Student's index Number UNIVERSITY OF GHANA (All rights reserved) UNIVERSITY OF GHANA BUSINESS SCHOOL 2"! SEMESTER EXAMINATIONS : FINC 302: BUSINESS FINANCE I 3 CREDITS September, 2022 Time allowed: 3 hours Instructions: Kindly answer all 100 questions. Citcle the correct answers on the question paper and write them on the answer template provided at the end of the questions. INDEX NUMBER: NAME OF YOUR LECTURER: 1. This merger refers to two firms operating in same industry and producing identical products combining. A. Horizontal B. Vertical C. Conglomerate B H A D. Concentric E, None of the above a z 2. ABC Lid. aquired substan number of equity shares in xz This is referred to as, D. Absorption E. None of the.above Page 1of20 Scanned with CamScannerStudent's Index Number: 3. An acquirer offers to buy shares directly from the shareholders of the target, firm. This is known as a A. Poison pill B. White knight C. Tender offer D. Direct Profit E. Cash Merger 4. Which of the following is not an anti-takeover defence A. Poison pill B. Golden parachute C. Greenmail D. Pac-Man defense E. None of the above 5. It refers to expected cost savings, growth opportunities and other financial benefits that occur as a result of the combination of two companies A. Value creation B. Acceleration C. Synergies D. Speculation E. None of the above 6. Which of the following is not a benefit of synergy from merger? A. Revenue enhancement B. Cost reductions C. Transfer of technology D. No tax benefit E. All the above 7. fan acquisition is made using cash payment then the acquisition is: . Not taxable Viewed as exchanging of shares and is not taxed A tax-free transaction as no capital gains or losses are recognized All the above . None of the above 8. During mergers through stock acquisition, A. No stockholder vote required B. The acquirer can deal directly with stockholders, even if management is unfriendly C. May be delayed if some target shareholders hold out for more money D. All the above E. None of the above 9. All the following are dubious reasons for a merger, except A. Bootstrapping B. Diversification C. Manager's personal incentives D. Increasing market power E. None of the above 40. An offer made by one company to buy the shares of another for a much higher per-share price than what that company is worth is referred to as > hoop fensah E, Ntow-Gyamfi M, Bokpin Page 2 of 20 x Scanned with CamScannerExaminer(s): Mensah A. Bear Hug B. White Squire C. Crown Jewel D. Golden Parachute E. None of the above 11. If PV,g= Value of the combined firm PVa= Value of the Acquirer PVp= Value of the Target firm Which of the following best describes the gain from a merger? A. Gain = (PVa+ PVs) PVas B. Gain= Van (PVa+PVs) C. Gain = (PVa+ PVe) +PVa8 D. Gain = (PVap-PVa) + PVa EB, Gain = (PVan +PVa)+PV5 12. All the following are merger-related activities of investment bankers, except? A. Identifying targets B. Arranging mergers C. Developing defensive tactics D. Establishing a fair value E, None of the above 423, ...vssseu Of a merger is the premium that the acquiring firm pays over and above the value of the firm being acquired. A. Economic Cost B. Net Present Value C. Gain D. Synergy E, Discount 14. Firm A has a value of GHS 100 million and Firm B has a value of GHS 70 million. If Firm A acquires Firm B, the present value of the new firm, Firm AB, will be GHS 200 million. Calculate the gain from the merger. A. GHS 30 million B. GHS 100 million C. GHS 130 million D. GHS 270 million E. GHS370 million. 15. A/An .. is a corporation formed for the sole purpose of owning the stocks of other companies. A. underwriter B. angel investor C. holding company D. venture capitalist E. None of the above 16. Combination of computer system manufacturer with a UPS manufacturer is an example of merger. A. Horizontal B. Vertical 3 Ntow-Gyamfl M, Bokpin G. A, Amoah La, Page 3 of 20 Scanned with CamScannerC. Conglomerate D. Concentric E. None of the above 17. All the following are methods of paying for a merger except 1. Cash 2. Securities 3. Combination of Cash and Securities 4, Promissory note 5. None of the above 18. One year ago, you purchased a stock at a price of GHS 47.50 a share. Today, you sold the stock and realized a total loss of 22.11 percent. Your capital gain was -GHS 