UNIVERSITY OF LAGOS

SCHOOL OF POSTGRADUATE STUDIES

M.sc Finance

Qualifying Entrance Examination

2010/2011 SESSION

Time Allowed: 60 Minutes

Instructions:

Answers all questions, shade the correct answers to

the questions and in the computer sheets
provided. Write your number as your
examination number and your course of study in
the spaces provided in the computer sheet.

1. What is the profitability index for the following set of cash flow if
discounted at 10%?
Year 0 1 2 3 4
Cash flow (N) -12,500 9,000 2,000 3,000 5,000
A. 1.26
B. 1.22
C. 1.52
D. 0.22

2. In the business environments for firms, risk may not arise from one of
these sources
A. General economic environment
B. Technological development
C. Harmonious labour climate
D. Change in customer preferences

3. Individuals who are given a choice between more or less risky

investments with identical expected monetary benefit would prefer the
later are said to be?
A. Risk -averters
B. Risk-seekers
C. risk-indifferent
D. gamblers

4. The cost of each type of capital funds to a firm over time depends upon
A. The risk free cost of the given type of capital funds only
B. the risk free cost of the type of funds and the financial risk of the firm

pg. 2
C. the risk free cost of the type of funds, the business and the financial
risk of the firm
D. Changes in the supply and demand for the given type of funds

5. one of the following is not an appropriate definitions of a projects cost

of capital?
A. it is the discount rate for discounting a project's cash flows
B. it is the minimum acceptable rate of return on funds committed to
project
C. It is more or less a compensation for time and risk in the use of capital
by a project
D. it is the required rate of return on the aggregates of a firms projects

6. Which of these approaches to weighting in the estimation of a firm's

weighted average cost of capital is most inferior theoretically?

A. Based on book value weights

B. Based on target capital structure
C. Based on current market value weights
D. Based on cost of specifics source of financing.

7. Suppose an ordinary share of TaTa Plc currently trading at N250 on the

stock market is expected to earn a dividend of N0.15 this year. Assuming
subsequent dividend of the company are expected to grow at an annual
rate of 8%. Calculate the cost of the company’s ordinary shares.

A. 14.00%
B. 14.50%
C. 6.50%
D. None of the above.

8. Which of these statements is correct?

A. leverage is the use of fixed cost to magnify the returns to shareholders

of the firm
B. Increase in a firm leverage leads to a decrease in its return and risk
C. changes in leverage don’ts result in changes in the degree of
uncertainty associated with a firm's ability to meet its fixed payment
obligations
pg. 3
D. the amount of leverage in a firm capital structure doesn’t affect value.

9. Suppose the firms has a weighted average cost of capital of 101/2%

assuming it has net operating earnings of N20,000 and a debt stock worth
N15,000 issued at 8% rate of interest per annum, what is the market
value of its equity?

A. N175,476.19
B. N179,048.00
C. N35,500.00
D. N90,476.20

10. What the firm equity cost of capital?

A. 10.50%
B. 9.87%
C. 10.71%
D. 8.77%

11. Which of the method of issuing new ordinary shares directly to existing
shareholders of the firm?

A. an offer for sale

B. An offer for sale by tender
C. a public issue
D. a right issue

12. A firm is considering leasing an equipment worth N2 million for which

it will be required to make 20 equal end-of-year instalment payments. If
interest is at the rate of 15%, what will be the annual payments?

A. N19,523.00
B. N122,201.00
C. N300,000.00
D. N319,525.00

pg. 4
13. The effect of a decrease in the ratio of current liabilities to total assets
of a firm is to

A. decrease its profitability only

B. increase both profitability and risk
C. decrease both profitability and risk
D. decrease risk only

14. The net present values of a project have been estimated as follows

Discounted rate (%) Net Present Value (N'000)

10 20
15 12
16 -6

Using the above data determine the best approximation of the project
internal rate of return
A.17.0% B. 15.7% C. 18.7% D. 18.9%

For questions 15 and 16

Given the following data for a proposed project

Initial cost outlay N75,000

Annual savings in operating costs N18,000
Salvage value N3,000
Useful life 7 years
Cost of capital 12%

