0607 - Midsem1 Ans for My Exam Study

UNIVERSITY OF MALAYA

MID-SEMESTER EXAMINATION FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION

ACADEMIC YEAR 2006/2007 – SEMESTER 1

CFGB6102: CORPORATE FINANCE

SEPTEMBER 2006 TIME: 2 HOURS

1. Rina is considering buying a new car. The sticker price is RM15,000 and she has RM2,000 to put toward a down payment. If she can negotiate a nominal annual interest rate of 10 percent and she wishes to pay for the car over a 5-year period, what are her monthly car payments?

a. RM216.67b. RM252.34c. RM276.21d. RM285.78e. none of the above

2. A bond has an annual 8 percent coupon rate, a maturity of 10 years, a face value of RM1,000, and makes semiannual payments. If the price is RM934.96, what is the annual nominal yield to maturity on the bond?

a. 8%b. 9%c. 10%d. 11%e. none of the above

3. Pepsi Corporation's current ratio is 0.5, while Coke Company's current ratio is 1.5. Both firms want to "window dress" their coming end-of-year financial statements. As part of their window dressing strategy, each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account. Which of the statements below best describes the actual results of these transactions?

a. The transactions will have no effect on the current ratios.b. The current ratios of both firms will be increased.c. The current ratios of both firms will be decreased.d. Only Pepsi Corporation's current ratio will be increased.e. Only Coke Company's current ratio will be increased.

CFGB 6102/2

4. Shuhada intends to purchase a 10-year, RM1,000 face value bond that pays interest of RM60 every 6 months. If her nominal annual required rate of return is 10 percent with semiannual compounding, how much should she be willing to pay for this bond?

a. RM1,086.15b. RM 957.50c. RM1,431.49d. RM1,124.62e. none of the above

5. Assume that Raeleen wishes to purchase a 20-year bond that has a maturity value of RM1,000 and makes semiannual interest payments of RM40. If she requires a 10 percent nominal yield to maturity on this investment, what is the maximum price she should be willing to pay for the bond?

a. RM619b. RM674c. RM761d. RM828e. none of the above

6. A RM1,000 par value bond pays interest of RM35 each quarter and will mature in 10 years. If Kate’s nominal annual required rate of return is 12 percent with quarterly compounding, how much should she be willing to pay for this bond?

a. RM 941.36b. RM1,051.25c. RM1,115.57d. RM1,391.00e. none of the above

7. Consider a RM1,000 par value bond with a 7 percent annual coupon. The bond pays interest annually. There are 9 years remaining until maturity. What is the current yield on the bond assuming that the required return on the bond is 10 percent?

a. 10.00%b. 8.46%c. 7.00%d. 8.52%e. none of the above

CFGB 6102/3

8. Benedict Incorporated issued BBB bonds two years ago that provided a yield to maturity of 11.5 percent. Long-term risk-free government bonds were yielding 8.7 percent at that time. The current risk premium on BBB bonds versus government bonds is half what it was two years ago. If the risk-free long-term governments are currently yielding 7.8 percent, then at what rate should Benedict expect to issue new bonds?


9. Kavitha Industries just paid a dividend of RM1.00 per share (i.e., D0 = RM1.00). Analysts expect the company's dividend to grow 20 percent this year (i.e., D1 = RM1.20), and 15 percent next year. After two years the dividend is expected to grow at a constant rate of 5 percent. The required rate of return on the company's stock is 12 percent. What should be the current price of the company's stock?


10. Last year Azman Co. had negative net cash flow, yet its cash on the balance sheet increased. What could explain these events?

a. Azman issued long-term debt.b. Azman repurchased some of its common stock.c. Azman sold some of its assets.d. Statements a and b are correct.e. Statements a and c are correct.

11. Hisham Motors is expected to pay a year-end dividend of RM3.00 a share (D1 = RM3.00). The stock currently sells for RM30 a share. The required (and expected) rate of return on the stock is 16 percent. If the dividend is expected to grow at a constant rate, g, what is g?


CFGB 6102/4

12. The last dividend paid by Amritzal Company was RM1.00. Amritzal's growth rate is expected to be a constant 5 percent for 2 years, after which dividends are expected to grow at a rate of 10 percent forever. Amritzal's required rate of return on equity (rs) is 12 percent. What is the current price of Amirtzal's common stock?


13. Bala Corporation has a stock price of RM20 a share. The stock’s year-end dividend is expected to be RM2 a share (D1 = RM2.00). The stock’s required rate of return is 15 percent and the stock’s dividend is expected to grow at the same constant rate forever. What is the expected price of the stock seven years from now?