12.70 a share. What was your dividend yield? A. 4.63 percent B. 4.88 percent C. 5.02 percent D. 12.67 percent E. 14.38 percent 19. A year ago, you purchased 400 shares of Stellar Wood Products, Inc. stock at a price of GHS 8.62 per share. The stock pays an annual dividend of GHS 0.10 per share. Today, you sold all of your shares for GHS 4.80 per share. What is your total dollar return on this investment? A. -GHS 382 B. -GHS 372 C. -GHS 1,528 D. -GHS 1,488 E. -GHS 1,360 20. One year ago, you purchased 500 shares of Best Wings, Inc. stock at a price of GHS 9.60 a share. The company pays an annual dividend of GHS 0.10 per share. Today, you sold all of your shares for GHS 15.60 a share, What is your total percentage return on this, investment? ‘A. 38.46 percent B. 39.10 percent C. 39.72 percent D. 62.50 percent E, 63.54 percent 21. A stock had returns of 11 percent, -18 percent, -21 percent, 5 percent, and 34 percent over the past five years. What is the standard deviation of these returns? ‘A. 18.74 percent B. 20.21 percent C. 20.68 percent D. 22.60 percent E, 23.49 percent .Amoah L, Flador Page 4 of 20 ‘Examiner(s): Mensah E, Ntow-Gyamfi M. Bokpin G. Scanned with CamScannerStudent’s Index Number: 22. A stock had returns of 12 percent, 16 percent, 13 percent, 19 percent, 15 percent, and -6 percent over the last six years, What is the geometric average retum on the stock for this period? A. 10.90 percent B. 11.18 percent C. 13.56 percent. 9 ~ = ~~~ =~ a D. 14.76 percent E. 15.01 percent 23. Last year, T-bills returned 2 percent while your investment in large-company stocks ‘earned an average of 5 percent. Which one of the following terms refers to the difference between these two rates of return? A. tisk premium B. geometric return C. arithmetic D. standard deviation E. variance 24. The expected return on a stock given various states of the economy is equal to the: A. highest expected return given any economic state. B. arithmetic average of the retums for each economic state. C. summation of the individual expected rates of return. D. weighted average of the retums for each economic sta E. return for the economic state with the highest probability of occurrence. You have a portfolio consisting solely of stock A and stock B. The portfolio has an expected retum of 8.7 percent. Stock A has an expected return of 11.4 percent while stock B is expected to return 6.4 percent. What is the portfolio weight of stock A? A. 39 percent B. 46 percent C. 54 percent D. 61 percent E. 67 percent 25. Which one of the following is an example of unsystematic risk? ‘A. income taxes are increased across the board B. a national sales tax is adopted C. inflation decreases at the national level D. an increased feeling of prosperity is felt around the globe E. consumer spending on entertainment decreased nationally fensah E, Ntow-Gyamifi M, Bokpin G. A, Amoah L, Fiador V, Mensah L. Scanned with CamScannerStudent’s.index Number 26. You want your portfolio beta to be 0.95. Currently, your portfolio consists of GHS 4,000 invested in stock A with a beta of 1.47 and GHS 3,000 in stock B with a beta of 0.54. You have another GHS 9,000 to invest and want to divide it between an asset with a beta of 1.74 and a risk-free asset. How much should you invest in the risk-free asset? A. GHS 4,316.08 B. GHS 4,425.29 C. GHS 4,902.29 D. GHS 4,574.71 E. GHS 4,683.92 27. According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the: A. amount of total risk assumed and the market risk premium, B. market risk premium and the amount of systematic risk inherent in the security. tisk fee rate, the market rate of retum, and the standard deviation of the security. D. beta of the security and the market rate of return, E. standard deviation of the security and the risk-free rate of return. 28. The stand-alone principle advocates that project analysis should be based solely on which one of the following costs? A. sunk B. total C. variable D. incremental B. fixed 29. Which one of the following is an example of a sunk cost? A. GHS 1,500 of lost sales because an item was out of stock B. GHS 1,200 paid to repair a machine last year C. GHS 20,000 project that must be forfeited if another project is accepted D. GHS 4,500 reduction in current shoe sales if a store commences selling sandals E. GHS 1,800 increase in comic book sales if a store commences selling puzzles 30. Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach? A. providing both ketchup and mustard for its customer's use B. repairing the roof of the hot dog stand because of water damage C. selling fewer hot dogs because hamburgers were added to the menu D. offering French fries but not onion rings E. losing sales due to bad weather 31, The top-down approach to computing the operating cash flow: A. ignores noncash expenses. B. applies only if a project increases sales. C. applies only to cost cutting projects. D. is equal to sales -.costs - taxes + depreciation. 7 E. is used solely to compute a bid price. yetaT Scanned with CamScanner/ / 5 Student's Index Number: 32. ais years 90, Knox Glass purchased a machine for a 3-year project. The machine is eos pepteciaie straight-line to zero over a 5-year period. Today, the project ended and ine was sold. Which one of the following correctly defines the aftertax salvage value of that machine? (T represents the relevant tax rate) A. Sale price + (Sales price - Book value) x T B. Sale price + (Sales price - Book value) x (1 - T) C. Sale price + (Book value - Sale price) x T D. Sale price + (Book value - Sale price) x (1 - T) E. Sale price x (1 - T) 33. Which one of the following best describes pro forma financial statements? A. financial statements expressed in a foreign currency B. financial statements where the assets are expressed as a percentage of total assets and costs are expressed as a percentage of sales ~ C. financial statements showing projected values for future time periods D. financial statements expressed in real dollars, given a stated base year E. financial statements where all accounts are expressed as a percentage of last year's values 34. The present value of an investment!s future cash flows divided by the initial cost of the investment is called the: ‘A. net present value. B. internal rate of return. C. average accounting return. D. profitability index. E. Cost-benefit ratio. 35. In evaluating independent projects using IRR, we accept a project ...... A. IFIRR is less than cost of capital B. If IRR is equal to the cost of capital C. IFIRR is equal to zero D. IRR is greater than the cost of capital E. only after comparing with the NPV 36. 4. The length of time a firm must wait to recoup, in present value terms, the money it has in invested in a project is referred to as the: A. Payback period. B. net present value. C. average accounting return, D. Discounted payback E. internal rate of return. 37. If a project has a net present value equal to zero, then: .. the total of the cash inflows must equal the initial cost of the project. . the project earns a return exactly equal to the discount rate. a decrease in the project's initial cost will cause the project to have a negative NPV. . any delay in receiving the projected cash inflows will cause the project to have a positive NPV. 1. the project's PI must also be equal to zero. pomp p sdor V. Mensah L. Page 7 of 20, Scanned with CamScannerStudent's index Numbel of GHS 2,100 a year for dan initial cost of GHS 38, Debright is considering a project that will produce cash inflows 4 years. The project has a 12 percent required rate of return an 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 39. You are the finance manager of NKHA Ltd with a budget of 70,000 for investments in the year 2022. You are considering two mutually exclusive projects; Project A and Project B. Your analysis indicates that Project A has an NPV of GHC 31,000 and B’s NPV is GH33,670. Your decision will be to .. . A. Choose both project A & B B. Choose Project B only C. Choose Project A only D. Base your decision on the IRR criteria E. None of the above 40, Greatdays Interiors is considering a project with the following cash flows. What is the IRR of this project? YEAR CASH FLOW 0 -GHS 114,600 1 35,900 2 50,000 3 45,000 A. 6.42% B. 7.03% C. 7.48% D. 8.22% E, 8.56% 41. Blacko Tech bought new machinery for GHC 5.6 million, This is expected to result in cash flows of GHC 1 million over the next seven years. The payback period for this project ...... If their acceptance period is five years, will this project be accepted? ‘A. 287 years; no B. 5.60 years; yes C. 2.87 