AS - SAMPLE FINAL EXAM PAPER - FIN700 - Finl MGT - T318

SAMPLE FINAL EXAMINATION
TRIMESTER 3, 2018
NOTE: The purpose of this sample Exam paper is to indicate the structure and type of
questions to be expected in the Final Exam. It is a sample paper only – the questions on the
following pages will not appear on the actual Final Exam or on any Deferred Exam paper.
STUDENT NAME & ID__________________________________________________
TUTORIAL DAY & TIME________________________________________________

**NAME OF YOUR TUTOR: Please circle one name on next line.**
Dr Mervyn Fiedler Ms Ruhina Karim; Mr Nishant Panthi;
SUBJECT NAME: PG - Financial Management
SUBJECT NUMBER: FIN700
TIME ALLOWED: 3 Hours plus 15 minutes reading time
PERMITTED MATERIALS:
 A non-programmable calculator, financial or scientific. No other aids are permitted.
 Mobile phones or any other devices capable of communicating or storing information are
prohibited. These and other books and papers should be placed at the front of exam room.
INSTRUCTIONS FOR STUDENTS:
1) Write your full name and ID at the top of this page. Complete your Tutorial details.
2) This examination consists of two sections.
 Section A consists of 15 multiple-choice questions
 Section B consists of 5 questions.
 All questions are compulsory questions.
REMINDERS:
3) Students are reminded about KOI policy on examinations. Any breach of this policy will be
considered cheating and appropriate action will be taken.
4) Any communication between students by any means whatsoever is strictly prohibited from
the time students enter the examination room until they exit at the completion of the
exam. This includes any temporary absence from the examination room during the exam.
5) Students may not enter the room 15 minutes after the exam begins nor leave the room 15
minutes before the exam ends.
EXAMINATION MARKING SHEET
Page 1 of 20
T318 - Specimen Final Exam Paper – FIN700 - Financial Management, February, 2019
For use by Examiners only.
Question Student Mark
1 - 15 Multiple Choice Questions /15
16 Shareholder value and the cost of capital /7
17 Financial leverage and capital structure policy /7
18 Derivative securities /7
19 Return, risk and the security market line /7
20 Lessons from capital market history /7
Total /50
SECTION A
Multiple-choice questions answer sheet.
Page 2 of 20
Please circle the letter that corresponds to the correct answer for each question.
QUESTION
1) a b c d
2) a b c d
3) a b c d
4) a b c d
5) a b c d
6) a b c d
7) a b c d
8) a b c d
9) a b c d
10) a b c d
11) a b c d
12) a b c d
13) a b c d
14) a b c d
15) a b c d
Page 3 of 20
SECTION A
Multiple-choice questions. Each question is worth 1 mark.
Please circle the correct answer on the answer sheet provided (see Page 3 of this booklet).
The following information relates to Question 1.

Shares in Norman Harvey Ltd were priced at $8.40 on 1 July, 2017. On 30 June, 2018, the
company paid a dividend of $0.45 and the share price had dropped to $8.10.
Questions 1 below refer to the year ended 30 June, 2018.
1) For Norman Harvey Ltd, what was the total return for the year?
a. 5.36%.
b. -3.57%.
c. 1.79%.
d. None of the above.
2) What is the formula for the dividend yield (DY), in terms of dividends (Do =
Dividends now; D1 = Dividends in one year’s time] and price (Po and P1)?
a. DY = Do / Po
b. DY = D1 / Po
c. DY = Do / P1
d. DY = D1 / P1.
3) What is the formula for the capital gain yield (CGY) for the year?
a. CGY = P1 / Po
b. CGY = (P1 – Po) / P0
c. CGY = (P1 – Po) / P1
d. CGY = (Po – P1) / Po.
e.
4) In a well-diversified portfolio, which type of risk is negligible?
a. Unique risk.
b. Market risk.
c. Systematic risk.
d. Systemic risk.
5) All else being equal, assets with smaller betas have:

a. Lower systematic risk.
b. Higher systematic risk and lower total risk.
c. Lower systematic risk and higher total risk.
d. Both lower systematic risk and lower unsystematic risk.
Page 4 of 20
6) The most diversification can be achieved if two assets have a correlation co-efficient
of:
a. 1.0.
b. 0.1.
c. 0.
d. -1.0.
7) The WACC (the weighted average cost of capital) can be interpreted as:
a. The cost of capital for a specific project
b. The required rate of return on the overall company
c. The cost of taxes paid on the company’s net profit
d. The cost of the company’s equity capital.
8) The D / E ratio reflects the firm’s:

a. Market value of debt.
b. Market value of equity.
c. Ratio of debt servicing costs to equity servicing costs.
d. Capital structure.
9) WACC unadjusted is known as unadjusted because it is not adjusted for:

