ZI

Student’s Index
Number:UNIVERSITY

OF GHANA
(All rights reserved)

BSC. ADMINISTRATION
SECOND SEMESTER EXAMINATION S — 2021/2022

DEPARTMENT OF DISTAN CE EDUCATION

FINC 302: BUSINESS FINANCE (3 CREDITS)

IN STRUCTION S:

SECTION A: L
ANSWER ALL QUESTIONS IN SECTION A. CIRCLE THE CORRECT
ANSWERS ON THE QUESTION PAPER AND WRITE THEM ON THE
ANSWER TEMPLATE PROVIDED AT THE END OF THE QUESTIONS.

SECTION B:
ANSWER ALL QUESTIONS IN SECTION B. ANSWER SECTION
2 B IN A
SEPARATE ANSWER BOOKLET.

TIME ALLOWED: THREE (3) HOURS

INDEX NUMBER: .................................................................................

 Student's Index Number:..........................................................

SECTION A: ANSWER ALL QUESTIONS

1. A company has a debt-to—equity ratio of 3:2. lt’s cost of equity is 20% and corporate tax
rate is 25%. What is the weighted average cost of capital for the company if its bond
investors expect a yield of 12% on their investment?
A. 13.4% h
B. l 1%
C. 9%
D. 3%
E. None ofthe above is correct.

2. The market risk premium is 20% and the risk-free rate is 5%. The beta of Asset D is 0.2.
What is Asset D’s expected return under the CAPM?
A. 30%
B. 20%
C. 8%
D. 3%
E. 9%
. . 3. lfthe coupon rate is less than the yield to maturity ofthe bond, the bond will sell
A. At Seasoned par value
B. l\/lore than its par value
C. At Par value
D. Less than its par value
E. None ofthe above

4. The type ofprovision which allows an early retirement of an issued bond is classified as
A. Sinking fund provision
B. Floating provision
C. Put provision
D. Retired provision
E. None ofthe above

5. A company has a total equity size of GHS 75,000.00. However, debt constitutes 45% of its
capital structure. 1t’s cost of equity is 20% and corporate tax rate is 35%. What is the
weighted average cost of capital for the company if its bond investors expect a yield of
18% on their investment?
A. 17.43%
B. 15.00%
C. 15.26%
D. 16.27%
E. None ofthe above is correct.

Examiner: Dr. Matthew Ntow-Gyamfi Page 2 of 12

 Student's Index
Number:6.

A company projects to pay dividend of GHS 200.00 per share on its preferred stocks at the
end ofthe year. 1fthe price per share of the preferred stocks is GHS 1,200.00, what is the
cost of preferred stocks?
A. 12%
B. 15%
C. 12.5°Vo
D. 16.67%
E. 8.00%

7. Executive Fruit has issued debt, preferred stock and common stock. The market value of
these securities are GHS 4mi1, GHS 2mil, and GHS 6mil, respectively. The required ‘
returns are 6%, 12%, and 18%, respectively. Assume a corporate tax rate of 35%.
Determine the WACC for Executive Fruit, lnc.
A. 12.8%
B. 12.3%
C. 15.3%
D. 15.8%
E. None ofthe above is correct.

2 8. The rate of required return by bondholders is used for the estimation of

· A. Cost ofdebt
B. Bond tax yield
C. Cost of internal capital
2 D. Cost of reserve assets
1 E. None ofthe above
9. Bonds issued by small companies tend to have all
A. High liquidity premium
B. Low default premium
C. High inflation premium
D. All the above
E. None ofthe above
10. Nyameye Co. Ltd. is a norma1—growth company that expects to earn 15% on reinvested
earnings. Ifthe company pays 30% of its earnings as dividends, what will be the stock’s
dividend growth rate?
A. 9.1%
B. 10.5%
C. 17.0%
D. 3.9%
E. None ofthe above

Examiner: Dr. Matthew Ntow-Gyamfi Page 3 of 12

 Student's Index
Number:1

1. Which ofthe following best describes the constant—growth

A. It is the formula for the present value ofa finite, unevendividend
cash
discount model?
B. lt is the formula for the present value ofa growing annuity flow stream
C. lt is the formula for the present value ofan ordinary
annuity
D. It is the formula for the present value ofa growing perpetuity.
E. None ofthe above

12. Consider a graph with beta on the horizontal axis and

The line that connects the risk—free rate and the optimalexpected
risky
return on the vertical axis.
A. the capital market line portfolio is called:
B. the characteristic line.
C. the indifference curve
D. the security market line
E. None ofthe above

