Finance Mid Sem

7/25/2019 Finance Mid Sem

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Cover Type B

TO BE RETURNED AT THE END OF THE EXAMINATION.

THIS PAPER MUST NOT BE REMOVED FROM THE EXAM CENTRE.

NAME: _______________________

STUDENT NUMBER: _______________________

TUTORS NAME: _______________________

TUTORIAL TIME: _______________________

_____________________________________________________________________

MID-SEMESTER EXAM

SPRING SEMESTER 2009

SUBJECT NAME : Fundamentals of Business Finance

SUBJECT NO. : 25300

DAY/DATE : Monday 21 September 2009

TIME ALLOWED : 10 minutes reading time followed by 2 hours exam time

START/END TIME : 12 pm - 2:10 pm

NOTES/INSTRUCTIONS TO CANDIDATES:

1. Write your details at the top of this exam paper. Include your tutorial details toensure your marked exam paper will be returned in your nominated tutorial.

2. All questions are compulsory.3. The paper is marked out of 30.

Part A: 15 multiple-choice questions worth 1 mark each (total 15 marks).Part B: 5 short answer questions worth 3 marks each (total 15 marks).

4. Use a pencil to indicate your answers to Part A on the General PurposeAnswer Sheet.Ensure you correctly enter your name and student number onthis sheet. Neatly write your answers to Part B in the space provided on theexam paper. Show all workings.

5. Financial calculators are allowed.6. A single sheet of A4 paper containing any form of information in any format

on both sides is permitted.


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PART A: MULTIPLE CHOICE QUESTIONS (15 MARKS)Use a pencil to indicate your answers on the General Purpose Answer Sheet.

1. You would like to have enough money saved to receive a $75,000 per year

perpetuity that starts exactly four years from today. How much would you

need to invest today to achieve this goal? The interest rate is 11% p.a.

a) $681,818

b) $449,135

c)

$498,540

d)

$404,626

e) $390,000

2.

Suppose that interest rates and the firms required rate of return increase. Thiswould NOT change the capital budgeting choices a firm would make if it:

a) uses payback period analysis.

b) uses net present value analysis.

c) uses internal rate of return analysis.

d) uses profitability indexes.

e) uses both net present value and internal rate of return analysis

3.

If an investor purchases shares cum-rights, it means that:

a) the investor will not participate in the rights issue.

b)

the investor will participate in the rights issue.

c) the investor will participate in the rights issue without having to pay the

subscription price.

d) the investor has to buy the right on the market

e) the investor cannot sell the right separately.

4.

Outback Industries Ltd just paid a dividend of $1.00 per share. The dividends

are expected to grow at 20% per year for the next four years and then grow 6%

per year thereafter. Calculate the expected dividend in year 5.

a)

$1.00

b)

$1.07

c)

$1.48

d) $2.20

e)

$1.91


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5. An appropriate capital budgeting process requires that the following steps are

taken in which order?

I. collection of data

II. reevaluation and adjustment

III.

evaluation and decision making

IV. search for and discovery of investment opportunities

a)

IV, I, III, II

b)

IV, I, II, III

c)

IV, II , I , III

d)

II , IV, I , III

e)

IV, I, III only

6.

When a security is sold in the financial markets for the first time, then:

a)

funds flow from the borrower to the investor

b)

funds flow to the issuer from the investor

c) it represents a secondary transaction to the underwriter

d) it is an asset for the borrower

e)

funds flow from investor to investor

7.

You have just purchased a government bond for $2,100 that promises to pay

$110 per year over the next six years. The market price of the bond has just

increased to $2,300. A likely reason for this is:

a)

the face value of the bond has been increased.

b)

the bond is perceived by the market to be more risky now than before.

c) interest rates, in general, have increased.

d) interest rates, in general, have decreased.

e) the coupon payment has been reduced

8.

Assuming that a firm has no capital rationing constraint and that a firm's

investment alternatives are not mutually exclusive, the firm should accept all

investment proposals

a) for which it can obtain financing.

b)

that have a positive net present value.

c)

that have positive cash flows.

d)

that provide returns greater than the after-tax cost of debt.e)

that have positive IRRs


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9.

Under a sole proprietorship, the owner has ________ for business debts.

a)

unlimited liability

b) limited liability

c) no liability

d) liability equal to the profits for the year

e) liability that is limited to the amount of interest

10.When is the present value of an ordinary annuity determined?

a)

At the same time as the final payment.b) One period before the final payment.

c) One period before the first payment.

d) One period after the first payment.

e) At the same time as the first payment.

11.Which of the following features of a bond is not necessarily constant for the

life of the bond?

a)

The coupon rate

b) The coupon payment

c) The face value

d) The yield to maturity

e) All of the above

12.The reason cash flow is used in capital budgeting is because

a)

cash rather than income is used to purchase new machines.b)

cash outlays need to be evaluated in terms of the present value of the resultant

cash inflows.

c)

to ignore the tax shield provided from depreciation ignores the cash flow

provided by the machine which should be reinvested to replace old worn out

machines.

d)

cash is more important than profits in capital budgeting

e) all of these.


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13. Upon maturity, the _________ must pay the bill's owner the face value.

a) drawer

b)

acceptor

c)

primary marketd)

discounter

e)

borrower

14.

A credit card has an interest rate of 18 percent p.a. and charges interest

monthly. The effective rate on this card is:

a)

18 percent per month

b)

12.18 percent p.a.

c)

11.96 percent p.a.d)

18 percent p.a. compounded annually

e)

19.56 percent p.a.

