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Diploma in FinancialManagement
PAPER DB1, INCORPORATING SUBJECT AREAS– FINANCIAL STRATEGY– RISK MANAGEMENTTUESDAY 2DECEMBER 2003QUESTION PAPER
Time allowed
3 hoursThis paper is divided into three sectionsSection A
ALL 20 questions are compulsory and MUST beanswered
Section B
THREE questions in total to be answered.
and
Candidates MUST answer ONE question from
Section C
Section B, ONE question from Section C and ONEfurther question from either Section B orSection C.
Present Value Rates are on page 2.
M o d u l e B
The net present value of £1 receivable at the end of n years at 10 per cent
n10%
01·0010·9120·8330·7540·6850·622
Section A – All 20 questions are compulsory and MUST be attempted.
Each question within this section is worth 2 marks.Please use the Candidate Registration Sheet provided to indicate your chosen answer to each multiple choice question.
1
Calcite Ltd used the NPV and IRR methods of investment appraisal to evaluate a project that has an initial cash outlayfollowed by annual net cash inflows over its life. After the evaluation had been undertaken, it was discovered that thecost of capital had been incorrectly calculated and that the correct cost of capital figure was in fact higher than thatused.
What will be the effect on the NPV and IRR figures of correcting for this error?
Effect onNPVIRR
A
DecreaseDecrease
B
DecreaseNo change
C
IncreaseIncrease
D
Increase No Change
2
A business evaluates an investment project that has an initial outlay followed by annual net cash inflows of £10 million throughout its infinite life. The evaluation of the inflows produced a present value of £50 million and aprofitability (present value) index of 2·0.
What is the internal rate of return and initial outlay of this project?
IRRInitial outlay%£m
A
2025
B
20100
C
4025
D
10100
3
Quartz plc pays an annual dividend of 30 pence per share to shareholders, which is expected to continue inperpetuity. The average rate of return for the market is 9% and the company has a beta coefficient of 1·5. Therisk-free rate of return is 4%.
What is the expected rate of return for the shareholders of the company and the predicted value of the shares inthe company?
Expected Predictedrate of returnvalue(%)(pence)
A
23·5705
B
17·5171
C
16·5182
D
11·52613[P.T.O.
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