a. The cost of preference capital.
b. The cost of retained earnings.
c. Taxes.
d. The inflation rate.
10) The value of a firm is maximized when:

a. The WACC remains the same.
b. The WACC increases.
c. The WACC is minimized.
d. The cost of equity is minimized.
11) M & M Proposition I can be stated as:

a. The firm’s cost of equity is unaffected by its capital structure.
b. The firm’s cost of debt is unaffected by its capital structure.
c. The firm’s cost of equity is affected by its capital structure.
d. The firm’s overall cost of capital is affected by its capital structure.
12) Homemade leverage is the use of:

a. EPS and ROE to estimate the target capital structure.
b. Corporate borrowing to alter the degree of financial leverage.
c. Personal borrowing to alter the degree of financial leverage.
d. Neither personal nor corporate borrowing, as the effect of financial leverage
depends on the EBIT.
Page 5 of 20
13) On or before expiry, the writer of a put option:
a. Has the right to sell the underlying asset if he wishes.
b. Is obliged to sell the underlying asset if the buyer decides to buy the asset.
c. May unilaterally, without consulting the other party, cancel the contract.
d. Is obliged to buy the underlying asset if the buyer decides to sell the asset.
14) An option that can be exercised at any date before its expiration date is a(n):
a. Look back option.
b. European option.
c. Exotic option.
d. American option.
15) An option that can be exercised only at the expiration date is a(n):
a. Look back option.
b. European option.
c. Exotic option.
d. American option.
Page 6 of 20
SECTION B
Long answer questions. Each question is worth 10 marks.
Answer each part of each question on the question sheet, in the space provided. Show all
workings for every question.
16) (3 + 2 + 2 = 7 Marks)
a) Wang Ltd has 10 million ordinary shares outstanding. Its most recent share price is $7.
The book value per share is $1.20. The company also has two debenture issues
outstanding. The first issue has a face value of $20 million, a 6% coupon and sells for 90
per cent of its face value. The second issue has a face value of $25 million, a 7% coupon
and sells for 88% of its face value.
i. What are Wang Ltd's capital structure weights on a book value basis?
ii. What are Wang Ltd's capital structure weights on a market value basis?
iii. Which is more relevant, the book value or market value weights? Why?
Page 7 of 20
b) Miller Ltd has a target capital structure of 50% equity, 10% preference shares and 40%
debt. The costs of these components are: cost of equity: 15%, cost of preference capital:
8% and cost of debt: 7%.
REQUIRED:
i. Calculate Miller Ltd's weighted average cost of capital.
ii. Assuming a corporate tax rate of 30%, calculate the weighted average cost of capital
(WACC) for Miller Ltd on an after-tax basis.
c) On 10 June, 2018, Hood Ltd had an issue of preference shares that traded at $75 a
share. If the face value of the shares was $100 per share and the dividend is$6.00.
REQUIRED:
i) Calculate Hood Ltd’s cost of preference shares.
ii) If the cost of debt is the same as in i) above, would you recommend that the
company use debt or preference shares to raise additional capital. Give reasons.
Page 8 of 20
17) (3+ 3 + 1 = 7 Marks)
a) Wood Ltd is comparing capital structures under two plans – Plan A is an all-equity plan;
and Plan B is a levered plan. Under Plan A, Wood Ltd will have 50,000 shares
outstanding. Under Plan B, the company will have 25,000 shares and $150,000 in debt
outstanding. The interest rate is 8% p.a., and there are no taxes.
i. If EBIT is $25,000, which Plan has the higher earnings per share? Show all calculations.
ii. If EBIT is $50,000, which Plan has the higher earnings per share? Show all calculations.
iii. What is the break-even EBIT, that is, the EBIT that generates the same EPS (earnings per
share) under both Plans?
Page 9 of 20
b) The following information relating to Bates Ltd is available. Currently, it has a debt to
equity ratio of 0.80, its weighted average cost of capital is 12% and its cost of debt is
9%.
In the questions which follow, ignore taxes.
REQUIRED:
i. What is the company's current cost of equity capital?
ii. If the debt-to-equity ratio were 1, what would the cost of equity be?
iii. Given the capital structure in ii. above, what would be Bates Ltd’s WACC?
c) Raven Ltd expects an EBIT of $80,000 every year forever. The

company tax rate is 30%.
The company has no debt, and its cost of equity is 16%.
What is the value of Raven Ltd?
Page 10 of 20
18) (2 + 3 + 2 = 7 marks)
a) The following information regarding option quotes available today (October, 2018) for
Bottle Ltd is supplied.
February, 2019 – Last sale price = $15.00
Premiums quoted for 2019 expiry dates
For Strike Price August September October

