Miss

Topics: Investment, Finance, Interest Pages: 15 (4415 words) Published: September 6, 2013
Examination Paper

Sample Exam 1 Guide Answers
4190 BUSINESS FINANCE II
CORPFIN 2006

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(CORPFIN 2006) SECTION A: Multiple Choice

Page 2 of EIGHT Pages

(Each question is worth 1 mark- select the answer you believe most correct. Answer these questions in the exam booklet, not on this paper)

A.1

Which of the following statements with regards to mortgage loans is false? (a) (b) (c) (d) Mortgage loans are usually made on a credit foncier basis. A ‘balloon’ payment may be necessary at maturity. Most life insurance companies specify a minimum amount for mortgage finance, usually upwards of $200,000. The main source of mortgage finance for companies has traditionally been superannuation funds.

A.2

A non-bank bill may be more difficult to discount than a bank bill because: (a) (b) (c) (d) the interest rate is recalculated each time a new bill is issued. bank bills are regarded as inferior quality. of the cost of the bill facility. the financial stature of the acceptor or endorser is not well regarded.

A.3

Which of the following is the least correct? (a) (b) (c) ‘Trade credit’ refers to credit sales made to other businesses whilst ‘consumer credit’ refers to credit sales made to individuals. ‘Consumer credit’ may require the customer to pay a service fee but for ‘trade credit’ this would be unusual. A business purchasing goods on credit is likely to be offered trade credit ‘on open account’, whereas an individual is likely to enter into a credit agreement which is likely to require regular repayment of an agreed amount. Trade credit’ normally applies to the retail industry, whereas ‘consumer credit’ strictly applies to service industries.

(d)

A.4

Share prices of companies paying franked dividends: (a) (b) (c) (d) should have increased since the introduction of dividend imputation because overseas residents would have sold this type of shares. should have increased since the introduction of dividend imputation because they have become more attractive to Australian investors. have not changed as a result of imputation. should have decreased since the introduction of dividend imputation because overseas residents are unable to use franking credits..

(CORPFIN 2006) A.5 An essential characteristic of operating leases is that: (a) (b) (c) (d)

Page 3 of EIGHT Pages

the lessor is able to use the asset without directly incurring the risks of ownership. the lessor is responsible for insuring the asset and maintaining it. they are usually short term. the lessee is able to use the asset without directly incurring the risks of ownership.

A.6

If an investment costing $2,000 is expected to generate real cash flows of $900 p.a. for 3 years and prices are expected to increase at a rate of 10% p.a., what is the real required rate of return if the nominal cost of capital is 15%? (a) (b) (c) (d) 6% 4.55% 5% 1.05%

A.7

If a company has on issue debentures paying a coupon rate of 12% p.a. and the market yield on similar securities is 18%, what is the correct cost of debt the company should use when estimating the WACC? (a) (b) (c) (d) 18%. 15% 12% 16%

A.8

According to the Miller-Orr model: (a) (b) (c) (d) there is an optimum division of each cash receipt into cash balances and interest bearing liquid assets. there is an optimum amount for each withdrawal. marketable securities should be held to take advantage of profitable opportunities. management should withdraw cash if the cash balance becomes too high and inject cash if the balance becomes too low.

Ignore A.8 – not relevant as not covered anymore

(CORPFIN 2006) A.9

Page 4 of EIGHT Pages

Which of the following statements with regards to ‘matching policies’ of assets and liabilities is true? (a) If maturity of debt is longer than the life of the asset, there is a risk that the company will not have sufficient cash to repay the debt, or will not be able to renew the debt. If maturity of debt is shorter...
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