# Corporate Finance

Pages: 9 (2494 words) Published: March 31, 2013
The Open Polytechnic of New Zealand

Trimester 1, 2012

71303 Corporate Finance Final Examination
Time allowed
Three hours, plus 10 minutes to read this paper.

Instructions
1. 2. 3. 4. Answer all questions. Read each question carefully. Start each question on a new page. Show all of your workings.

Mark allocation
Question Part A Part B 1. 2. 3. 4. 5. Cost of capital Risk and return Investment timing real option Capital structure Dividend policy 14 12 15 20 15 Total 100 Topic Multiple-choice questions Marks 24

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Useful formulae FV PV PVCF PVperp EAR YTM Yield CV Po Or; Po rs re rd ri WACC g BPre S V Or; V VB VU VL rsL (Proposition II) rsL bL = = = = = = = = = = = = = = = = = = = = = = = = = = PV(1 + r)n FV / (1 + r)n n n ⎛ 1 ⎞ Σ _ CFt ⎜1 + i⎟ ⎝ ⎠ t=1 PMT / r [1 + (rNm/m)]m – 1 [I + (M – V)/n] / [(M + 2V)/3] (D1 + P1 - P0) / P0 σ/r D1/(rs – g) S/no. of shares (D1 / P0) + g [D1 / P0(1 - F)] + g i(1 - t) rRF + bi (rM - rRF) wdrd (1 - t) + weke ROE(Retention ratio) Retained earnings / Equity fraction [(EBIT - rdD)(1 - T)] / rs D + [(EBIT - rdD)(1 - T)] / rs D+S n Σ⎡_ INT/(1 + Kd)t ⎤ + M/(1 + rd)n ⎢ ⎥ ⎣t = 1 ⎦ EBIT(1 -t) / rsU Vu + TD - PV(distress + agency costs) rRF + bu(rM - rRF) + bu(rM - rRF)(1 - T)(D / S) rsU + (rsU –rd)(1 – T)(D/S) bu[1 + (1 - T)(D / S)]

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Carrying cost = AFN Carrying cost AFN = = =

DSO(sales / day)(VCR)(WACC) (A*/S0)ΔS0 - (L*/S0)ΔS - MS1(RR) DSO(sales / day)(VCR)(WACC) (A*/SO)ΔSO - (L*/SO)ΔS - MS1(RR)

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Part A: Multiple-choice questions

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Beta coefficient calculation 2. Security A has a beta of 1.5 and Security B has a beta of 0.5. Assuming market equilibrium, which of the following statements about these securities must be true? A B C D E When held in isolation, Security A has a greater risk than Security B. The expected return on Security B will be greater than the expected return on Security A. The expected return on Security A will be greater than the expected return on Security B. Security B would be a more desirable addition to a portfolio than Security A. Security A would be a more desirable addition to a portfolio than Security B.

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Time value concepts 3. Which of the following statements is most correct? A The first payment under a 3-year, annual payment, amortized loan for \$1,000 will include a smaller percentage (or fraction) of interest if the interest rate is 5% than if it is 10%. If you...