13. Which ifthe following best describes market risk?

A. unique risk and non-diversifiable risk
B. systematic risk and diversifiable risk
C. non—diversifiable risk and systematic risk
D. systematic risk and unique risk
E. None ofthe above
14. The beta ofthe market portfolio is always equal to:
A. 0.5
· B. 0.1
C. -1.0
D. 0
E. 1.0
15. To achieve maximum diversification in a two-asset
stocks with correlation of: portfolio, investors should choose
A. -1.0
B. +1.0
cr 0
p. -0.5
+0.5
16. In capital budgeting, the estimated benefits from a
instead of income flows because: project are expressed as cash flows
A. it is simpler to calculate cash flows than income flows.
B. it is cash, not accounting income, that is
C. this is required by the Internal Revenue central to the firm's capital budgeting decision.
Service.
D. this is required by the Securities and Exchange
E. None ofthe above Commission

Examiner: Dr. Matthew Ntow·Gyamfi

Page 4 of 12
.
Student's Index Number:
................17.
A profitability index of 0.85 for a project means
A. the present value of benefits is 85% greater that:
B. the project's NPV is greater than
than the project's costs.
zero.
C. the payback period is less than one year.
D. the project returns 85 pesewas in present
value for each Ghana cedi invested.
E. None ofthe above
18. A capital investment is one that
A. has the prospect oflong—term benefits.
B. has the prospect of short~term benefits
C. is only undertaken by large corporations
D. applies only to investment in fixed assets.
E. None ofthe above

19. Which ofthe following statements is correct?

A. Ifthe NPV ofa project is greater than 0,
B. lfthe IRR ofa project is 0%, its NPV, its P1 will equal 0.
0. using a discount rate, k, greater than 0, will
C be
C. lfthe Pl ofa project is less than 1, its
D. lfthe Pl ofa project is less than 1, its NPV should be negative.
E. None ofthe above NPV should be positive.

20. lfeapital is to be rationed for only the

current period, a firm should probably first
selecting projects by descending order consider
A. net present value of.........
B. payback period
C. internal rate of return
D. profitability index
E. discounted payback period
21. A bond that sells below its face value is
A. Present value bond classified as a
B. Discount bond
C. Coupon issued bond
D. Par value bond
E. None of the above
22. XYZ company Ltd wants to purchase
a
issuer promises to pay annual coupon5-year bond with a par value ofGHS 1,000.00.
of 8%. However, the market expects The
maturity of 10%. How much should the company a yield to
A. 918.24 pay for the bond?
B. 924.18
C, 942.18
D. 981.24
E. None ofthe above is correct.

Examiner: Dr. Matthew Ntow—Gyamfi

Page 5 of 1,2
 Student’s Index
Number:23.

The length of time a firm must wait to recoup, in present value

invested in a project is referred to as the: terms, the money it has
A, Payback period.
B. net present value.
C. average accounting return.
D. Discounted payback
E. internal rate of return.
24. Holding all other things equal, as the relative amount of debt in the
the firm increases, the cost of equity capital will capital structure of
A. lncrease
B. Decrease
C. remain the same
D. first increase and then decrease
E, None ofthe above
25. Dividends: what are they?
A. Distribution ofa company’s after—tax earnings (or accumulated
shareholders in proportion to the number of shares. earnings) to
B. Distribution ofa company’s before-tax earnings (or accumulated
shareholders in proportion to the number of shares. earnings) to
C. Distribution ofa company’s Earnings before interest and tax (EBIT)
earnings) to shareholders in proportion to the number of shares. (or accumulated
D. None ofthe above
E. All ofthe above
26. ............is the model that determines the present value ofa stock
next annual dividend, the dividend growth rate, and the applicable based on its
A. Zero growth model discount rate.
B. Dividend growth model
C. Capital pricing model
D. Earnings capitalization model
E. Discounted dividend model

27. lf an investor’s required rate of return increases and all other

characteristics ofa stock
remain the same, the value ofthe stock will...........
A. Remain the same
B. lncrease
C. Decrease
D. Double
E. None ofthe above '

Examiner: Dr. Matthew Ntow—Gyamfi

Page 6 of 12
 Student’s Index Number: ..........................................................

28. Which of the following is NOT an example of systematic risk?

A. Income taxes are increased across the board
B. Inflation increases at the national level
V C. Consumer spending on entertainment decreased nationally
D. All the above
E. None ofthe above
29. Which ofthe following events is Iikely to encourage a company to increase its target debt
ratio, all things being equal?
A. lncrease in Corporate tax rate
B. increase in Personal tax rate
C. Decrease in Corporate tax rate
D. lncrease in l\/lonetary Policy Rate
E. None ofthe above
30. Which ofthe following is a type of equity security that has a fixed dividend and a priority
status over other equity?
A. Senior bond
B. Debenture
C. Warrant
D. Common stock
E. Preference stock

3l. A bond is a legally binding agreement between a borrower and a lender that specifies the:
A. Par (face) value
B. Coupon rate
C. Coupon payment
D. l\/laturity Date
E. All the above

32. On a bond certificate, the amount that will be repaid after the maturity period is called
A. Par (face) value
B. Coupon
C. Dividend
D. l\/Iaturity Date
E. All the above

33. Term structure is the relationship between time to maturity and ........
A. Par (face) values
B. Coupon rates
C. Yields
D. l\/Iaturity Dates

I
Examiner: Dr. Matthew Ntovv—Gyamfi Page 7 ef 12
 Student’s Index Number: ..........................................................

