual dividend of $0.22. This dividend is not expected to change in the future. if the shareholders of BRC have a required return of 10.71% p.a. compounded semi-annually, how much Would you expect to pay for one BRC share today? . Z a) $2.08 ' ' Rafi 4' of“) "‘l b) $2.11 . l _ - 0.2.2 '1‘ v i .. _-—-——r s. c) $2.00 . <31 pg... 0“ , $2 ct) $2.05 . . . e) Insufficient information to determine the current share price 14. A management team that is inefficiently utilising the company's scare resources may find itself at risk of losing theirjobs due to which of the following market mechanisms? a) Corporate regulators " I b) The market for corporate control 0). Management shareholdings d) Management remuneration incentive packages e) Fisher’s separation theorem I I Solar explanatiofy’ Page Questions 15 and 16 relate to the following information. Newton and Associates Pty Ltd recently paid a dividend of $0.48. Newton pays dividends twice a .year. The company expects the next dividend to be $0.50 and then expects dividends to continue to grow at the same rate forever. The shareholders of Newton require a return on equity of 8% per six months. 15. What should be the current price of one Newton and Associates share? . . . o a) $6.25 g’: d] b)‘ $12.52 -. ‘— ' - _ c) $6.52 ' ' r ’ 004466 “ ct) $6.00 - 0-90 9) $13.04 . 1% : smug _: 16. The directors of Newton and Associates Pty Ltd expect that EPS for the next halt-year wilt be . $1.00. The average PE ratio for this industry is 8x. Given this, which of the following statements ' 9 IS most correct. 7 .130? . a) Newton is overpriced P b ‘T/ I 1304' X b) - Newton is underpriced _ _ c) Newton is overpriced or its shareholders have a higher required return on equity than'the ' industry average. - . _ _ d) Newtonis underpriced or has a lower dividend payout ratio than the industry average. e) Newton is overpriced or it has a higher eXpected growth rate than the industry average. 5 . (l 17. Ms Nina Sharpe expects to receive $100,000 from an inVestment in.5 years time. If the appropriate opportunity cost for this investment is 10% pa. continuously compounded, what will be its Value toda '?' y . 100,006; , a) $164,872.13 . ‘ PU: 6.1x; b) $95,452.74 ' 8 0) $62,092.13 0) $161,051.00 . p '. '6 e) $60,653.07 - _ . t $60! 653 7 18..Lavender Textiles Ltd had an EPS this year of $0.80 and a DPS of $0.24. The company has a ' capital structure of 50% debt and 50% equity. The company has required return on equity of . 12.50%, a required return on debt of 8.25%, and an ROE of 11%. On the'basis of this . information, what would you estimate the dividend growth rate of Lavender Textiles Ltd shares to be? ' ' a') 3.85% 3;: 1, Fay/0121‘ 16.12;) .x Roe b) 7.70% . I 4 I c) 10.37% ’ v 02 ‘ d) 11.00% - _ «(l m] x 0.11 e) 12.50% - . . 3‘ 0.077 Page 5 '19. 20. Mr JohnNixon has just started a newjob. He expects to be paid $100,000 this year and' $140,000 next year. What is the most money he could consume next year if the opportunity cost is 10% pa. compounded daily? a) $250,515.53 ‘ b) $228,878.97 0) $227,272.73 0) $240,000.00 e) $250,000.00 1070,0009, 0’ + (40,00 0, —.