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Student Name:

Student ID Number:

THE UNIVERSITY OF NEW SOUTH WALES

JUNE / JULY 2006

FINS1613 Business Finance – Final Exam

(1)

TIME ALLOWED - 2 hours

(2)

TOTAL NUMBER OF QUESTIONS - 50

(3)

ANSWER ALL QUESTIONS

(4)

ALL QUESTIONS ARE OF EQUAL VALUE.

(5)

THIS PAPER MAY NOT BE RETAINED BY CANDIDATE

(6)

CANDIDATES MAY BRING A PENCIL AND ERASER TO THE EXAMINATION. CANDIDATES MAY NOT BRING THEIR OWN CALCULATORS

(7)

THE FOLLOWING MATERIALS WILL BE PROVIDED BY THE EXAMINATIONS SECTION: Calculators, and Mathematical tables (PV and FV)

PRINT YOUR STUDENT NUMBER ON TOP RIGHT HAND CORNER

ANSWER ALL QUESTION ON THE PROVIDED ANSWER SHEET

ALL ANSWERS MUST BE ANSWERED IN PENCIL.

FINS 1613 Final Exam

1

S1 2006

Multiple Choice - 50 Questions: 1 mark each No negative marking 1) Hiphop Limited must choose between one of two mutually exclusive projects. • Project A has an up-front cost (t = 0) of $120,000, and it is expected to produce cash inflows of $80,000 per year at the end of each of the next two years. Two years from now, the project can be repeated at a higher up-front cost of $125,000, but the cash inflows will remain the same. • Project B has an up-front cost of $100,000, and it is expected to produce cash inflows of $41,000 per year at the end of each of the next four years. Project B cannot be repeated. Both projects have a cost of capital of 10 percent.

Hiphop wants to select the project that provides the most value over the next four years. What is the net present value (NPV) of the project that creates the most value for the company? a) b) c) d) e) $34,425 $30,283 $29,964 $29,240 $24,537

2)

Which of the following statements is most correct? a) b) c) d) e) Corporations generally face fewer regulations than sole proprietorships do. Corporate shareholders have unlimited liability. It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship. All of the above statements are correct. None of the above statements is correct.

FINS 1613 Final Exam

2

S1 2006

3)

Which of the following statements is most correct? a) b) c) The bird-in-the-hand theory implies that a company can reduce its WACC by reducing its dividend payout. The bird-in-the-hand theory implies that a company can increase its stock price by reducing its dividend payout. One problem with following a residual dividend policy is that it can lead to erratic dividend payouts that may prevent the firm from establishing a reliable clientele of investors who prefer a particular dividend policy. Statements a and c are correct. All of the statements above are correct.

d) e)

You are given the following information about Frugal Fashions. Use this information for the next three questions, numbers 4, 5 and 6. Frugal Fashions is considering opening a new store. In evaluating the proposed project the company's CFO has collected the following information: • It will cost $10 million to construct the new store. These costs will be incurred at t=0. These costs will be depreciated on a straight-line basis over the next 10 years. • The company will need an additional $5 million of inventory to stock the new store. $2 million of this inventory will be financed with accounts payable, the other $3 million will be paid for in cash. The cost of this net increase in operating working capital will be incurred at t = 0. Assume that this net operating working capital is fully recovered at t = 4. • The new store will be open for four years. During each of the four years (t = 1, 2, 3, and 4) the store will produce the following financial projections (in millions of dollars): t=1 $8.0 1.0 7.0 2.8 4.2 t=2 $8.0 1.0 7.0 2.8 4.2 t=3 $8.0 1.0 7.0 2.8 4.2 t=4 $8.0 1.0 7.0 2.8 4.2

EBITDA Depreciation EBIT Taxes Net income

Frugal finances its projects with 100 percent equity; thus, there is no interest expense. The company has a 10 percent weighted...
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