14. An increase in a firm's expected growth rate would normally cause the firm's required rate of return to

a. Increase.b. Decrease.c. Fluctuate.d. Remain constant.e. Possibly increase, possibly decrease, or possibly remain unchanged.

15. If the expected rate of return on a stock exceeds the required rate,

a. The stock is experiencing supernormal growth.b. The stock should be sold.c. The company is probably not trying to maximize price per share.d. The stock is a good buy.e. Dividends are not being declared.

16. Which of the following statements is most correct?

a. The constant growth model takes into consideration the capital gains earned on a stock.

b. It is appropriate to use the constant growth model to estimate stock value even if the growth rate never becomes constant.

c. Two firms with the same dividend and growth rate must also have the same stock price.

d. Statements a and c are correct. e. All of the statements above are correct.

CFGB 6102/5

17. On its 1999 balance sheet, Awasi Books showed a balance of retained earnings equal to RM510 million. On its 2000 balance sheet, the balance of retained earnings was also equal to RM510 million. Which of the following statements is most correct?

a. The company must have had net income equal to zero in 2000.b. The company did not pay a dividend in 2000.c. If the company’s net income in 2000 was RM200 million, dividends

paid must have also equaled RM200 million.d. If the company lost money in 2000, they must have paid a dividend.e. None of the statements above is correct.

18. Which of the following would not cause an increase in net operating working capital?

a. Inventory increases.b. Accounts receivable increases.c. Accounts payables decrease.d. Accruals decrease.e. Short-term investments increase.

19. Which of the following best describes free cash flow?

a. Free cash flow is the amount of cash flow available for distribution to all investors after all necessary investments in operating capital have been made.

b. Free cash flow is the amount of cash flow available for distribution to shareholders after all necessary investments in operating capital have been made.

c. Free cash flow is the net change in the cash account on the balance sheet.d. Free cash flow is equal to net income plus depreciation.e. Free cash flow is equal to the cash flow from non-taxable transactions.

20. A company has the following balance sheet. What is its net operating working capital?

Cash RM 10 Accounts payable RM 30Short-term investments 30 Accruals 10Accounts receivable 50 Notes payable 50Inventory 40 Current liabilities 90 Current assets 130 Long-term debt 60Net fixed assets 100 Common equity 30

Retained earnings 50Total assets RM230 Total liab. & equity RM230


CFGB 6102/6

21. A bond has an annual 11 percent coupon rate, an annual interest payment of RM110, a maturity of 20 years, a face value of RM1,000, and makes annual payments. It has a yield to maturity of 8.83 percent. If the price is RM1,200, what rate of return will an investor expect to receive during the next year?

a. -0.33%b. 8.83%c. 9.17%d. 11.00%e. None of the above

22. Other things held constant, which of the following will not affect the current ratio, assuming an initial current ratio greater than 1.0?

a. Fixed assets are sold for cash.b. Long-term debt is issued to pay off current liabilities.c. Accounts receivable are collected.d. Cash is used to pay off accounts payable.e. A bank loan is obtained, and the proceeds are credited to the firm's

checking account.

23. You are given the following information: Stockholders' equity = RM1,250; price/earnings ratio = 5; shares outstanding = 25; market/book ratio = 1.5. Calculate the market price of a share of the company's stock.

a. RM 33.33b. RM 75.00c. RM 10.00d. RM166.67e. none of the above


a. One of the advantages of the corporate form of organization is that there is no double taxation.

b. The partnership form of organization has easy transferability of ownership.c. One of the disadvantages of the sole proprietorship form of organi-

zation is that there is unlimited liability.d. Statements b and c are correct.e. None of the statements above is correct.

25. The future value of a lump sum at the end of five years is RM1,000. The nominal interest rate is 10 percent and interest is compounded semiannually. Which of the following statements is most correct?

a. The present value of the RM1,000 is greater if interest is compounded monthly rather than semiannually.

b. The effective annual rate is greater than 10 percent.c. The periodic interest rate is 5 percent.d. Statements b and c are correct.e. All of the statements above are correct.

CFGB 6102/7

26. You have determined the profitability of a planned project by finding the present value of all the cash flows from that project. Which of the following would cause the project to look more appealing in terms of the present value of those cash flows?

a. The discount rate decreases.b. The cash flows are extended over a longer period of time, but the total

amount of the cash flows remains the same.c. The discount rate increases.d. Statements b and c are correct.e. Statements a and b are correct.


a. A 5-year RM100 annuity due will have a higher present value than a 5-year RM100 ordinary annuity.

b. A 15-year mortgage will have larger monthly payments than a 30-year mortgage of the same amount and same interest rate.

c. If an investment pays 10 percent interest compounded annually, its effective rate will also be 10 percent.

d. Statements a and c are correct.e. All of the statements above are correct.