-.. gze‘ofirzm‘ ($250,573.52?) Mr Alan Bluespan wishes have a bank balance of $600,000 when he retires in 10 years time. BankEast is offering an interest rate of 6.50% compounded mOnthly on 10-year term deposits. .How much must Mr Bluespan deposit in a BankEast term deposit today to reach his retirement goat? 600,000 8) $300,000.00 _ to) $325,548.54 . PV C H ogégyzmo _c) $331,883.98 - . I ,a, d) $313.777.38 . _ e) $319,635.62 - : $3i3i 777. 3% This is the end of your exam Page 6 _ ' Future Value of $1 Due at the End of n Periods [FVIFi _ 12%J 14% 1.120 1.140 1:351:29 Present Value of $1 Due at the End of n Periods [PVI'FI - [firiodfm- 2% |_3% 4% 5% [_5%i7%. 8% 9% 1,10% .12% 14% 159g 1 0.990 0.980 0.971 0.952 0.952 0.943 0.935 0.925L0.91-7 0.91m 0.893 0.877 0.870 L2 4 0.980 0.951T 0.943 0.925 0.907 0.873 0.857 0.842 0.825 0.797 0.759 0.7551 3 0.915 0.815T 0.7%0774 0.751 0.712 0.575 0.558 |_ 4 0.753 735 0708 0583' 0.535 05921 0.572 5 . 1,} |_ 5 7 |_ 8 9 |_ 10 . . 0.145 . . . 0.212 0.180|_0.130 0.095 0.081 . __ 0.232 0.193 0.154 0.115 , 53230.21 51:90.178 a.;'10.I1,4§F.:;%50'.10'4 H Page 7 Future Valueof an Annuit 0f 1 er Period fornPeriOds FVIFA iod 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 12% 14% 15% '- 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.0?[1000 1.000 1.000 .050 I 2.010 2.020 2.030 2.040 2 2.030 2.070 2.030 2.090 2.100 2.120 2.140 2.15fl 3.030 3.030 3.091 3.122 3.153 ’7 4.030 4.122 4.134 4.310 "U (D ., —\. 3.215 3.246 3.278 3.310 3.374 3.440 . ‘ - ' 4' 779 4.921 6.892 ' 8.142 9.214 9.549 10.53 11.027 2.4003 8.654 . 7 10.2301 : . 1 11.973 1 . 1 2.212 9. a; ;: 3131.335 V ' ' _,_ 1.000-01:001th 20355223045 11 13.486 14.207 14.972 15.784 L12 . 16.870l17.888 21.384 24.133 27.271 ' 13 . 18.882 20.141 24522428029 32.089 14 21.015 22.550 32.393 37.581 . . ,. ., 2805434342 3 .950’i753 50.930 . 40.545 43.334 59.113 35.075 41.3fl‘ 45.599 55.750 33.394 75.33‘3l 443 43.013 51.159 33.440 73.939 33.212 . ‘ 25373127333 13.430 20.012 21.732 25.340 23.213 30.340 W32 30 903 33.999 19.615 21.412 23.414 . 20.811 22.841 25.117 30.539 33.760 37.379 ., $303656: 236321.86 403395151... Present Value of 5m Annuit of 1 I er Period for n Periods PVIFA Perm 1% '2% 3% 4% 5% 3% 7% 3% 9% 10% TT2% 14% 15%J 1 0.990 0.930 0.971 0.932 0.952 0.943 0.935 0.923 0.917 0.909 0.393 0.377 0.370 1.970 1.942 1.913 1.333 1.359 1.333 1.3031733 1.759 1.733 1.390l_1.347 1.323, 2.941 2.334 2.329 2.775 2.723 2.373 2.324 2.577 2.531 2.4371‘ 2.402 3902 30 .543 . 3.337 3.312 3.2.40 170 3.037 g}. .. , 77itmmflI.533.933 , 7 U'I-Fta-JN 4.76 4.623 4.486 5.389 5.971- . 6.515 11.335732“; .. 7.499 . m . 1. 5.453 "5.234 ,. 7.943 . '. . . 5.330 5.421 . 3.353 7. . ' . '. I . 5.342 5.533 3 . 8.745 ‘ iii,:93.éi1.138= ii; . ‘ 9.447 9.733 10.059 Page 8 Corporate Finance -| Mid sessiOn Exam Formula Sheet This sheet must be returned with your exam paper oryou will fail. FV: 2X,(1+r)* r=l 7 D=Z ‘ F t+ B FV _ r . _ ,=1(1+rd) (1+rd) PV= 7 n . d (1+r) R :__. . - re I r m Effective rate= [1+fl] —1 - d m ' P =- {+1 . '7 rte-g n AX'I I I , PV_ ga+flr g=(I—pay0ut-ratfo)xROE Fv=222g(1+ry (=1 ' F'Vz Al:(1+r)” A] T' W: A[I—(l+r)'”] I" A PV=—- f” W=Pw”e PV = FVe‘" V= D+E ' Page? ...
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This note was uploaded on 08/19/2011 for the course FINC 5001 taught by Professor Elivisjarnecic during the Three '11 term at University of Sydney.

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Exam with solutions - . SURNAME: FIRST NAME/S: SiD NUMBER:...

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