Call Options
$13.40 $1.95 $2.10 $2.20
Put Options
$13.40 $0.80 $0.95 $1.15
REQUIRED:
i. Are the September put options in the money? Why? Show all calculations. [NOTE: Each
option contract is for 1,000 shares.]
ii. If, in 4 months’ time, Bottle Ltd's shares are selling on the August expiration date for
$16.00 each, what is the net gain or net loss for each call option contract (1,000
shares) bought today? Show all calculations.
Page 11 of 20
b) Gander, a farmer, anticipates buying 4,000 cattle in June, 2019. Assume the price today
of a June, 2019 futures contract is $420 an animal. Gander decides to hedge all of his
intended purchase, so as to protect himself from rises in the cattle price between now
and purchase time.
Assume that In June, 2019, the auction price of cattle then will be $435 each and the
June futures contract will be trading at $432 a head.
REQUIRED:
Calculate the value of Gander’s net purchase cost in June, 2019, including the profit or
loss from his futures trading. Show all calculations.
c) The spot rates of interest (or yield to maturity) for a series of bonds are currently:
Years to maturity Yield to Maturity Per Annum (%)

1 6.2%
2 6.8%
3 7.2%
REQUIRED:
Calculate the forward rate of interest for years 2 and 3 (as percentages, correct to 2
decimal places).
Page 12 of 20
19) (3 + 4 = 7 marks)
a) Jones Ltd holds the following share investments in the companies listed below.
 $64,000 in K Ltd, whose beta is 0.87 and whose expected return is 8% pa.
 $48,000 in L Ltd, whose beta is 1.04 and whose expected return is 10% pa.
 $32,000 in M Ltd, whose beta is 1.21 and whose expected return is 12% pa.
 $16,000 in N Ltd, whose beta is 1.44 and whose expected return is 15% pa.
i. What are the portfolio weights?
ii. What is the expected return of Jones Ltd’s portfolio?
iii. What is the portfolio beta?
Page 13 of 20
b) The following information is available. The risk free rate is 3%. A share in CD Ltd has a
beta of 0.9 and an expected return of 11%. Mary has decided to spread her investment
across the risk-free asset and the share.
REQUIRED:
i)What is the expected return for a portfolio that is equally invested in the two assets?
II. If the portfolio in i) has a beta of 0.5, what are the portfolio weights?
iii)If portfolio of the two assets has an expected return of 9%, what is its beta?
iv)What is the expected return on the market?
Page 14 of 20
20) [(1 + 2) + (1 + 1) + 2 = 7 marks].
a) William Hunting Ltd has been operating in Sydney since 1984. Over the last 5 years, the
company has achieved the following percentage rates of return.
Year Annual Returns (% pa)
2013 15
2014 6
2015 -6
2016 13
2017 12
REQUIRED:
i) Calculate the average annual return for the past 5 years.
ii) Calculate the standard deviation of these returns.
Page 15 of 20
b) In 2017, in an overseas country, the real rate of interest on a bond was 4% and the rate
of inflation was 6%. What nominal rate would you expect to see on the government
bond? Use the geometric or Fisher method.
c) Is a negative real rate of interest likely to be expected? Give reasons.
d) Is it possible for a negative real rate to occur if the nominal rate is positive? Explain, with
the aid of a hypothetical example.
END OF EXAM PAPER
Page 16 of 20
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page.
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SAMPLE FINAL EXAMINATION

STUDENT NAME & ID__________________________________________________

TUTORIAL DAY & TIME________________________________________________

SUBJECT NAME: PG - Financial Management

SUBJECT NUMBER: FIN700

TIME ALLOWED: 3 Hours plus 15 minutes reading time

EXAMINATION MARKING SHEET

Question Student Mark

1 - 15 Multiple Choice Questions /15

16 Shareholder value and the cost of capital /7

17 Financial leverage and capital structure policy /7

19 Return, risk and the security market line /7

20 Lessons from capital market history /7

Multiple-choice questions answer sheet.

The following information relates to Question 1.

5) All else being equal, assets with smaller betas have:

8) The D / E ratio reflects the firm’s:

9) WACC unadjusted is known as unadjusted because it is not adjusted for:

10) The value of a firm is maximized when:

11) M & M Proposition I can be stated as:

12) Homemade leverage is the use of:

i. Calculate Miller Ltd's weighted average cost of capital.

i) Calculate Hood Ltd’s cost of preference shares.

i. What is the company's current cost of equity capital?

c) Raven Ltd expects an EBIT of $80,000 every year forever. The

February, 2019 – Last sale price = $15.00

Premiums quoted for 2019 expiry dates

For Strike Price August September October

Years to maturity Yield to Maturity Per Annum (%)

i. What are the portfolio weights?

ii. What is the expected return of Jones Ltd’s portfolio?

iii. What is the portfolio beta?

iv)What is the expected return on the market?

Year Annual Returns (% pa)

ii) Calculate the standard deviation of these returns.

c) Is a negative real rate of interest likely to be expected? Give reasons.

END OF EXAM PAPER

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