E. All the above

34. All the following are disadvantages of the IRR, EXCEPT ..........
A. Does not distinguish between investing and borrowing
B. IRR may not exist, or there may be multiple 1RRs
C. Problems with mutually exclusive investments
D. Easy to understand and communicate
E. None ofthe above
35. lftwo projects are completely independent (or unrelated), the measure of correlation
between them is:
A. 0
B. -1
C. +1
D. -0.5
E. +0.5
36. A company hasjust paid a dividend of GHC 2.50 per share on its common stock. The
company is expected to maintain a constant growth rate of 6% into the foreseeable future.
Ifthe stock sells for GHC 50 a share, what is the company’s cost of equity?
A. 12.46%
B. 8.56%
C. 11%
D. 1 1.3%
E. 6.5%
37. Sir Prince Holdings Company has a beta of 0.95. The market risk premium is 7.5% and
Treasury Bills are currently yielding 7%. What is the firm’s cost of equity?
A. 7.48(Vo
B. 15.89%
C. 14.50/0
Ü. 14.13Vo
E. 15.45%
38. Queen Gee is considering a project that will produce cash inflows of GHS 2,100 a year
for 4 years. The project has a 12 percent required rate of return and an initial cost of
GHS 5,000. What is the discounted payback period?
A. 2.97 years
B. 3.11 years
C. 3.26 years
D. 4.38 years
E. The project will never be paid off

Examiner: Dr. Matthew Ntow-Gyamfi Page 8 of 12

l
Student’s Index
Number:39.

The capital structure of ABC Ltd is made

up of60% equity and 40% debt. The
equity and debt are 20% and 15% respectively. cost
before and after tax weighted average cost lfthe tax rate is 25%, the company’sof
A. 13% and 17.5% of capital are ..... and .... respectively.
B. 18% and 35%
C. 35% and 60%
D. 18% and 16.5%
E. 35% and 16.5%
40. The cost of equity capital is all ofthe
A. the minimum rate that a firm should following EXCEPT:
investment. earn on the equity-financed part of an
B. a return on the equity-financed portion
market price ofthe stock unchanged. of an investment that, at worst, leaves the
C. by far the most difficult component
D. generally lower than the before—tax cost to estimate.
E. None ofthe cost of debt.
above

Examiner: Dr. Matthew Ntow-Gyamfi

Page 9 gf 12
 _ Student's Index Number:
.......SECTION

A: ANSWER SHEET
QN ANSWER
QN2
22 —
2 — 22 —
ui2 — 22M —
Ü- = 22 —
K1 22 — 22 —
Ü- — 22 —
22 —
22 — 22 —
22 — 22 —
22 — 22 —
22 — 22 —
22 — 22 —
22 — 22 —
22 — 22 —
22 — 22 —
22 22 —
22 ÄTÄ
 Student’s Index
Number:SECTION

B: ANSWER ALL QUESTIONS IN THIS SECTION.

QUESTION 1.
A. Consider the following scenario analysis
Probability Stock Bond
Recession 0.2 -5% l4%
Normal 0.6 I5% 8%
Boom 0.2 25% 4%

i. Calculate the expected rate of return and standard deviation for each investment. (6
marks)
ii. Which investment would you prefer? (2 marks)
iii. Compute the covariance between the two securities. (3 marks)
_ iv. What is the expected rate of return and standard deviation ofa portfolio with weights
of 60% in Stocks and 40% in Bonds? (6 marks)
v. Would you prefer to invest in the portfolio, in stocks only, or in bonds only? (2 marks)

B. Explain the various forms of efficient market as postulated by the Efficient

Market
Hypothesis (EMH). (6 marks)

QUESTION 2
A. Mergers and acquisitions and other forms of corporate restructurings
continue to be
indispensable tools in building the emerging generation of re—engineered companies.
Discuss the economic and dubious reasons often cited for mergers and acquisitions. ‘
(16
marks)
B. What four (4) anti-takeover strategies can be employed as defenses
against a hostile
takeover? (4 marks)
 Student's Index Number:..........................................................
l
QUESTION 3
Determine ifthe following securities are (i) underpriced, (ii) efficiently priced or (iii) overpriced,
according to the Capital Asset Pricing l\/lodel (CAPl\/1), in a market with a risk·free rate of 8% and
a market portfolio return of 15%.

P
Actual Return u Beta
Fankyiniko Co. Ltd. 15% 0.80
One-Legged—Chair Co. Ltd.
20.6%(15 Marketing Co. Ltd.
13%In-Your-Face
marks)