years; yes oe : niet sath D. 5.60 years; no as E.5 years; yes 42, Abby's Restaurant is analyzing a project that requires GHS 180,000 of fixed assets. When the project ends, those assets are expected to have an after tax salvage value of GHS 45,000. How is the GHS 45,000 salvage value handled when computing the net present value of the project? ‘A. Deduct GHS 45,000 from the cash outflow at time zero B. Add GHS 45,000 to cash inflow in the final year of the project C. Add GHS 45,000 to cash inflow for the year following the final year of the project D. The GHS 45,00 is treated as cash inflow prorated, over the life of the project B. The GHS 45,00 is not included in the net present value Mensab L. Page 8 of 20, Bokpin G. A, Amoah L, Examiner(s): Mensah , Ntow-Gyamfi M, Scanned with CamScannerStudent's index Number: 43. A capital project will provide an annual cash flow GHC 3,000 for the next project cost GHC 9,000, which of the following statement is correct if the Sete A. The project has a payback period greater than 3 years and an NPV of GHC 2,372 B. The project has a payback period of 3 years and an NPV of GHC 0 C. The project has a payback period of 3 years and an NPV of -GHC 2,572 D. The project has a payback period of 3 years and an NPV of GHC 2,372 E. The project has a payback. period less than 3 years and an NPV of -GHC 2,572 44. A company has just 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. If the stock sells for GHC 50 a share, what is the company’s cost of equity? A. 12.46% B. 8.56% c. 11% D. 11.3% E. 6.5% 45. A company issued a 30 year, 8% GHC1,000 bond 10 years ago. The bond is currently selling at GHC 960. What is the company's cost of debt? A. 8.4% B. 12.12% C. 9.2% D. 13.33% E. 8% 46. Stocks Pinnacle Holdings have 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% B. 15.89% C. 14.5% D. 14.13% E, 15.45% 47. The capital structure of ABC Ltd is made up of 60% equity and 40% debt. The cost of equity and debt are 20% and 15% respectively. If the tax rate is 25%, the company’s before and after tax weighted average cost of capital are ..... and .... respectively. A. 13% and 17.5% B. 18% and 35% C. 35% and 60% D. 18% and 16.5% BE. 35% and 16.5% 48. Holding all other things equal, as the relative amount of debt in the capital structure of the firm increases, the cost of equity capital will A. increase B. decrease C. remain the same D. first increase and then decrease ‘Examiner(s): Mensah E, Ntow-Gyamfi M, Bokpin G. A, Amoah L, Fiador V, Mensah L Page 9 of 20, Scanned with CamScannerStudent's index Number: E. cannot say 49. The theory that explains that firm should borrow up to the point where the additional tax benefit from an extra cedi of debt equals the additional costs associated with financial distress from that additional debt? ‘A. M&M proposition II with taxation B. Pecking order C. Static trade-off theory D. Benefit-cost theory E. Traditional theory 50. A firm's business risk is largely determined by the financial characteristics of its industry, especially by the amount of debt the average firm in the industry uses .. A. True B. False 51. Financial risk refers to the extra risk stockholders bear as'a fesult of using debt as. compared with the risk they would bear if no debt were used A. True B. False 52. Whenever a firm borrows money, it is using financial leverage A. True B. False 53. Business risk is not affected by increase in debt ratio A. True B. False 54. An increase in the debt ratio will not generally affect which of the following items? A. Business Risk B. Total Risk C. Financial Risk D. Market Risk E. The firm’s Beta 55. Which of the following events is likely to encourage a company to increase its target debt ratio, all things being equal? A. Increase in Corporate tax rate B. Increase in Personal tax rate : C. Decrease in Corporate taxrate : D. Increase in Monetary Policy Rate 56. Which of the following states that the value of the firm is unrelated to its Capital Structure? ‘A. Capital Assets Pricing Model (CAPM) B. M&M Proposition I C. M&M Proposition I D. Pecking order Theory 57. Which of the following states that a firm's’ cést of equity is directly aind‘proportiGnally related to the firm’s Capital Structure? © ~ A. M&M Proposition I B. M&M Proposition'If "= C. Capital Assets Pricing Model (CAPM) Examiner(s): Mensah E, Ntow-Gyamfi M, Bokpin G.A. Amoah L, Flador V, Mensah Scanned with CamScanneri a ye Student's Index Number: D. Efficient Market Hypothesis * 58. The unlevered cost of equity referred to cost of equity for a (an) A. Private Firm B. All-Equity Firm C. Government Entity D. Private Individual. 