Multiple choice questions finance

1)Which one of the following is a working capital management decision?

d. determining whether to pay cash for a purchase or use credit

2)A company raises new equity by issuing stocks while it raises new debt financing by issuing
bonds

3)Long run objective of financial management.

b. Maximize the value of firms equity

4)A 2 yr investment of 100 earns an annual interest rate of 8% compounded twice a year. How much earned
in 1 and 2 yr?
c. 8,16; 8,83

5)Currently the bond market requires a return of 11,6% on bonds. What is 11,6%?
c. YTM

6)Which one of the following is true?

a. A 20 yr treasury bond has a greater interest risk than a 1 yr bond.

7)Stocks are different from bonds, because..

c) Stocks, unlike bonds represent residual ownership

8)New bond has a 7% coupon, semi annual, Bonds are priced at face value. YTM needs to be:
b. 7%

9)Which is true?
a. Interest payment reduces tax expenses

10) Company has a 12 % rate of return. No dividends for 15 years, then 2$. At that time the company
expects to grow 7% forever. What is the stock price?
c. 42,80

12) Payback period:

4 year project with costs of 100,000 with future cash flows of 50,000, 40,000, 30,000
And 20,000, we will accept the payback period if it is 31 month.
Will we accept it?
-> Yes, because it pays back in 28 month

13) When the NPV is positive the IRR is ______ the required rate of return
-> greater than

14) If a project has a NPV of 0, then…

-> a decrease in the projects initial costs will cause the project having a positive NPV

15) A company is thinking about investing in a project that is more risky than the overall risk
What should be used as a discount rate of NPV?
-> Weighted average cost of capital plus adjustments

16) EBIT is 50,000, depreciation is 10,000 and tax rate is 15%, What is the OFC?
-> 44,000
17) In _____ efficient markets, current prices already reflect price history, volume and public
information
-> Semi- strong

18) What is the expected return and the standard deviation?

Pi Ri
1 0.2 10 %
2 0.6 15 %
3 0.2 20 %

-> expected return= 0.15

-> std. dev= 3.16
(for the exact calculations take a look at the photo)

19) Which should earn most risk premium?

-> the highest beta with 1.38

20) A company spends last week 1,200€ in repairing a machine? What costs are this?
-> Sunk costs

21) Given is the price=60€, variable costs=32€, fixed costs= 9,000€, required return with 12%
Initial investment= 18,000, use a straight line depreciation over 4 years, ignoring
Taxes, which statement is true?
-> The cash break even quantity is around 321 units
-> 9,000/(60-32)=321.43

22) In calculating the WACC for the proportional amount of equity financing employed by a firm we should
use…
-> the current market price per share of common stock times the number of shares
Outstanding

Open questions

OPEN QUESTION 1
a)
1. invest 2.000.000 in 4 stocks
2. portfolio return of 13,075%
3. 400.000 invested in a 15% stock
4. 600.000 in a 12 % stock
5. 350.000 in a 11% stock
6. rest of the money in puka puka stock
How much return stock Puka puka should provide so that you earn the portfolio return? (i.e. 13,075)

b) invested 700.000 in phillips (rate of return of 16% and beta of 1,5) and is considering 300.000 in
government bonds which is a risk-free asset (with rate of return of 4%).
What would be the impact on risk (calculate) of adding the government bonds to the portfolio ?

OPEN QUESTION 2
Exons mobile price dropped to 20€ overnight. given the dividend growth rate of 4% forever and the last
annual dividend of 1,2.
a) What is the dividend yield and capital gain yield?
b) suppose market risk premium is 6%, the risk free rate is 3% and inflation rate is 2%. what is the real
return from this stock? what is the risk premium of this stock?

OPEN QUESTION 3
Huffmann system just spend 20,000 on a market research showing that a new home alarm system can be
profitable. The company starts to make following forecast.
Sales: 60,000 at 40 per unit
Production cost 50% of sales price
Additional fixed costs at 200,000& manufacturing costs of 2,400,000 and will be depreciated to 0. Project
lasts 3 yrs.
Company has to make an investment of 40,000 at the beginning.
Investors require 10% return.
Tax rate is 30%
What is the NPV of the project?

OPEN QUESTION 4
WACC
Given is the debt equity ratio by 0.6, the tax rate is 0.35 and no preference shares are used. Moreover, the pre
tax cost of debt are 0.1. There are 25,000 shares of equity outstanding with a market price of 20€ per share.
The beta is 1.2, the market risk premium is 8.5% and the risk free rate is 3.6%.
What is the WACC?

Answers to open questions

OPEN QUESTION 1
a) 2.000.000 - 400.000 - 600.000 - 350.000 = 650.000 invested in Puka puka

Pukas weight in portfolio: 650.000 / 2.000.000 = 32.5 %

0,13075 = 0,20 x 0,15 + 0,3 x 0,12 + 0,175 x 0,11 + 0,325 x puka

puka = 0,14 = 14 %

b) Portfolio beta: phillips weight x phillips beta + risk free asset x risk free beta
= 0,7 x 1,5 + 0,3 x 0 = 1,05

beta measures risk, systematic risk is reduced for the portfolio

OPEN QUESTIONS 2
a) next dividend = 1,2 x 1,04 = 1,248
dividend yield = next dividend / current price
1,248 / 20 = 0,0624 = 6,24 %

stock price p0 = d1 / (r-g)

20 = 1,248 / (r - 0,04) so total return r = 0,1024
 capital gains yield = total return - dividend yield
0,1024 - 0,0624 = 0,04

b) real return = nominal rate / inflation rate - 1

1,1024 / 1,02 - 1 = 8,08 %

risk premium = nominal return - risk free rate

= 10,25% - 3% = 7,24

OPEN QUESTION 3
Sales = 40 x 60.000
Cost = 20 x 60.000
fixed cost = 200.000
Depr. = 2.400.000 / 3 = 800.000
gross income = 200.000
net income = 200.000 x 0,7 = 140.000

OPEN QUESTION 4
Market value of equity:
E= 25,000*20= 500,000
Re=using CAPM= 0.036+1.2*0.085=0.138
Market value of debt:
D/E= 0.6, so D/500,000=0.6
D= 300,000
Overall value V= 500,000+300,000=800,000
Rd= 0.1

WACC= E/V*Re +D/V*Rd*(1-T)

WACC= 500,000/800,000*0.138 + 300,000/800,000*0.1+(1-0.35)= 11.06%