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 ar
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.
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
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 t
Question1(25 Marks)
(i)
(9 marks) Simply the Best Ltd, has a corporate tax rate of 30 percent and the
tax rate for a representative investor is 38%. The company has a before tax
profits of $100 millio
Question 1 (25 Marks)
i.
(9 Marks) The table gives the risk premium on the three factors in an APT model:
Factors
Risk Premium%
Change in GNP
6.00
Change in inflation
-1.50
Yield spread
3.50
Given tha
22. Project NPV Hindustan Motors has been producing its Ambassador car in India since
1948. As the company's website explains, the Ambassador's dependability, spaciousness,
and comfort factor have mad
NOTE: The exam may contain more computation questions than are in these
examples.
Question 1
a. Describe and explain the Lintner model
b. What do you expect to happen to a companys share price when it
22. Project NPV Hindustan Motors has been producing its Ambassador car in India since
1948. As the company's website explains, the Ambassador's dependability, spaciousness,
and comfort factor have mad
Decision trees Magna Charter is a new corporation formed by Agnes Magna to provide an
executive flying service for the southeastern United States. The founder thinks there will be a
ready demand from
ch21
Student: _
1.
Discounted cash flow approach to valuation does not work in the case of options because:
A. it is possible to but difficult to estimate the expected cash flows.
B. the estimated cas
ECSY-COLA IN INGLISTAN
Minicase solution, Chapter 11
Principles of Corporate Finance, 10th Edition
R. A. Brealey, S.C. Myers and F. Allen
Libby Flannery prepared the attached spreadsheet to analyze th
Chapter
11
Investment,
Multiple
1.
Strategy,
and
Economic
Rents
Choice
Answer
Key
Questions
The best way to uncover forecasting errors contained within NPV estimates is by looking
at:
I)
book
values;
Chapter
30
Working
Capital
Multiple
1.
Management
Answer
Choice
Firms
employ
the
Key
Questions
following
types
of
inventories:
A. raw material.
B. work in process.
C. finished goods.
D. all of these o
Machines A and B are mutually exclusive and are expected to produce the following real cash flows:
Machine
A
B
Cash Flows ($ thousands)
C0
C1
C2
111
+121
+132
131
+121
+132
C3
+144
The real opportunit
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
4.2 NPV Decision Rule
c For independent projects:
I If NPV>0, increase wealth. Accept!
J If NPV<0, decrease wealth, Reject!
0 For M projects: Choose the one with highegt NPV
Part 2 - Investment
4.1 Ba
6.1 Posslble Bad Outcome 81F5d9
m I
r Adjustment for possible bad outcome
4.x ,._.~. flow
cfw_Correct New? AdjusI the cash flow (Use expemd me Of ca? oun)t rate)
IneomcIMe'iIEIod: Amugrfmte (Add a Fud
Part 5 - Options
111 Basic Characteristics of Option
13.2 Intrinsic Value 8. Option Value
13.3 Option Value Determinants
3 P Concept: 13.4 Put-Call Parity
13.5.1 Com-d Cull
13.5.2 Protective Put
13.5.
5.2.1.1 Sensitivity Analysis Example
In
Projected NPV f
. ~ 0 a
With Low with Hugh R3093 M09 1
Variable Base case estimate estimate estlm - sensitvo
n i 1 111 1. 20 1 0. 94 98.6
L" I Sales 1 1.1 .98 -
2.1.2.1 MM Theory Without Tax - Proposition 1
I
r MM proposition 1 without taxes: capital structure irrelevance
0 Value 15 net eteeted by iust chenge the leverege Qf e rm;
0 with the increase in lever
Part5: Options
Part 5 - Options
13.5.160vered Cal!
14.2 Memodz: Binomial Model (Risk-Neutral Model - Discrete)
143 Methodii: Black-Scholes Model (Risk-Neutral Model - Continuous)
13
5.2.3.1 Real Options
It.
2 Timing options: allow the company to delay investing.
r Sizing options
0 Abandonment option: Similar to put options. Allow management t
abandon a project if the CF from aban
wwv
Ex
ample 24 (Put-Call Parity)
-mon .
month puts With an Examisteh 5 on ABC Ltd With an exercise price of $50. 6-
' . rioe .
Options and the interest rateFi; 5%0f $50 for $8. The options are Europe
i
2.1.2.2 MM Theory Without Tax - Proposition 2
Bl
\
,_-_
-r~i ma
WACC
. Cost of debt
2.1.2.2 MM Theory Without Tax - Proposition 2
8
D .
n=rn+(r_rd)(f) 1:5: .1. .7.
69
D
+(ad)E mW/m. (MAML
~ 2
11.3 Inventory Management
Inventory costs. dollars
Optimal
order size
Total costs
' costs
Can'ymg
Total order costs
Order size
:1 Order size that minimizes total inventory costs
t er 0 der
Econo