City University of Hong Kong Final Examination Course code & title: CB3410 Financial Management Session + Semester A, 2013-2014 for all seetions Time allowed Two hours ‘This paper has SEVEN pages (include the cover page) ‘The examination consists of two parts . Part | contains 20 multiple choice questions with 40 marks. Part 2 contains 5 short questions with 60 marks. |. You must do all questions. ‘This isa elosed-book examination. Candidates ore allowed to se the following materials/aids: Cateulator Materias/aids other than those stated above are not permitted. Candidates will be subject to disciplinary action if any unauthorized materials or aids are found on them. —$$<$— Do Not Take Away] | NOT TO BE TAKEN AWAY BUT FORWARDED 70 LIBPart 1: Multiple Choice Questions (40 Marks, 2 Mark each) 1. reduction in the sales ofan existing product eased bythe introduction of «new produc isan empl of 0) snk cost ‘opportunity cos. Fixed cor None of the above The two flaws ofthe intemal rate of eur ule re [A abirary detrminaton ofa discount ate an flue to consider iii expenditures. 1. arbitrary determination ofa diecount ste and flue to correctly analyze mutually ccs invennent projets, C arbitrary determination ofa discount ate and the mule rate of ret proble, D, flue to consider initial expendiures and fare to comely analyze mutually cxclsive investment projets E flue wo coneety analyze mutual multiple ae of return problem exclusive iavesiment project and he 53. The problem of multiple IRs can occur when ‘A. ther is only one sign change inthe eash flows the fit eat flow i abvay’s postive the ash flows decline over the if ofthe projet. there is more than one sign change inthe eash flows E, None oftheabove ‘Which ofthe following statements is core? "The ikfes rte of etm has ask premium of 1.0 “The reward for bering risk icalled the standard deviation Risks and expected return ae inversely related ‘The higher the expected rate of return, the wider the distribution of returns Risk premioms ere inversely elated tothe andor deviation of etm 5, One yer age you purchased 100 shares of tock. Tis moring you sold those Shares and reali a ttl return of 82 percent. Given this information, you know for sure the ‘A stock price increased by 8.2 percent over he ls yea. "Hook need in vale ove the pst yar: C. stock paid a dividend. . dividend yield spear than zero . sum ofthe dividend yield and the capital gin yield i 8.2 percent‘Which one ofthe following isthe best example of systematic sk? Diseovery ala major gs eld Desreaseintextile imports Increase ia svieultural exports Decrease in gross domestic product Decrease inmanagement bones for banking exeutives, mopees 7. Which one ofthe following terms refers tthe best option that was foregane when 4 particular investment is selected? AN Side effect, 8. Erosion C. Sunk cost 1. Opportunity ost E, Marginal cost 8 Portfolio dvestcation eliminates which one of the fllowing? [A Toa investnent gk 1B. Ponti risk premium Cc Market risk 1 Uneystematis isk Reward for tearing 7 9. All else consant, an increase ina F's cos of deb: ‘A could be caused by an increase in the fs x ate 'B, will result nan increase in the ims cost of capital. will lower ths Tim's weighted average cos of expt ‘will lower te firm's cox of equity wll increasethe Fimis capital structure weight of debt 10.The Dll House has pre-tax cost of debt af 79 percent and a retun on asst of 1177 percent The debtasset ati is OS. Ignore taxes. What he cost of equity? Aa B.14,03% cia D. 148% E 149896 11. The level of financial sk to which firm is exposed is dependent upon the Fins Ask rate Bi deb-equity mo, ret on ast, D level of earings befor intrest and taxes E operational keel of isk. 12. A pontolioconains four assets. Asso | has beta of 8 and comprises 30% of ‘he porto, ASet2 has & bea of |. and comprises 30% ofthe potoio, Ase 3 has bet of 1S and comprises 20% of the portoi, Asset 4 has beta of 16 and comprises the venaiing 20% ofthe polio Ifthe rskest rate is expected to be 396sind the market rik premium is 6%, what isthe beta ofthe poli? ‘A080 B10 C19 D135 lad 13. Liberty ences is now atthe end ofthe fina year ofa projest. The equipment ‘iginaly coat $22.50, of which 13% hus been depreciated. The fin can sell te ‘sed equipment today for $600, and its tax rate 40%, What isthe equipments afer salvage vale for use in capital budgeting analysis? Note tat ifthe ‘suipment’ fal market vale les than its book value, the firm wil recive 3a edie as a resutof these, $5538 8.53850 rary D.$6.450 B.