15.Marble Books Ltd. is expected to pay an annual dividend of $1.80 per share

next year. The required return is 16 percent and the growth rate is 4 percent.

What is the expected value of this stock five years from now?

a)

$15.00b) $15.60

c) $16.80

d) $18.25

e) $18.98


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PART B: SHORT ANSWER QUESTIONS (15 MARKS)Neatly write your answer to each question in the space provided. Show all workingbecause if you make a mistake then you may still receive some marks.

Question 1 (3 marks)

a) Exactly eighteen months ago BHP Ltd issued a bond with a 15-year maturity.The bonds face value is $2 million and the coupon rate is 8.5% p.a. paid half-yearly. The bond matures on 24 March 2023 and the YTM. is 10.25% p.a.compounded half-yearly. What is the current bond price? (2 Marks)

FV = 2,000,000

PMT = (0.0852) * 2000000= 85000

n = 13 * 2 = 27

i = 0.10252 = 0.05125

PV = 85000 11.0512527.05125

+2000000(1. 05125)27= 1,228,344 + 518,761.5

= 1,747,106 (to the nearest whole dollar)

[Note: the bond is trading at a discount because the YTM is greater than the couponrate. So you shouldve expected to get a bond price of less than $2 million even

before you started the calculations]

b) Give one example of a covenant that might appear in a loan agreement.(1 mark)

Just two of an infinite number of answers:Must maintain a minimum liquidity ratio of 4Must not exceed a leverage ratio of 55%


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You wish to accumulate $70,000 in fifteen years time by investing a certain numberof equal-sized amounts of money every three months. You make the first investmentin six months time and the final investment is made in ten years time. If the interest

rate is 8% p.a. compounded quarterly, what is the dollar amount of your equal-sizedinvestments?

Converting the time periods to quarters and writing the amounts on a timeline gives:Note the first investment is made in 6 months time = 2 quarters.

PMT PMT 70,000

|___|___|___________________|_____________|___0 1 2 40 60

i = 8% 4 = 0.02n = 39

Converting all money to quarter 60 (i.e. 15 years) wehave that 70,000 equals thefuture value of 39 payments.

70,000 = PMT 1.0239 10.02

1.0220PMT = 808.90


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TGV Ltd requires short-term finance of approximately $500,000 for a period of 120days. TGV Ltd has prepared a bill and has requested National Australia Bank (NAB)to act as the acceptor. The bill has a $500,000 face value and a maturity of 120 days.

The appropriate market rate is 4.72% p.a.

a) What is the cash inflow for TGV today? (1 mark)

= 5000001 + 0.0472 120365

= 492,359.66

b) An investor purchases the bill in a) above and sells it in 90 daystime. If marketrates have risen to 5.31%, what is the sale price? (1 mark)

= 5000001 + 0.0531 30365

= 497,827.29

c) Do bills have an explicit interest rate? Explain. (1 mark)

No. Bills are discount securities and therefore the difference between the current priceand the face value represents the interest.


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Cal.I.Fornia Ltd (CIF) is listed on the Australian Securities Exchange (ASX) and youwant to calculate CIFs theoretical share price. This year CIF paid a dividend of$0.20 but due to the Global Financial Crisis they will not pay a dividend for the next

two years. They will pay a dividend of $0.50 in year 3 and year 4, and in year 5 thedividend will be $0.80. Dividends are then predicted to increase by 3% each yearthereafter. If the required return is 9.25% what is CIFs current share price?

0.20 0 0 0.50 0.50 0.80

|______|______|______|______|______|___ 0 1 2 3 4 5

| g = 3% p.a.

The current share price is the present value of all future dividends. The dividend paidthis year, D0, is ignored in the calculation.

D3and D4are both discounted to time zero:

0.50

1.09253+

0.50

1.09254= 0.3834 + 0.3510 = 0.7344

The present value of D5and after can be valued using the constant growth formulawhich will give a price at year 4.

4 = 5 =

0.80

0.0925 0.03= 12.80

P4is then discounted to time 0 as follows:

12.80(1.0925)-4= 8.9851

Now, we can add up all the time zero amounts:

P0= 0.7344 + 8.9851 = $9.72

Or, writing the entire value as a single equation:

P0 =0.50

1.09253+

0.50

1.09254+

12.80

1.09254

= $9.72


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One Star Productions is considering two mutually exclusive investment proposals. Thecompanys benchmark payback period is two years and the required rate of return is14%. The two projectscash flows appear in the following table:

Project Year 0 Year 1 Year 2 Year 3

Alpha -20,000 25,000 0 -5,000

Omega -30,000 5,000 5,000 30,000

a) Calculate the payback period for each project and state which project would youselect using the payback method. (1 mark)

Payback PeriodAlpha= 20,000/25,000 = 0.8 years

Payback PeriodOmega= 2 + 20,000/30,000 = 2.67 years

Project Alpha is acceptable because its payback period is less than 2 years.

b) Calculate the NPV of each project and state which project would you selectusing the NPV decision criteria. (1 mark)

NPVAlpha= 20000 + 250001.14

+50001.14 3

= $1,445.03NPVOmega= 30000 + 5000

1.14+

5000

1.14 2+

30000

1.143 = $1,517.55

Neither project is acceptable using the NPV because both have a negative NPV.

c) What is meant by the term, internal rate of return?(1 mark)

It is the discount rate that makes the NPV equal to zero.

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Finance Mid Sem