59. The Optimal Capital Structure has been achieved when the A. Debt-Equity Ratio is equal to 1 B. Weight of debt is equal to weight of equity C. Cost of equity is maximized given a pre-tax cost of debt D. Debt-equity ratio results in the lowest possible weighted average cost of capital ABC Company has a beta of 1.5 with the market value of its debt outstanding amounting to be GHS 100m. The interest rate on its debt is 30% pa. The company has 1m in issued shares and its currently trading at GHS 50 per share, The risk free rate is 29% and the market expects a return of 35%, ABC’s marginal tax rate is 30%. Use the information above to answer questions 61-63 60. What is ABC’s after-tax cost of debt? A. 21% B. 22% C. 23% D. 29% 61. Caleulate ABC’s cost of Equity A. 35% B. 30% C. 38% D. 39% 62. What is ABC’s weighted average cost of Cepital (WACC) A. 26.67% B. 32.67% C. 30.67% D. 25.67% 63. The interest tax shield is a key reason why A. the required rate of return on assets rises when debt is added to the capital structure B. the value of an unlevered firm is equal to the value of a levered firm. C. the net cost of debt to a firm is generally less than the cost of equity D. the cost of debt is equal to the cost of equity for a levered firm 64, Based on M&M Proposition II with taxes, the weighted average cost of capital: A. is equal to the after-tax cost of debt B. hasa linear relationship with the cost of equity capital C. is unaffected by the tax rate D. decreases as the debt-equity ratio increases 65. Which of the following is an example of cost of financial distress A. Opportunity cost of not making optimal decisions ‘Amoah L, Flador V, Mensah L ‘Page 11 of 20 ‘Examiner(s): Mensah E, Ntow-Gyamfi M, Bokpl Scanned with CamScannerStudent's index Number: B. Inability to negotiate long-term supply contracts C. Loss of customers D. All of the above = 66, Which of the following statements is CORRECT? A. All else equal, long-term bonds have less interest rate price risk than short-term bonds. B. All else equal, low-coupon bonds have less interest rate price risk than high-coupon bonds. x C. All else equal, short-term bonds have less reinvestment rate risk than long-term bonds. D. All else equal, long-term bonds have less reinvestment rate risk than short-term. bonds. E. All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds. 67. Which of the following statements is CORRECT? A. Long-term bonds have less interest rate price risk but more reinvestment rate risk than short-term bonds. B. If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less interest rate risk. + C. Relative to a coupon-bearing bond with the same maturity, a zero-coupon bond has more interest rate price risk but less reinvestment rate risk. D, Long-term bonds have less interest rate price risk and also less reinvestment rate risk than short-term bonds. E, One advantage of a zero-coupon Treasury bond is that no one who owns the bond has to pay any taxes on it until it matures or is sold. 68. Which of the following statements is CORRECT? ee ‘Examiner(s): Mensah E, Ntow-Gyamfi M, Bokpin G.A, Amoah L, Flador V, Mensah L. Page 16 of 20 Scanned with CamScannerStudent's Index Number: C. Warrant D. Common stock B. Preference stock 87. Ifthe intrinsic value of a stock is greater than its market value, which of the following is reasonable conclusion? A. The stock has a low level of risk B. The stock offers a high dividend payout ratio CC. The market is undervaluing the stock D. The market is overvaluing the stock E. The stock is value-priced 88. Atlanta Airlines will pay a GhS4 dividend next year on its common stock, which is currently selling at GhS100 per share. What is the market’s required rate of return on this investment if the dividend is expected to grow at 5% forever? A. 4 percent : B. 5 percent C. 6'percent D. 7 percent E. 9 percent 89. The firm of Sun and Moon purchased a share of ABC.com common stock exactly one year ago for GhS45. During