Finance Final Exam

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Question 1: (1)

Ten multiple choice questions.

When a firm's investment decisions have different consequences for the value of equity and the value of debt, managers may take actions A) that benefit shareholders at the expense of debt holders. B) to decrease costs of distress. C) to reduce fixed costs. D) to increase debt values. (2) Which of the following is NOT an advantage of private debt over public debt? A) B) C) D) It does not dilute the ownership of the firm. It has to have interest and principal payments made upon it. It is liquid. It need not be registered with ASIC.

(3) The book value of equity of a firm is $100 million and the market value of equity is $200 million. The face value of debt of the firm is $50 million and the market value of debt is $60 million. What is the market value of assets of the firm? A) $150 million B)$250 million C) $260 million D) $160 million

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(4) Coca-Cola Amatil (CCA) has a weighted average cost of capital of 9%. CCA is considering investing in a new plant that will save the company $25 million over each of the first two years, and then $10 million each year thereafter. If the investment is $100 million, what is the netpresent value (NPV) of the project? A) $37.5 million B) $36.5 million C) $39.7 million D) $34.2 million

(5) Which of the following is NOT a reason why an IPO is attractive to the managers of a private company? A) It gives access to large amounts of capital in the IPO. B) It gives their private equity investors the opportunity to diversify. C) It gives access to much larger amounts of capital through the public markets in subsequent offerings. D) It reduces the complexity of requirements regulating the company's management (6) How does the total cost of issuing shares for the first time compare to the issuance costs of other securities? A) substantially less than the costs for most other securities B) substantially less than the cost for a few other securities C) substantially larger than the costs for most other securities D) about the same as the cost for most other securities

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(7) The spot exchange rate for Indian Rupees is Rs 42/$. The one-year forward exchange rate is Rs 43/$ and the one-year Australian interest rate is 4%. What is the implied one year interest rate in India? A) 7.25% B)5.56% C) 6.48% D) 8.91% (8) Which of the following could be considered a method of hedging because a firm can lock in the cost of a commodity at today's prices plus any carrying costs. A) Vertical integration B) Rationalisation C) Storage D) Merger (9) A ________ contract is often used for hedging and is an exchangetraded agreement to purchase an asset at some future date at a price that is locked in today. A) long-term B) futures C) put option D) call option

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(10) The price at which the holder of an option buys or sells a share when the option is exercised is called the ________ price. A) American B) dilutive C) exercise D) none of the above Question 2 (i) Compute the average return, variance of return and standard deviation of return from the following sample of returns on stock A over 5 different periods. Show that • the average return is 3% and • the variance of return is 0.000250 expressed as a decimal Period 1 2 3 4 5 Return (%) 5% 1% 2% 4% 3% Average return =

1 15% = 3% ( 5% + 1% + 2% + 4% + 3% ) = 5 5 Variance of return 2 2 2 2 2 ( 5% − 3% ) + (1% − 3% ) + ( 2% − 3% ) + ( 4% − 3% ) + ( 3% − 3% ) = 5 −1 ( 22 + 22 + 12 + 12 + 02 ) × 0.0001 = 10 × 0.0001 = 0.00025 = 4 4

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[4 marks]

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(ii) Two stocks A and B have returns of 10% and 20% p.a. The standard deviation of return for stock A is 40% and the standard deviation of return for B is 40%. The correlation between the returns is -0.50. Using this information, • compute the expected return and • standard deviation of return on a portfolio where you have $50 invested in stock A and $50 invested in stock B. Check that the results are: Expected return = 15%, standard deviation...
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