STUDENT NAME: ______________

STUDENT ID. NUMBER: ______________

TUTORIAL TIME & DAY: _________________________________________________

READ THESE INSTRUCTIONS BEFORE COMMENCING:

 DO NOT open this paper until instructed to do so.
 This is a closed book test and ONLY non-programmable calculators
can be used.
 A formula sheet is attached to this test paper.
 This test comprises 7 multiple choice questions (each MCQ is worth
one mark). Choose the one alternative that best completes the
statement or answers the question. In addition, there are 7 practical
questions.
 You are required to show all workings to the practical questions. If
calculations are NOT shown no marks will be awarded.
 Students have 60 minutes to complete the test.
 Answers to the MCQ must be transferred to the boxes below. Answers
NOT transferred below will not be MARKED
 Answers to the practical questions are to be written in ink in the space
provided.
 This test is worth 15% of your final assessment.
 Misconduct of any sort will result in an automatic fail of this
assessment and the incident will be escalated to the University board.

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1. You are given two choices of investments, Investment A and
Investment B. Both investments have the same future cash flows and
same time period. Investment A has a discount rate of 4%, and
Investment B has a discount rate of 5%. Which of the following is
true?

A) The present value of cash flows in Investment A is lower than the present
value of cash flows in Investment B.
B) The present value of cash flows in Investment A is equal to the present
value of cash flows in Investment B.
C) The present value of cash flows in Investment A is higher than the present
value of cash flows in Investment B.
D) No comparison can be made - we need to know the cash flows to calculate
the present value.

2. A company releases a 10-year bond with a face value of $1,000 and

8% coupons paid semi-annually. If market interest rates imply an
YTM of 9%, which of the following is TRUE?

A) The bond price will be less than the par value.

B) The bond price will be more than the par value.
C) The bond price will be equal to the par value.
D) None of the above

3. Financial management is the study of:

A) Maximisation of profit.
B) Creation of money.
C) Computing corporate tax liability.
D) Creation of shareholder wealth.

4. Which of the following statements is FALSE?

A) In relation to coupon bonds the coupon rate can change, whilst the yield to
maturity is fixed over the life of a bond.
B) Coupon bonds typically make two types of payments to their holders.
C) The time remaining until the repayment date is known as the term of the
bond.
D) Bonds are a security sold by governments and corporations to raise money
from investors today in exchange for promised future payments.

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5. Which of the following statements are true in relation to how i (interest rate
per period) and n (number of periods) affect the present value (PV)?

A) Both i and n exhibits a negative (inverse) relationship with PV.

B) Both i and n exhibits a positive (direct) relationship with the PV.
C) i exhibits a positive (direct) relationship with PV, whilst n exhibits a negative
(inverse) relationship with PV.
D) n exhibits a positive (direct) relationship with PV, whilst i exhibits a negative
(inverse) relationship with PV.

6. Put the following steps of the financial cycle in the correct order:

I. Money flows to companies who use it to fund growth through new

products
II. People invest and save their money
III. Money flows back to savers and investors

A) III, II, I
B) II, III, I
C) I, II, III
D) II, I, III

7. The purpose of the dividend imputation system in Australia is to:

A) Reconcile the economic and accounting views of the firm.

B) Make dividend income subject to one levy of tax.
C) Solve the agency problem.
D) Increase the tax rates on company profits.

8. You purchase a second-hand car for $40,000 and pay an $8,000 deposit and agree
to pay the remaining balance of the loan over the next 5 years that include
principal payments plus 8% p.a. interest compounded semi-annually on the
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 unpaid balance. What will your semi-annual payment be? (2 marks)

9. Andrew plans to start his university education four years from now. To pay for
his education, he has decided to save $1,200 a quarter for the next four years in a
bank account paying 8% per annum interest, compounded quarterly. How much
will he have at the end of the fourth year? (2 marks)

10. You plan to purchase property in Melbourne 4 years from today at an estimated
purchase price of $750,000. The funds for the property will be accumulated by
making equal annual deposits in your savings account, which earn 8% p.a.
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 interest. If you make your first deposit at the end of this year and you would like
your account to reach $750,000 when the final deposit is made, what will be the
amount of each annual deposit?
(2 marks)

11. You can buy a bond for $1,000 that will pay no coupon interest during its 8-year
life and have a value of $2400 at maturity. What yield does this bond pay?
(1
mark)

12. Assuming you are a rational investor and are offered the following choices of
cash inflows, which would you select? (Hint: You need to determine the PV of
these cash flows).
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 (i) $350 per quarter for 6 years at 8% per annum compounded quarterly.
(ii) $11,200 at the end of 6 years at 10% per annum compounded semi-
annually. (2.5 marks)

13. You are a shareholder in a corporation which has announced a profit of $6 per
share before taxes. Once it has paid taxes it will distribute the rest of its profits to
you as dividend payments. The corporate tax rate is 30% and your personal tax
rate is 22%. How much is left for you after all taxes are paid/refunded?
(2
marks)

14. How much do you have to deposit today so that, starting 13 years from now, you
can withdraw $12,000 a year for the next 4 years (years 13 to 16). Assume a
discount rate of 9% p.a., compounded annually. (3 marks)

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 Formula Sheet
Present value of a perpetuity Present value of a growing perpetuity
c c
PV  PV 
r rg
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Future value of a single amount Present value of a single amount

FVn  C (1  r ) n c
PV 
(1  r ) n
Future value of an ordinary annuity Calculating interest rate or growth rate

1
 
1

FVn  C  1  r  n  1  FV  n
i  1
r  PV 

Present value of an ordinary annuity Effective annual interest rate

1 1  APR m
PV  C  1   EAR  (1  ) 1
r  (1  r ) n  m
Determining amount of the annuity payment when Determining amount of the annuity payment
PV is known when FV is known

PV FV
c c
1
1 
1 

1
r
 
(1  r ) n  1
r  (1  r ) n 


Yield to maturity of an n-year zero-coupon bond Price of a zero-coupon bond

1
 Face Value  n
YTM n    1
 Pr ice   Face Value 
P n 
 (1  ytm) 

Price of a coupon bond Yield to maturity of a coupon bond

1 1  FV
PV  CPN  1 n  + YTM ≈ I + [(F – M) / n]
y  (1  y )  (1  y ) n
(F + M) / 2