28. Ricky has the opportunity to buy a perpetuity that pays RM1,000 annually. His required rate of return on this investment is 15 percent. He should be essentially indifferent to buying or not buying the investment if it were offered at a price of

a. RM5,000.00b. RM6,000.00c. RM6,666.67d. RM7,500.00e. none of the above


a. A good goal for a corporate manager is maximization of expected EPS.b. Most business in the U.S. is conducted by corporations; corporations’

popularity results primarily from their favorable tax treatment.c. A good example of an agency relationship is the one between

stockholders and managers.d. Corporations and partnerships have an advantage over proprietorships

because a sole proprietor is subject to unlimited liability, but investors in the other types of businesses are not.

e. Firms in highly competitive industries find it easier to exercise “social responsibility” than do firms in oligopolistic industries.

CFGB 6102/8

30. A real estate investment has the following expected cash flows:

Year Cash Flows1 RM10,0002 25,0003 50,0004 35,000

The discount rate is 8 percent. What is the investment’s present value?

a. RM103,799b. RM 96,110c. RM 95,353d. RM120,000e. none of the above

31. In 1958 the average tuition for one year at an Ivy League school was RM1,800. Thirty years later, in 1988, the average cost was RM13,700. What was the growth rate in tuition over the 30-year period?

a. 12%b. 9%c. 6%d. 7%e. none of the above

32. Wong Electronics needs to arrange financing for its expansion program. Bank A offers to lend Wong the required funds on a loan in which interest must be paid monthly, and the quoted rate is 8 percent. Bank B will charge 9 percent, with interest due at the end of the year. What is the difference in the effective annual rates charged by the two banks?


33. You want to borrow RM1,000 from a friend for one year, and you propose to pay her RM1,120 at the end of the year. She agrees to lend you the RM1,000, but she wants you to pay her RM10 of interest at the end of each of the first 11 months plus RM1,010 at the end of the 12th month. How much higher is the effective annual rate under your friend’s proposal than under your proposal?


CFGB 6102/9

34. A bank recently loaned Jaafar RM15,000 to buy a car. The loan is for five years (60 months) and is fully amortized. The nominal rate on the loan is 12 percent, and payments are made at the end of each month. What will be the remaining balance on the loan after he makes the 30th payment?

a. RM 8,611.17b. RM 8,363.62c. RM14,515.50d. RM 8,637.38e. none of the above

35. Badrul just bought a house and have a RM150,000 mortgage. The mortgage is for 30 years and has a nominal rate of 8 percent (compounded monthly). After 36 payments (3 years) what will be the remaining balance on his mortgage?


36. A 30-year, RM175,000 mortgage has a nominal interest rate of 7.45 percent. Assume that all payments are made at the end of each month. What will be the remaining balance on the mortgage after 5 years (60 monthly payments)?

a. RM 63,557b. RM165,498c. RM210,705d. RM106,331e. none of the above

37. Nora has been offered an investment that pays RM500 at the end of every 6 months for the next 3 years. The nominal interest rate is 12 percent; however, interest is compounded quarterly. What is the present value of the investment?


38. Which of the following is not considered a capital component for the purpose of calculating the weighted average cost of capital (WACC) as it applies to capital budgeting?

a. Long-term debt.b. Ordinary shares.c. Accounts payable and accruals.d. Preferred shares.

CFGB 6102/10

39. Ali Brothers is estimating its WACC. The company has collected the following information:

Its capital structure consists of 40 percent debt and 60 percent common equity. The company has 20-year bonds outstanding with a 9 percent annual coupon

that are trading at par. The company’s tax rate is 40 percent. The risk-free rate is 5.5 percent. The market risk premium is 5 percent. The stock’s beta is 1.4.

What is the company’s WACC?


40. A company’s balance sheets show a total of RM30 million long-term debt with a coupon rate of 9 percent. The yield to maturity on this debt is 11.11 percent, and the debt has a total current market value of RM25 million. The balance sheets also show that that the company has 10 million shares of stock; the total of common stock and retained earnings is RM30 million. The current stock price is RM7.5 per share. The current return required by stockholders, rS, is 12 percent. The company has a target capital structure of 40 percent debt and 60 percent equity. The tax rate is 40%. What weighted average cost of capital should you use to evaluate potential projects?


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0607 - Midsem1 Ans for My Exam Study