1
Final Exam Review Questions Semester 2 2011
Some final exam practice questions are provided below. The exam paper requires
you to state any assumptions and show all calculations.
Question 1
Below are the financial statements for Manouk Manufacturers Ltd
Answers.
1.
a.
8.
a, b, d, g, h; c is a sunk cost. e is an overhead cost. f is not an
incremental cash flow because depreciation is not a cash flow. i is a
sunk cost.
NPVA = $100,000; NPVB = $180,000.
b.
Given the NPV for each project, we need to find the
24. Fudge factors An oil company executive is considering investing $10 million in one or
both of two wells: well 1 is expected to produce oil worth $3 million a year for 10 years;
well 2 is expected to produce $2 million for 15 years. These are real (inf
ACCT5001, Semester 2, 2011
Questions
Mid-Semester Quiz Review/Sample Exam
1
MID-SEMESTER QUIZ SAMPLE QUESTIONS
The mid-semester quiz will not be in the same format nor will the questions be the
same type as those provided for your practice in this documen
NOTE: The exam may contain more computation questions than are in these
examples.
Question 1
a. Describe and explain the Lintner model
b. What do you expect to happen to a companys share price when it announces
an unexpected dividend increase and when it
22. Project NPV Hindustan Motors has been producing its Ambassador car in India since
1948. As the company's website explains, the Ambassador's dependability, spaciousness,
and comfort factor have made it the most preferred car for generations of Indians.
22. Project NPV Hindustan Motors has been producing its Ambassador car in India since
1948. As the company's website explains, the Ambassador's dependability, spaciousness,
and comfort factor have made it the most preferred car for generations of Indians.
ECSY-COLA IN INGLISTAN
Minicase solution, Chapter 11
Principles of Corporate Finance, 10th Edition
R. A. Brealey, S.C. Myers and F. Allen
Libby Flannery prepared the attached spreadsheet to analyze the NPV of EcsyColas proposed investment in Inglistan. Wi
Decision trees Magna Charter is a new corporation formed by Agnes Magna to provide an
executive flying service for the southeastern United States. The founder thinks there will be a
ready demand from businesses that cannot justify a full-time company plan
Case #33
California Pizza Kitchen
Synopsis and Objectives
This case examines the question of financial leverage at California Pizza Kitchen (CPK) in July
2007. With a highly profitable business and an aversion to debt, CPK management is considering a
debt
1) When a firm has the opportunity to add a project that will utilize excess factory
capacity (that is currently not being used), which costs should be used to determine if
the added project should be undertaken?
A. Opportunity cost
B. Sunk cost
*C. Incre
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25 You are con51dering making a "Hillary" action gure to capitalize on what you are sure will be a massive resurgence p
A company is 49% financed by risk-free debt. The interest rate is 8%, the expected market risk
premium is 6%, and the beta of the companys common stock is 0.59.
a.
What is the company cost of capital? (Do not round intermediate calculations. Round
your an
Machines A and B are mutually exclusive and are expected to produce the following real cash flows:
Machine
A
B
Cash Flows ($ thousands)
C0
C1
C2
111
+121
+132
131
+121
+132
C3
+144
The real opportunity cost of capital is 11%. (Use PV table.)
a. Calculate
INPUTS
EXERCISE PRICE
Share Price
sigma (SD) per period
r
t
OUTPUTS
PV(EX)
P/PV(EX)
sigma x sqrt(t)
d1
d2
N(d1)
N(d2)
Call Value
900
467
0.35
0.1
3
= EX / (1+r)^t
= log[P/PV(EX)]/[sigma x sqrt(t)] + [sigma x sqrt(t)/2]
= d1-sigma x sqrt(t)
0.3792483606
0.
