MASTER OF BUSINESS PROGRAMME

Department of Accountancy
University of Kelaniya
MBACC 51034 Corporate Finance
01. A potential agency problem arises due to;
a) The manager of the firm owns less than 100 percent of the firms common stock
b) Conflicts occur between shareholders & the firm
c) Conflict occur between board of directors and the Government
d) Differences between managers and debt holders
02. Market values are often used in computing the weighted average cost of capital because
a) this is the simplest way to do the calculation.
b) this is consistent with the goal of maximizing shareholder value.
c) this is required in Sri Lanka by the Securities and Exchange Commission.
d) this is a very common mistake.

03. When your parents got married 38 years ago, they purchased a house for Rs.31,900. They have taken
good care of the house but have not invested any more money into it. Today, their house is valued at
Rs.149,900. What rate of return have your parents earned on their home?
a)
b)
c)
d)

04.

3.92 percent
4.16 percent
4.58 percent
5.39 percent

Which one of the following statements related to equity securities is correct?

a. Preferred shareholders generally receive two votes for every one vote granted to a common
shareholder.
b. If a dividend payment is missed on a cumulative preferred stock, the issuer must pay the missed
dividend prior to paying any common stock dividends.
c. Dividend income received by an individual is exempt from taxation.
d. The dividend growth model can be used to determine the value of any individual stock.

05. When a capital budgeting project generates a positive net present value, this means that the project earns
a return higher than the
a) internal rate of return.
b) annual rate of return.
c) required rate of return.
d) profitability index
06. The capital budgeting method that takes into account both the size of the original investment and the
discounted cash flows is the
a) cash payback method.
b) internal rate of return method.
c) net present value method.
d) profitability index.

07. Julia. has an 8% required rate of return. She is considering a project that would provide annual cost
savings of Rs.20,000 for 5 years. The most that Julia would be willing to spend on this project is
Year
Present
Present
Value
Value of an
Annuity
1
.926
.926
2
.857
1.783
3
.794
2.577
4
.736
3.312
5
.681
3.993

a) Rs.50,364.
b) Rs.66,240.
c) Rs.79,860.
d) Rs.13,620.

08. You need a new oven for your bakery. Your current oven is worn out so you are trying to decide which
one of two ovens to buy as a replacement. Whichever oven you purchase will be replaced after its useful life.
Oven A costs Rs.25,000 and costs Rs.3,000 a year to operate over an 8-year life. Oven B costs Rs.20,000
and costs Rs.4,500 a year to operate over a 6-year life. Given this information, which one of the following
statements is correct if the applicable discount rate is 10 percent?
A)

The equivalent annual cost of oven A is -Rs.7,481.

B)

The equivalent annual cost of oven B is -Rs.8,209.

C)

Oven A lowers the annual cost by Rs.1,406 as compared to oven B.

D)

Oven B lowers the annual cost by Rs.1,598 as compared to oven A.

09. Which one of the following represents a potential agency problem?

A)

adherence to Government decisions.

B)

hiring a manager and compensating her with shares of company stock

C)

paying a management bonus based on the number of employees managed

D)

paying all company earnings out to shareholders in the form of dividends

10. Frank deposited Rs.5,000 into her retirement account today. How much money will she have 40 years
from now if this is the only deposit she makes and she earns an average of 13 percent, compounded
annually?
A)

Rs.597,264

B)

Rs.648,306

C)

Rs.663,908

D)

Rs.671,909

11. A project will produce cash flows of Rs.2,400, Rs.2,800, and Rs.4,100 a year for the next three years,
respectively. What is the net value of these cash flows today if the applicable discount rate is 12 percent?
A)

Rs.7,778.80

B)

Rs.8,056.16

C)

Rs.7,293.30

D)

Rs.8,303.57

12. Which one of the following statements correctly applies to the modified internal rate of return (MIRR)?
A)

The MIRR is preferable to the IRR when a project has conventional cash flows.

B)

The MIRR is used to evaluate projects that have negative NPVs.

C)

The MIRR is another means of computing an accounting rate of return.

D)

The MIRR depends upon an external discount rate, an external compounding rate, or both.

13. Which one of the following is another name for market risk?
A)

Diversifiable

B)

Systematic

C)

Total

D)

Unique

14. The tax savings of the firm derived from the deductibility of interest expense is called the:
a) Interest tax shield.
b) Depreciable basis.
c) Financing umbrella.

d) Current yield.
15. Consider two bonds. Bond A has a face value of Rs.1000 and a coupon rate of 10% . Bond B has a face
value of Rs. 1000 and a coupon rate of 5%. Both bonds have the same maturity. Which bond has the greater
interest rate risk?
16. Consider two bonds. Bond C has a face value of Rs. 1000 and five years remaining to maturity. Bond D
has a face value of Rs.1000 and ten years remaining to maturity. Both bonds have the same coupon rate of
10%. Which bond has the greater interest rate risk?
17. ABC company has a beta of 1.2. The expected risk free rate of interest if 4% and the expected premium
for the market as a whole is 5%. What is the expected return for ABC company stock?
18. When calculating WACC market values are used. Do you agree? Why?
19. Why cost of equity capital is higher than cost of debt?
20. The two cardinal rules which financial analysts follow to avoid capital budgeting errors are: (1) capital budgeting
decisions must be based on accounting income, and (2) only incremental cash flows are relevant to accept/reject
decisions.

a. True
b. False