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INSTRUCTIONS TO CANDIDATES 1. 2. This examination paper contains SIX (6) questions and comprises TWENTY-THREE (23) printed pages. You are required to answer ALL the questions. Answers should be written on the spaces provided in this examination paper. Be concise and present your answers clearly and legibly. Where calculations are required, show all computations leading to the final answer. If you need more writing spaces, use pages 18-19. The complete set of this examination paper will be collected at the end of the examination. The time value tables are given at the end of the paper. Students may use University-approved calculators. This is a Closed Book Examination.

3. 4. 5.

Marks Recording Space for Lecturers Question 1 2 3 4 5 6 Total Matriculation No.: Marks

-2QUESTION 1 (20 marks)

BH2004

Multiple-Choice: Choose the most appropriate answer for each question and tick (√ ) on the answer sheet on page 5. No marks will be deducted for incorrect answers. (2 marks each) 1. What is the future value in 12 years of $800 payments received at the beginning of each year for the next 12 years? Assume an interest rate of 8.25%. a. b. c. d. e. 2. $14,259.63 $15,408.65 $16,679.86 $18,495.48 $20,782.15

Your portfolio consists of $100,000 invested in a stock that has a beta of 0.8, $150,000 invested in a stock that has a beta of 1.2, and $50,000 invested in a stock that has a beta of 1.8. The risk-free rate is 7 percent. Last year this portfolio had a required rate of return of 13 percent. This year nothing has changed except for the fact that the market risk premium has increased by 2 percent. What is the portfolio's current expected rate of return? a. b. c. d. e. 5.14% 7.14% 11.45% 15.33% 16.25%

3.

The times interest earned ratio is 5.0. Based on this ratio, a creditor knows that EBIT must decline by more than _____ before the firm will be unable to cover its interest expense. a b. c. d. e. 33% 67% 75% 80% 90%

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-34. The percentage of sales approach to financial planning requires: a. b. c. d. e. 5.

BH2004

All assets and liabilities change at the same rate as sales. The dividend policy remain unchanged from year to year. The firm be operating at full capacity. Separating accounts into those that vary with sales and those that do not. The firm's sales to increase each year.

You hold a diversified portfolio consisting of a $5,000 investment in each of 20 different common stocks. The portfolio beta is equal to 1.15. You have decided to sell one of your stocks, a lead mining stock whose beta is equal to 1.0, for $5,000 net and to use the proceeds to buy $5,000 of stock in a steel company whose beta is equal to 2. What will the new beta of the portfolio be? a. b. c. d. e. 1.12 1.20 1.22 1.10 1.15

6.

You just purchased a 10-year corporate bond that has an annual coupon rate of 10 percent. The bond sells at a premium above par. Which of the following statements is most correct? a. b. c. d. e. The bond’s yield to maturity is less than 10 percent. The bond’s current yield is greater than 10 percent If the bond’s yield to maturity stays constant, the bond’s price will be the same one year from now. Statements a and c are correct. None of the answers above is correct.

7.

Over the past few years, Company ABC has retained, on the average, 70% of its earnings in the business. The future retention ratio is expected to remain at 70% of earnings, and the long-term earnings growth is expected to be 10%. If the risk free rate is 8%, the expected return on the market is 12%, Company ABC beta is 2.0, and the most recent dividend was $1.5, what is the most likely market price and P/E (P0/E1) ratio for Company ABC’s stock today? a. b. c. d. e. $27.50; $33.00; $25.00; $22.50; $45.00; 5.0 times...