SESSION 1 EXAMINATIONS JUNE 2012
Unit: AFIN253: Financial Management Time Allowed: 2 hours plus 10 minutes reading time. Total Number of Questions: 20 Multiple Choice Questions plus 6 full response questions.
Instructions: 1. PART A (60 marks): There are 20 multiple choice questions. Answers to these must be recorded on a red-coloured General Purpose Answer Sheet which will be marked by a computer. Please make sure your name is on this sheet. 2. PART B (60 marks): There are 6 questions. Attempt all questions. Show all workings. Write answers in the spaces provided. Illegible handwriting risks loss of marks. Materials Allowed: No dictionaries are permitted. A non-programmable calculator (no text retrieval capacity) is permitted. Financial calculators may be used. Mobile telephones must be turned off and left at the front of the room. Question: Out of: Mark: 1
PART A (60 Marks)
There are TWENTY (20) multiple choice questions. Please select the most correct answer for each question. Each question in Part A is worth 3 marks. Record your answers on the computer readable answer sheet. Question 1: Treasury bonds currently have a return of 5%. A stock has a beta of 0.5 and the market return is 10%. What is the expected return of the stock? (a) 5% (b) 7.5% (c) 10% (d) 12.5% (e) 20%
Question 2: You want to buy an apartment worth $500,000. You have saved a deposit of $50,000. The bank has agreed to lend you the $450,000 as a fully amortising mortgage with a term of 25 years. The interest rate is 6% pa and is not expected to change. What will be your monthly payments? (a) 1,500.00 (b) 2,250.00 (c) 2,855.79 (d) 2,899.36 (e) 35,202.02
Question 3: A firm can issue 3 year annual coupon bonds at a yield of 10% pa and a coupon rate of 8% pa. The beta of its levered equity is 2. The market's expected return is 10% pa and 3 year government bonds yield 6% pa with a coupon rate of 4% pa. The market value of equity is $1 million and the market value of debt is $1 million. The corporate tax rate is 30%. What is the firm's after-tax WACC? Assume a classical tax system. (a) 8.40% (b) 10.50% (c) 10.80% (d) 12.00% (e) 21.00% Question 4: A retail furniture company buys furniture wholesale and distributes it through its retail stores. The owner believes that she has some good ideas for making stylish new furniture. She is considering a project to buy a factory and employ workers to manufacture the new furniture she's designed. Furniture manufacturing has more systematic risk than furniture retailing. Her furniture retailing firm's after-tax WACC is 20%. Furniture manufacturing firms have an after-tax WACC of 30%. Both firms are optimally geared. Assume a classical tax system. Which method(s) will give the correct valuation of the new furniture-making project? Select the most correct answer. (a) Discount the project's unlevered CFFA by the furniture manufacturing firms' 30% WACC after tax. (b) Discount the project's unlevered CFFA by the company's 20% WACC after tax. (c) Discount the project's levered CFFA by the company's 20% WACC after tax. (d) Discount the project's levered CFFA by the furniture manufacturing firms' 30% WACC after tax. (e) The methods outlined in a and c will give the same valuations, both are correct. 3
Question 5: According to the theory of the Capital Asset Pricing Model (CAPM), total risk can be broken into two components, systematic risk and idiosyncratic risk. Which of the following events would be considered diversifiable according to the theory of the CAPM? (a) Economic recession. (b) A major terrorist attack. (c) An increase in corporate tax rates. (d) The outbreak of world war....