finance mid sem

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finance mid sem

© All Rights Reserved

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You are on page 1of 10

THIS PAPER MUST NOT BE REMOVED FROM THE EXAM CENTRE.

NAME:

_______________________

TUTORS NAME:

_______________________

TUTORIAL TIME:

_______________________

_____________________________________________________________________

MID-SEMESTER EXAM

SPRING SEMESTER 2009

SUBJECT NAME

SUBJECT NO.

: 25300

DAY/DATE

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 to

ensure 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 Purpose

Answer Sheet. Ensure you correctly enter your name and student number on

this sheet. Neatly write your answers to Part B in the space provided on the

exam 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.

Page 1

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)

b)

c)

d)

e)

$681,818

$449,135

$498,540

$404,626

$390,000

2. Suppose that interest rates and the firms required rate of return increase. This

would NOT change the capital budgeting choices a firm would make if it:

a)

b)

c)

d)

e)

uses net present value analysis.

uses internal rate of return analysis.

uses profitability indexes.

uses both net present value and internal rate of return analysis

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)

b)

c)

d)

e)

$1.00

$1.07

$1.48

$2.20

$1.91

Page 2

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

taken in which order?

I.

II.

III.

IV.

a)

b)

c)

d)

e)

collection of data

reevaluation and adjustment

evaluation and decision making

search for and discovery of investment opportunities

IV, I, III, II

IV, I, II, III

IV, II , I , III

II , IV, I , III

IV, I, III only

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

a)

b)

c)

d)

e)

funds flow to the issuer from the investor

it represents a secondary transaction to the underwriter

it is an asset for the borrower

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)

b)

c)

d)

e)

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

interest rates, in general, have increased.

interest rates, in general, have decreased.

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)

b)

c)

d)

e)

that have a positive net present value.

that have positive cash flows.

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

that have positive IRRs

Page 3

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

a)

b)

c)

d)

e)

unlimited liability

limited liability

no liability

liability equal to the profits for the year

liability that is limited to the amount of interest

a)

b)

c)

d)

e)

One period before the final payment.

One period before the first payment.

One period after the first payment.

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)

b)

c)

d)

e)

The coupon payment

The face value

The yield to maturity

All of the above

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.

Page 4

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

a)

b)

c)

d)

e)

drawer

acceptor

primary market

discounter

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)

b)

c)

d)

e)

12.18 percent p.a.

11.96 percent p.a.

18 percent p.a. compounded annually

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)

b)

c)

d)

e)

$15.00

$15.60

$16.80

$18.25

$18.98

Page 5

Neatly write your answer to each question in the space provided. Show all working

because 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 halfyearly. 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

11.05125 27

.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 coupon

rate. So you shouldve expected to get a bond price of less than $2 million even

before you started the calculations]

b)

(1 mark)

Just two of an infinite number of answers:

Must maintain a minimum liquidity ratio of 4

Must not exceed a leverage ratio of 55%

Page 6

Question 2 (3 marks)

You wish to accumulate $70,000 in fifteen years time by investing a certain number

of equal-sized amounts of money every three months. You make the first investment

in 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-sized

investments?

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

40

60

i = 8% 4 = 0.02

n = 39

Converting all money to quarter 60 (i.e. 15 years) we have that 70,000 equals the

future value of 39 payments.

1. 0239 1

70,000 = PMT

1.02

0.02

PMT = 808.90

Page 7

20

Question 3 (3 marks)

TGV Ltd requires short-term finance of approximately $500,000 for a period of 120

days. 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)

500000

1 + 0.0472

120

365

= 492,359.66

b) An investor purchases the bill in a) above and sells it in 90 days time. If market

rates have risen to 5.31%, what is the sale price? (1 mark)

500000

1 + 0.0531

30

365

= 497,827.29

No. Bills are discount securities and therefore the difference between the current price

and the face value represents the interest.

Page 8

Question 4 (3 marks)

Cal.I.Fornia Ltd (CIF) is listed on the Australian Securities Exchange (ASX) and you

want 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 the

dividend will be $0.80. Dividends are then predicted to increase by 3% each year

thereafter. If the required return is 9.25% what is CIFs current share price?

0.20

0.50

0.50

0.80

|______|______|______|______|______|___

0

| g = 3% p.a.

The current share price is the present value of all future dividends. The dividend paid

this year, D0, is ignored in the calculation.

D3 and D4 are both discounted to time zero:

0.50

0.50

+

= 0.3834 + 0.3510 = 0.7344

3

1.0925

1.09254

The present value of D5 and after can be valued using the constant growth formula

which will give a price at year 4.

5

0.80

=

0.0925 0.03

= 12.80

4 =

12.80(1.0925)-4 = 8.9851

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

P0 = 0.7344 + 8.9851 = $9.72

0.50

0.50

12.80

+

+

3

4

1.0925

1.0925

1.09254

= $9.72

P0 =

Page 9

Question 5 (3 marks)

One Star Productions is considering two mutually exclusive investment proposals. The

companys benchmark payback period is two years and the required rate of return is

14%. The two projects cash flows appear in the following table:

Project

Alpha

Omega

a)

Year 0

-20,000

-30,000

Year 1

25,000

5,000

Year 2

0

5,000

Year 3

-5,000

30,000

Calculate the payback period for each project and state which project would you

select using the payback method. (1 mark)

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 select

using the NPV decision criteria. (1 mark)

NPVAlpha = 20000 +

25000

NPVOmega = 30000 +

1.14

5000

1.14

5000

1.14 3

5000

= $1,445.03

+ 1.14 2 +

30000

1.14 3

= $1,517.55

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

c)

Page 10

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