15. What is the project' NPV?

A. N7,148 B. N8,505 C. N5,791 D. N18,004

16. Ignoring the salvage value of N3,000, what is the project's Internal
rate of return?
A. 14.0% B. 12.0% C. 14.95% D. 16.2%

pg. 5
17. the size and importance of the finance function in a business firm
depends primarily on the
A. profitability of the firm's operation
B. financial structure of the firm
C. size of the firm
D. custom and practice in the country in which the firm is domiciled

18. Wealth maximization is considered superior to profit maximisation as

an objective of the firm on the following basis with the exception of

A. Recognition of the prospect of a firm in the short-run

B. Explicit consideration of risks in investments
C. Recognition of the importance of distributing returns to shareholders
D. Recognition of the perception of shareholders about the returns
realizable from their investments

19. The estimates of a projects after-tax cash flows and probability

distribution are as follows:

After -tax cash flows (N'000) Probability

50 0.2
30 0.3
10. 0.3
-5 0.2

If the expected life of the project is 3 years, the initial cost is N35,000 and
the risk-adjusted after tax discount rate is 20%, what is the rate

A. N13,450 B. N9,237 C. N28,000 D. -N6,667

For Questions 20-21

The equipment to produce a new product whose demand is estimated at

4000 units annually will cost N45,000. There will be no salvage value for it
at the end of 5 years. The new product is expected to sell at N10 per unit
and involve labour and material costs of N4 and N3 per unit respectively. If
the cost of capital is 12%

pg. 6
20. At what level of sales volume will the project's NPV be zero?
A. 3,121 units B. 4161 units C. 1783 units D. 1248 units

21. At what level of sales revenue per unit will the project's NPV be zero?

A. N3.88 B. N7.12 C. N10.12 D. N6.12

22. Which of these characteristics does not distinguish equity capital from
debt capital?

A. Debt capital involves a legal obligation to pay interest practically and

make full repayment of principal as a specified future date
B. suppliers of equity capital have residual claim on their firms income
and assets
C. Dividend payments to suppliers of equity capital are not treated as tax
deductible expenses
D. debt capital is long-term capital

23. Which of these statements does not appropriately explain how

dividend decision is a financing decision?

A. Payment of cash dividend is usually decision of the firm’s board of

directors
B. Payments out of earnings in form of dividend results in the reduction
of a firm’s cash flows
C. Retention of earnings permits a firm to eliminate certain existing
sources of earning
D. Retention of earnings enables a firm to avoid raising a given amount
of funds from outside.

24. Alhaji Bello has a 36-month car loan of N50,000 at 12% interest rate
per annum. What is the monthly loan repayment?

A. N1,661.00 B. N14,817.00 C. N11,389.00 D. N846.00

25. a firm has a N1 million bond issues outstanding. Assuming it can earn
8% per annum on its investment. How much would it need to invest each
pg. 7
year in order to accumulate enough money to retire the bond at the end of
20 years( to the nearest Naira)?

A. N101,853.00 B. N214,548.00 C. N21,852.00 D. N50,374.00

For questions 26-33

The data below have been extracted from the financial statement of Bee
Plc.

N'000
Sales (credit) 5,640
Gross profits 4,060
Net profits after tax 760
Debtors 930
Stocks 1,250
current assets 2,410
Current liabilities 4,370
Total assets 4,620

