November 13, 2020 [SAMPLE FINAL EXAMINATION PAPER]

ROYAL INSTITUTE OF MANAGEMENT

TERM EXAMINATION PAPER (SAMPLE)

Name:________________________________ Student No: __________________

Unit : Business Finance PG

Time Allowed : 2 Hours

Marks for this paper : 40

Course : Master of Business Administration

Term : 3rd

INSTRUCTIONS FOR STUDENTS

1. You are not allowed to carry anything into the examination hall other than a non-
programmable calculator and financial table.
2. Write your name and student No. in the space provided for both question paper and the
answer booklet.
3. Read the instructions carefully before answering the questions. There are two sets of
questions, Set A and Set B. All the questions from Set A are compulsory. From Set B, you can
choose to answer ANY FOUR of six questions.
4. Write your answers in the answer booklet only.
5. At the end of the exam, hand over both question paper and answer booklet.

1 MBA/Business Finance (sample examination paper) | Royal Institute of Management

 November 13, 2020 [SAMPLE FINAL EXAMINATION PAPER]

Set A (12 Marks)

Answer all the questions.
1. What is money market? How does it work? (2)
2. What are efficient markets? What determines the price of an individual security in such
a market? (2)
3. What is the difference between present value and future value? (1)
4. What is the term structure of interest rates, and how is it related to the yield curve? (2)
5. What is the difference between an ordinary annuity and an annuity due? Which always
has greater future value and present value for identical annuities and interest rates?
And why? (2)
6. What role does an investment banker play in a public offering of securities? (2)
7. When is the coefficient of variation preferred over the standard deviation for comparing
asset risk? (1)

Set B (28 Marks)

Choose and answer any FOUR (4) questions.

Question 1
1.1. Briton Company has an outstanding issue of $1000 par value bonds with a 14% coupon
interest rate. The issue pays interest annually and has 15 years remaining to its maturity
date.
a. If bonds of similar risk are currently earning 12% rate of return, how much should the
Briton Company bond sell today? (2 ½ )
b. If the required return were 14% instead of 12%, what would be the current value of
Briton Company’s bond? (1)

1.2. The Atilier Industries Ltd. currently sells company’s bond for $920 which has a face
value (or par value) of $1000. The bond has a stated coupon interest rate of 10% per
annum. If this bond has a maturity period of 10 years, what would be the yield to the
maturity (YTM) on this bond to the investors? (3 ½ )

Question 2
2.1. You plan to retire exactly 30 years from now. To supplement your retirement you
estimate that you need to accumulate Nu.2,200,000 by the end of 30 years from today. You
plan to make equal annul end-year deposits into a bank account paying 8% annual interest.
a. How large must the annual deposit be to create Nu. 2,200,000 by the end of 30
years? (2)
b. If you can afford to deposit only Nu. 6000 per year into the account, how much will
you have accumulated by the end of the 30th year? (2)
2 MBA/Business Finance (sample examination paper) | Royal Institute of Management
 November 13, 2020 [SAMPLE FINAL EXAMINATION PAPER]

2.2. A retirement home at Old-age Nursing Homes now costs $85,000. Inflation is expected
to cause this price to increase at 6% per year over the 20 years before Mrs. Brookes retires.
How large an equal end-of-year deposit must be made each year into account paying an
annual interest of 10% for Mrs. Brookes to have the cash to purchase a home at
retirement? (3)

Question 3
Lawrence Industries’ most recent annual dividend was $1.80 per share, and the firm’s required
return is 11%. Find the market value of Lawrence’s shares when.
a. Dividends are expected to grow at 8% annually for three years followed by a 5%
constant growth rate from year 4 to infinity. (4)
b. Dividends are expected to grow at 6% annually to infinity. (2)
c. Dividends are expected to remain same till infinity. (1)

Question 4
Jackson Company Ltd. is contemplating the purchase of a new high-speed widget grinder to
replace the existing grinder. The existing grinder was purchased two years ago at an installed
cost of $60,000. It was being depreciated using the prime costs method (straight line method)
over an effective life of five years. The existing grinder is expected to have a usable life of five
more years. The new grinder would costs $105,000 and require $5000 in installation costs; it is
has a five-year usable life and would be depreciated using the prime costs method (straight line
method) over an effective life of five years. The existing grinder can currently be sold for
$70,000 without incurring any removal costs. To support the increased business resulting from
purchased of the new grinder, accounts receivable would increase by $40,000, inventories by
$30,000 and accounts payable by $58,000. At the end of five years, the existing grinder is
expected to have market value of zero; the new grinder would be sold to net $29,000 after
removal costs and before taxes. The firm pays a tax rate of 40%.

The estimated profits before depreciation and taxes over the five years for both the new and
existing grinders are given below:
Profits before depreciation and taxes
Year New Grinder Existing Grinder
1 $43000 $26000
2 $43000 $24000
3 $43000 $22000
4 $43000 $20000
5 $43000 $18000

a. Calculate the initial investment associated with the replacement of the existing grinder
by the new one. (2 ½)
b. Determine the incremental operating cash inflows associated with the proposed grinder
replacement. (3 ½)
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 November 13, 2020 [SAMPLE FINAL EXAMINATION PAPER]

c. Determine the terminal cash flow expected from the proposed grinder replacement. (1)

Question 5
Tashi Industries is in the process of choosing the better of two equal-risk, mutually exclusive
capital expenditure projects – A and B. The relevant cash flow for each projects are given
below. The firm’s cost of capital is 16%.
Project A Project B
Initial investment (II) Nu.285,000 Nu. 270,000
Year (t) Net cash inflows (CFt)
1 Nu. 90,0000 Nu.130,000
2 100,000 120,000
3 110,000 100,000
4 111,000 90,000
a. Calculate each project’s payback period (2)
b. Calculate the net present value (NPV) for each project (4)
c. Summarize the preferences dictated by each measure and indicate which project you would
recommend. Explain why? (1)

Question 6
Three projects – X, M and P – are currently being considered by Damchen Group of Companies.
The following probability distributions of expected returns for these projects have been
developed.
Project X Project M Project P
I Pri Return, ki Pri Return, ki Pri Return, ki
1 0.10 40 % 0.40 35 % 0.10 40 %
2 0.20 10 % 0.30 10 % 0.20 20 %
3 0.40 0% 0.30 -20 % 0.40 10 %
4 0.20 -5 % 0.20 0%
5 0.10 -10 % 0.10 -20 %
a. Calculate the expected value of return, k, for each of the three projects. Which provides
the largest expected return? (3)
b. Calculate the standard deviation, σ, for each of the three projects’ returns. Which
appears to have the greatest risk? (4)

___________________________________________________________________End of Paper

GOOD LUCK

4 MBA/Business Finance (sample examination paper) | Royal Institute of Management