Professional Documents
Culture Documents
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TUTORIAL TIME:
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MID-SEMESTER EXAM
SPRING SEMESTER 2009
SUBJECT NAME
SUBJECT NO.
: 25300
DAY/DATE
Page 1
$681,818
$449,135
$498,540
$404,626
$390,000
2. Suppose that interest rates and the firms required rate of return increase. This
would NOT change the capital budgeting choices a firm would make if it:
a)
b)
c)
d)
e)
4. Outback Industries Ltd just paid a dividend of $1.00 per share. The dividends
are expected to grow at 20% per year for the next four years and then grow 6%
per year thereafter. Calculate the expected dividend in year 5.
a)
b)
c)
d)
e)
$1.00
$1.07
$1.48
$2.20
$1.91
Page 2
5. An appropriate capital budgeting process requires that the following steps are
taken in which order?
I.
II.
III.
IV.
a)
b)
c)
d)
e)
collection of data
reevaluation and adjustment
evaluation and decision making
search for and discovery of investment opportunities
IV, I, III, II
IV, I, II, III
IV, II , I , III
II , IV, I , III
IV, I, III only
6. When a security is sold in the financial markets for the first time, then:
a)
b)
c)
d)
e)
7. You have just purchased a government bond for $2,100 that promises to pay
$110 per year over the next six years. The market price of the bond has just
increased to $2,300. A likely reason for this is:
a)
b)
c)
d)
e)
8. Assuming that a firm has no capital rationing constraint and that a firm's
investment alternatives are not mutually exclusive, the firm should accept all
investment proposals
a)
b)
c)
d)
e)
Page 3
9. Under a sole proprietorship, the owner has ________ for business debts.
a)
b)
c)
d)
e)
unlimited liability
limited liability
no liability
liability equal to the profits for the year
liability that is limited to the amount of interest
11. Which of the following features of a bond is not necessarily constant for the
life of the bond?
a)
b)
c)
d)
e)
Page 4
13. Upon maturity, the _________ must pay the bill's owner the face value.
a)
b)
c)
d)
e)
drawer
acceptor
primary market
discounter
borrower
14. A credit card has an interest rate of 18 percent p.a. and charges interest
monthly. The effective rate on this card is:
a)
b)
c)
d)
e)
15. Marble Books Ltd. is expected to pay an annual dividend of $1.80 per share
next year. The required return is 16 percent and the growth rate is 4 percent.
What is the expected value of this stock five years from now?
a)
b)
c)
d)
e)
$15.00
$15.60
$16.80
$18.25
$18.98
Page 5
Exactly eighteen months ago BHP Ltd issued a bond with a 15-year maturity.
The bonds face value is $2 million and the coupon rate is 8.5% p.a. paid halfyearly. The bond matures on 24 March 2023 and the YTM. is 10.25% p.a.
compounded half-yearly. What is the current bond price? (2 Marks)
FV = 2,000,000
PMT = (0.0852) * 2000000
= 85000
n = 13 * 2 = 27
i = 0.10252 = 0.05125
PV
= 85000
11.05125 27
.05125
+ 2000000(1. 05125)27
= 1,228,344 + 518,761.5
= 1,747,106 (to the nearest whole dollar)
[Note: the bond is trading at a discount because the YTM is greater than the coupon
rate. So you shouldve expected to get a bond price of less than $2 million even
before you started the calculations]
b)
Page 6
Question 2 (3 marks)
You wish to accumulate $70,000 in fifteen years time by investing a certain number
of equal-sized amounts of money every three months. You make the first investment
in six months time and the final investment is made in ten years time. If the interest
rate is 8% p.a. compounded quarterly, what is the dollar amount of your equal-sized
investments?
Converting the time periods to quarters and writing the amounts on a timeline gives:
Note the first investment is made in 6 months time = 2 quarters.
PMT
PMT
70,000
|___|___|___________________|_____________|___
0
40
60
i = 8% 4 = 0.02
n = 39
Converting all money to quarter 60 (i.e. 15 years) we have that 70,000 equals the
future value of 39 payments.
1. 0239 1
70,000 = PMT
1.02
0.02
PMT = 808.90
Page 7
20
Question 3 (3 marks)
TGV Ltd requires short-term finance of approximately $500,000 for a period of 120
days. TGV Ltd has prepared a bill and has requested National Australia Bank (NAB)
to act as the acceptor. The bill has a $500,000 face value and a maturity of 120 days.
The appropriate market rate is 4.72% p.a.
a) What is the cash inflow for TGV today? (1 mark)
500000
1 + 0.0472
120
365
= 492,359.66
b) An investor purchases the bill in a) above and sells it in 90 days time. If market
rates have risen to 5.31%, what is the sale price? (1 mark)
500000
1 + 0.0531
30
365
= 497,827.29
No. Bills are discount securities and therefore the difference between the current price
and the face value represents the interest.
Page 8
Question 4 (3 marks)
Cal.I.Fornia Ltd (CIF) is listed on the Australian Securities Exchange (ASX) and you
want to calculate CIFs theoretical share price. This year CIF paid a dividend of
$0.20 but due to the Global Financial Crisis they will not pay a dividend for the next
two years. They will pay a dividend of $0.50 in year 3 and year 4, and in year 5 the
dividend will be $0.80. Dividends are then predicted to increase by 3% each year
thereafter. If the required return is 9.25% what is CIFs current share price?
0.20
0.50
0.50
0.80
|______|______|______|______|______|___
0
| g = 3% p.a.
The current share price is the present value of all future dividends. The dividend paid
this year, D0, is ignored in the calculation.
D3 and D4 are both discounted to time zero:
0.50
0.50
+
= 0.3834 + 0.3510 = 0.7344
3
1.0925
1.09254
The present value of D5 and after can be valued using the constant growth formula
which will give a price at year 4.
5
0.80
=
0.0925 0.03
= 12.80
4 =
P0 =
Page 9
Question 5 (3 marks)
One Star Productions is considering two mutually exclusive investment proposals. The
companys benchmark payback period is two years and the required rate of return is
14%. The two projects cash flows appear in the following table:
Project
Alpha
Omega
a)
Year 0
-20,000
-30,000
Year 1
25,000
5,000
Year 2
0
5,000
Year 3
-5,000
30,000
Calculate the payback period for each project and state which project would you
select using the payback method. (1 mark)
b)
Calculate the NPV of each project and state which project would you select
using the NPV decision criteria. (1 mark)
NPVAlpha = 20000 +
25000
NPVOmega = 30000 +
1.14
5000
1.14
5000
1.14 3
5000
= $1,445.03
+ 1.14 2 +
30000
1.14 3
= $1,517.55
Neither project is acceptable using the NPV because both have a negative NPV.
c)
Page 10