Lecture 3
Project Analysis
Topics Covered
The Capital Investment Process
Sensitivity Analysis
Monte Carlo Simulation
Real Options and Decision Trees
Capital Investments
Items for consideration
Capital Budget A list of investment projects
under considerat
Lecture 2
Risk and the Cost of Capital
Topics Covered
Company and Project Costs of Capital
Measuring the Cost of Equity
Analyzing Project Risk
Certainty Equivalents
Company Cost of Capital
A firms value can be stated as the sum of the
value of its variou
24. Fudge factors An oil company executive is considering investing $10 million in one or
both of two wells: well 1 is expected to produce oil worth $3 million a year for 10 years;
well 2 is expected to produce $2 million for 15 years. These are real (inf
Decision trees Magna Charter is a new corporation formed by Agnes Magna to provide an
executive flying service for the southeastern United States. The founder thinks there will be a
ready demand from businesses that cannot justify a full-time company plan
24. Fudge factors An oil company executive is considering investing $10 million in one or
both of two wells: well 1 is expected to produce oil worth $3 million a year for 10 years;
well 2 is expected to produce $2 million for 15 years. These are real (inf
Fudge factors
An oil company executive is considering investing $10 million in one or both of
two wells: well 1 is expected to produce oil worth $3 million a year for 10
years; well 2 is expected to produce $2 million for 15 years. These are real
(inflat
Miller Sisters has an overall beta of 0.64 and a cost of equity of 11.2 percent for the
firm overall. The firm is 100 percent financed with common stock. Division A within
the firm has an estimated beta of 1.08 and is the riskiest of all of the firm's
ope
Question 1 (25 Marks)
i.
(9 Marks) The table gives the risk premium on the three factors in an APT model:
Factors
Risk Premium%
Change in GNP
6.00
Change in inflation
-1.50
Yield spread
3.50
Given that the risk free rate is 6.5%, compute the equilibrium e
Question 1 (25 Marks)
i.
(9 Marks) The table gives the risk premium on the three factors in an APT model:
Factors
Risk Premium%
Change in GNP
6.00
Change in inflation
-1.50
Yield spread
3.50
Given that the risk free rate is 6.5%, compute the equilibrium e
NOTE: Below are a series of mockup exam mini-questions. Each mini-question
is worth around 5 to 6 marks. About 4 or 5 of these mini-questions (often of a
common theme, e.g. dividend) make up one exam question of 25 marks. There are
four of these 25-mark q
Formulas
(The section number indicates the principal reference in the text.)
Perpetuity (3.2] _
The value of a perpetuity of $1 per year is:
W = l
r
Annuity.(3.2] _. _. _
The value of annuity of $1 per period for t
years (3-year annuity factor) is:' ' ‘ '
SID450635755
Real Option and Financial Option for Risk Management
Introduction
Businesses face with a wide range of risks in their daily practices. While some of
these risks are negligible or affordable, some are extremely catastrophic and needs to
be car
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Decision trees Magna Charter is a new corporation formed by Agnes Magna to provide an
executive flying service for the southeastern United States. The founder thinks there will be a
ready demand from businesses that cannot justify a full-time company plan
5.
Beta of assets = .5 .15 + .5 1.25 = .7.
10.
a.
110
121
PV = 1 r (r r )
1 r f (rm r f ) 2
f
m
f
=
12.
110
121
$200
1.10 1.10 2
b.
To solve for the certainty equivalent, we set CEQ1/1.05 = 110/1.10.
Therefore, CEQ1 = (110 x 1.05) / 1.10.
CEQ1 = $105.
Fo
Chapter 20
16.
From put-call parity:
C + [EX/(1 + r)] = P + S
P = S + C + [EX/(1 + r)] = 230 + 46.97 + [230/(1.03)1.25] = $38.63
22.
a.
Use the put-call parity relationship for European options:
Value of call + present value of exercise price = value of p
15.
Binomial valuation You have an option to purchase all of the assets of the Overland Railroad for $2.5
billion. The option expires in nine months. You estimate Overland's current (month 0) present value
(PV) as $2.7 billion. Overland generates after-ta
Dividend policy and the dividend discount model Consider the
following two statements: Dividend policy is irrelevant, and Stock
price is the present value of expected future dividends. (See
Chapter 4.) They sound contradictory. This question is designed