26. What is the firms gross profit margin?

A. 19% B. 13% C. 32% D. 5.3%

27. What is the firms net profit margin?

A. 5.3% B. 32% C. 13% D. 19%

28. What is the average collection period (assuming a 360day year)?

A. 22 days B. 80 days C. 58days D. 5days

29. What is its total assets turnover?

A. 1.2 B. 0.82 C. 0.16 D. 0.23

30. What is firms stock (inventory) turnover?

pg. 8
A. 0.6 B. 1.1 C. 6.1 D. 0.82

31. What is the firms return on investment (ROI)?

A. 0.16% B. 0.23% C. 1.2% D. 0.82%

32. What is the current ratio?

A. 1.08 B. 1.76 C. 0.57 D. 3.40

33. What is the quick (acid test) ratio?

A. 1.08 B. 0.18 C. 0.85 D. 2.70

34.If the revenue of a sugar producing company is R = X2 + 2x-48 where

x is kilograms of sugar sold. When R = 0, what is (are) the unit(s) of sales

a. -4kg, -12kg
b. -6kg, 8kg
c. 8kg
d. -8kg, 6kg
e. 6kg

35. The revenue function of a firm is given by R = 4p2 + 5p + 100 where

P is the price per unit in naira, find the revenue when P is 20 naira.

a. N100
b. N20
c. N500
d. N1,800
e. N1,600

pg. 9
Use the following information to answer the next two questions

A philanthropist deposited N20 m with an insurance company just before

he died with an instruction to pay 40% of the sum deposited to a
motherless babies home one year after the man's death and thereafter,
the insurance company should pay 40% of what was paid in the previous
year.

Original sum=N20 million

Rate of payment is 40%=0.4

36. What was the total amount paid to the motherless babies' home 5
years after the death of the man?

(a) N8m
(b) N40m
(c) N8.24m
(d) N82.48m
(e) N0.82m

37. What is the maximum cumulative amount of money (in million naira)
that the motherless babies’ home can ever collect from the insurance
company correct to two places of decimal?

(a) Uncountable amount

(b) N13.33m
(c) N15.25m
(d) N8.33m

38. A company has 420 employees, out of these, 310 participate in at least
one of the company’s two payroll savings plans. If 250 participate in plan
A and 200 participate in plan B, how many participate in both payroll
savings plan?

a. 310
b. 280
c. 30
pg. 10
d. 450
e. 140

39. A house costs N1.5 billion. A buyer is required to make a deposit of

25% and then pay the balance later. If the balance is to be paid in five
equal instalments, the amount of each instalment is

a. N300,000
b. N125,000
c. N375,000
d. N225,000

40. The retirement age for workers in a company is 60 years. For each
additional year of service after retirement the company pays N2000 as
benefits in addition to the salary. One of the employees is now twice as old
as his son while the sum of the ages of the father and the son is 111
years. How much will the company pay to the father this year as benefit?

a. N74,000
b. N28,000
c. N140,000
d. N111,000

41. Adenike deposited N9000 in a savings account

paying 10% interest compounded annually. How
much will she have in the account at the end
of 6 years?

A. N15944.00 B.N69440.00 C.N39,198.00

D.N5081.00

42. Mr Banji a civil servant wishes to determine

the sum of money he will have in his savings
account by depositing N10,000 at the end of
each year for the next 6 years. If annual
interest rate is 11%, how much will be in his
account?

pg. 11
A.N18,704.00 B.N79,129.00 C. N37,833.00 D.
N39,593.00

43. A woman sells an item for N4,620 at a profit of 40%. Find the price at
which he bought the item
a. N2776
b. N3300
c. N1848
d. N1320
e. N1840

44. A person has N10,000 invested in a company. If the investment is

worth half as much at the end of each year as it is at the beginning f the
year, in how many years will it be worth less than N1,000N
a. 2
b. 3
c. 4
d. 5

45. Which of the following is not a reason why

ordinary shares as a source of finance are
said to place minimum construction on issuing
firm?

A. Dividends don’t have to be paid and their non-

payment doesn’t affect the recipient of
payments by other suppliers of finance.
B. Ordinary shares don’t have maturity hence
entail no repayment obligations
C. Their more permanent nature enhances the
borrowing power of the issuing firm
D. Dividends on ordinary shares are not tax-
deductible expenses to the issuing firm.

46. Preference shares are sometimes referred to as

hybrid securities because...

pg. 12
 A. they are part of the risk bearing ownership
of the firm
B. they come in different varieties
C. they carry prior right to a fixed dividend
and seniority of claims over ordinary
D. they hear both features of pure equities and
debt capital

47. A firm has a N1 million bond issues outstanding. Assuming it can earn
8% per annum on its investment. How much would it need to invest each
year in order to accumulate enough money to retire the bond at the end of
20 years ( to the nearest Naira)?