the past year, the common stock paid an annual dividend of GhS2.40. ‘The firm sold the security today for Gh$85. What is the rate of retum the firm has earned? A. 84.2 percent B. 92.4 percent C. 94.2 percent D. 82.4 percent E. 98.2 percent 90. A preferred stock will pay a dividend of Gh$3.00 in the upcoming year, and every year thereafter for three years. You require a return of 9 percent on this stock. Using the dividend model, calculate the intrinsic value of the stock A. GhS33.33 : B. GhS$10.27 C. GhS31.82 D. GhS21.10 E. GhS38.12 91. Which one of the following statements is correct? A. Preferred stocks have constant growth dividends SB. The capital gains yield is the annual rate of change in a stock's price : C. Aconstant dividend growth stock cannot be valued using the dividend growth model D. The dividend growth model can be used to compute the current value of any stock E. An increase in the required return will decrease capital gains yield Page 17 of 20 Bokpin G. A, Amoah L, Fiador V. Scanned with CamScannerStudent's Index Number: 92. Waterson Co. has a dividend paying stock with a total return for the year of -6.5 percent. Which of the following must be true? A. The dividend must be constant _ B, The stock has negative capital gains yield C. The stock has negative dividend yield D, The required rate of return for the stock increased over the year E. The firm is experiencing supernormal growth 93. A preferred stock that is GhS100 par value pays 7% dividend annually. The current market, price is GhS106.80. What is the intrinsic value of the preferred stock is the required return is 6.5 percent? A. GhS115.02 B. GhS107.69 C. GhS106.80 D. Gh$106.97 B. GhS109.67 94, ABC corp is a tech company that is expected to experience a high growth of 14 percent for the next 2 years, slowing to a perpetual growth rate of 6 percennt thereafter. The company Just paid a dividend of GhS3. Using the Gordon Growth Model, estimate the intrinsic value of ABC's shares in two year’s time. Assume a required return of 11 percent. A. GhS82.68 B. GhS78.00 C. GhS67.10 D. GhS61.70 EB. GhS87.10 95. ACB corp. is a tech company that is expected to experience a high growth of 14 percent for the next 2 years, slowing to a perpetual growth rate of 6 percent thereafter. The company just paid a dividend of GhS3. Using the Gordon Growth Model, estimate the intrinsic value of ABC's shares in two year's time. Assume a resid: retum of 11 peroent A. GhS69.62 nee eee B. GhS73.35 C. GhS79.59 D. Gh$79.95 E, GhS75.33 96. A common stock pays an annual dividend per share of GhS2.10. the risk-free rate is 7 percent and the risk premium for this stock is 4 percent. If the annual dividend is expected to remain at GhS2.10, the value of the stock is closest to ......... A. GhS19.09 B. GhS19.90 C. Gh$30.00 D. GhS52.50 Examiner(s): Mensah E, Ntow-Gyamfi M, Bokpin G.A, Amoah L., Flador V, Mensah L Page 18 of 20, Scanned with CamScannerStudent's Index Number BE. GhS55.20 97. Today, Madeolo Consult paid dividends on its common stock of GhS1.25 per share. If dividends per share are expected to increase to GhS3.50 per share 6 years from now, what is the percentage dividend growth rate? A. 30.5 percent B, 18.7 percent C. 17.8 percent D. 28.0 percent E, 2.80 percent 98. Wilk productions wants its shareholders to earn a 12 percent return on their investment in the company. At what value would Wilk stock be priced if the company paid GhS2.75 per share in constant annual dividend? A. Gh$29.92 B. GhS22.92 C. GhS22.29 D. GhS29.22 E. Insufficient data 99. If an investor's required rate of return increases and all other characteristics of a stock remain the same, the value of the stock will. A. Remain the same B. Increase C. Decrease D. Double E. None of the above 100. Coursera has just paid a dividend on its shares. This dividend is expected to grow at 20 percent for 2 years after which it settles into a 5 percent growth into the indefinite futur. Price in year 2is expected to be GhS35.23, reflecting the intrinsic value. If investors expect to earn a 15 percent return on the stock, compute the value of the dividend just paid. A. GhS3.52 B. GhS3.35 C. GhS2.33 D. GhS3.23 E. Insufficient data Examiner(s): Mensah E, Ntow-Gyamfi M, Bob Page 19 0f20 in G, A, Amoah L, Flador Scanned with CamScanner