$6,772 1M. Tagart Ines stock has 50% chance of producing a 25% retun, 3 30% chance ‘of producing 210% return and 20% chance of producing 228% rer, Wha the nm’ expected rate of ret? Aoai% 965% 990% D. 10.15% Elosose 15. Laveme Indstres stock has btaof 1.25. The company jst pid a dividend of $0.15, andthe dividends are expected wo grow at 46. The moat ecent stock prices ‘81, What i the cost of equity using the dividend growth model method? 43.15% Ba26% C49 Ds.6% E5056 16. You hav $1,000 to invest ina stock portfolio. Your ehoiees are Stock X with an ‘expected rtumof 13% and stock Y with an expected return of 10% IF your goal sto ‘rete a portfolio with an expected turn of 124%, how much money wil you invest in Sock X? 4.811.000 859,000 c.s8.000 D.$6,000 $3,000,17 Which one af the following i th slope of the security market ine? ‘A Risk rate 2B Market risk premium Reta coeticent 'D Risk premium onan individual asset Market ate af eum 18. Which one af the following is the pre-tax cor of deb? ‘A. Average cowpon rte onthe ims outstanding bonds ‘8. Coupon rateon the ems atest bond ise . Weighed average yel-to-maurty on the firms outstanding debt 'D Average curent yield on the fem’ outstanding debt Annual interest divided by the market price per bond forthe test bod issue 19. Which ofthe flowing i ot a elevant item to consider in ash flow estimation? ‘Aca change in current eset invested inthe projec. B. achange in urentlisbilies to Finance new iventvies CC regular meting fees forthe Board of directors incared when vote onthe project, D. any net charges ia working esptl over he ie ofthe invest E.Alloftheaboe, 20. Which of te following doesnot characterize NPV? ‘A. NPV does rot incorporate sk nt the analysis B. NPV incorporates all relevant information, CCLNPV uses al ofthe project’ cash ows 1D. NPV discounts al futireeath flows E Using NPV wil ead to decision that maximize sharsholder weltPart 2: Short Questions (60 Marks) 1 Favre, le, us paid a dividend of $2 per share on its stock. The dividends are ‘expected to grow at constant rate of 3 percent per year indefinitely. investors require I2percent rctum on Favre stock, what the curent price? What will the price be in ive years? (aris) 2. You deve purchase a brand-new car and you ned to pay $31,900 now to buy the ear. Hovever, you hve only $4,000 now andthe emining a the cr pice should be faanced (bowed, Iyou borrow rom the ea dealer (option 1) you {21.9% APR inaning for 60 montis (yu wil pay buck te borrowed money ty 60 equa monthly ayeents) you desig nt 1 boro fo the dealer, the ear ean fer you 2 $2,500 dsount now in he epic option 2). Ifyou ‘choose the eptin 2, the remaining ofthe ea rice afer discount canbe borrowed frm local bank with 6 59% APR francng or 60 months. How misch so you need to pay monthly fortwo options? ‘(2mars) 3. You are considering the following two mutually exclusive projets ” A 8 © § (67.00) $ (67.00) 1 S 1800 $ 37.00 2 S300 S 2800 3 5 3100 $ 19.00 (tthe requieed ret is 13 percent, which pojet has the higher NPV? (i) Tthe required eur is 9 percent, which peoject asthe higher NPV? Gil) Which project sth quicker payback time? (Assume that the es Sows, in ech yar afer the initial one, come smoothly over the year) (iv) othe extern of payback ime nd NPV disagree, fr required return ‘9% oF 13% If they disagree then expan which eierion bet. (02 marks) 4. Weare evaluating projec that requires $1.68 million in ina capital Investment has a 5-year lif, nd hs no salvage value, Assume depreciation is staight-line to zero over te life ofthe project Sales are projected at 82,000 units per year. Price per unit is $43.2, variable cost per units $22.18, and Fxed ‘cots are (23,000 pe year. The ax rat is 30 percent, and we requitea 10 erent retum on this project. Ignore investment in net working capt () What iste NPV ofthe project” (i) Please show all the steps to obtain NPV ofthe project. (2 macs)5 Using the following data to answer he questions (6mats) ‘+The company ha etaget apt stuctre of 40% debt and 60% equity ‘Bonds with face value of 1,000 pay 10% coupon eemi-annul), mature in 20 years, and sel for $849.54 ‘+The company stock betas 12 1 Rishi rate is 10%, and market sk premium is, ‘+The company is» constane-growth fi that jst pid m ividend of $2.00, sell forS27 per sare, ani asa grow rte of 96 ‘+ Yield to Maturiy is 12%. ‘© Thecompany's marginal tx te ie 40% 1) The company’s alert cost of debt is (4k) 1) The company’s cos of equity using the Capital Asse Pricing Mode! (CAPM) spprach ie (marks) ) The companys cos of equity using the dividend growth model is: (4 mass) 4) The company's Weighed Average Cost of Capital (WACC), using the ost of aut fom CAPM is (darks) Formulas Present value of annuity with C received each year for'T years PV=Cir [1- U(042)"] Capital Asset Pricing Model Re=Rr +Be(Ru-Rr) Cost of equity from Dividend Growth Model Re=D,/Po-e.