A. N101,853.00 B. N214,548.00 C. N21,852.00 D. N50,374.00

48. Financial decisions are usually influenced or determined by:

A. The timing of the returns and the associated risks

B. The timing of the returns and the amount involved and the associated
risks
C. The timing of the returns arising from such decision only
D. The amount involved and the timing of the returns

49. Which of these statements is not in support of the relevance of

dividend policy argument?
A. A firm’s dividend carries information on the soundness of its
management and its profitability
B. Dividend policy merely changes the form in which investors receives
their returns
C. Dividend is synonymous with the proverbial "bird in the hand being
worth more that two in the bush"
D. Differential taxation on capital gain and dividend influence firms to
develop their clientele of shareholders

50.A Man took a building loan of N40,000.00 at 2%

compound interest for 3 years. If he pays the
amount and interest at equal annual

pg. 13
 instalments, how much does he pay every year.
Express your answer in thousand naira,
(a) 14.43
(b) 13:33
(c) 13.87
(d) 13.00

51. which of these statements does not appropriate explain the importance
of inventory (stock) management in business firms?

A. Inventory (stock) usually constitutes a significant part of a firm's total

assets
B. It is the liquid of a firm current assets
C. Changes in the level of inventory (Stock) affect the operations of a
firm
D. The need for inventory varies with the time of year.

52. A firm uses 25,000 units of raw materials 800 units are placed on
order each time. if stock out is estimated at 250 and management accepts
a stock -out probability of 30% at a cost of N2.80 per unit. What is the
total stock-out cost?

A. N6, 562.50
B. N26.30
C. N15,312.50
D. N2.3

53. An equipment purchased for y Naira depreciates at 10% annually

and is sold as a scrap when its present value is less than 1/5 of its
purchase value. After how many years will the equipment be
discarded?
(a) 14
(b) 15
(c) 16
(d) 17

54. An Accountant resolves to deposit N500.00 in a new savings account

on the last day of each month starting from July 1997. How much will be
in this account on the 1st of March 1999, assuming no interest is earned?
a. N10,000
b. N8,500
pg. 14
c. N110,000
d. N9,500

55. The total asset of a young man grew from N20m in 1975 to N40m in
1995. What is the annual constant growth rate?

a. 2.5% b. 5% c. 50% d. 1.25% e. 1%

56. Which of these factors is not usually of primary concern to a firm

intending to raise new finance through an equity issue to the public?

A. The issue cost involved B. The obligation to pay dividends

C. The dilution of ownership control D. The pricing of the issue

57. Which of the following factors will not tend to an increase in a firms
profit margin?

A. Lower cost of goods sold while selling remains constant

B. Higher selling prices and constant cost of goods sold
C. A proportionate increase in the volume of higher margin items sold
D. Larger sales volume resulting from a reduction in selling prices while
cost of goods sold remain constant

58. Which of these statements does not appropriately explain how

dividend decision is a financing decision?
A. Payment of cash dividend is usually decision of the firm’s board of
directors
B. Payments out of earnings in form of dividend results in the reduction
of a firm’s cash flows
C. Retention of earnings permits a firm to eliminate certain existing
sources of earning
D. Retention of earnings enables a firm to avoid raising a given amount
of funds from outside.

pg. 15
59. A worker in Mr Biggs finds that 3 fowl and 6 ducks will cost N3081, but
5 fowl and 3 ducks will cost N2475. Find the cost of a duck and a fowl
respectively.
a. N342.33, N342.33
b. N200.22, N413.50
c. N200.00, N312.50
d. N267.00, N380.00

60. Stag enterprises called for bids for the supply of heavy equipment.
Two contractors A and B with chance of ¼ and 2/5 respectively of being
shortlisted made quotations for the supply of the equipment. Find the
probability that only one of the two will be shortlisted.
(a) 3/20
(b) 9/20
(c) 6/20
(d) 7/20

pg. 16