Question 1 (3 marks)
What is the appropriate goal of financial managers? Can managers' decisions affect this goal in any way? If so, how?
Question 2 (3 marks)
Donald purchased a 10 year maturity bond three years ago. The bonds pay annual coupons at a rate of 10% of the face value of $1,000. At the time when Donald purchased the bond, the yield to maturity was 8%. If Donald sells the bond after receiving the fifth coupon payment when the bond's yield to maturity had fallen to 6%, what is Donald's effective annual yield on the investment.
Question 3 (3 marks)
You have bought a house worth $260,000 by taking a 15 year loan at an annual rate of 4% per annum compunded monthly, what will be the loan outstanding at the end of 5 years?
Question 4 (3 marks)
A company currently pays a dividend of $2 per share that is D0 =$2. It is estimated that the company's dividend will grow at a rate of 20 percent for the next 2 years and thereafter the dividend will grow at a constant rate of 7 percent forever. The company's shares has a beta equal to 1.2, the risk free rate is 7.5 percent and the market risk premium is 4 percent. What is the shares current intrinsic value?
Question 5 (3 marks)
To fund her retirement, Helen requires a portfolio with an expected return of 12 per cent per year over the next 30 years. She has decided to invest in Shares 1, 2, and 3, with 25 per cent in Share 1, 50 per cent in Share 2, and 25 per cent in Share 3. If Shares 1 and 2 have expected returns of 9 per cent and 10 per cent per year, respectively, then what is the minimum expected annual return for Share 3 that will enable Helen to achieve her investment requirement?
Question 6 (10 marks)
(a) Rosemount Energy Company is installing new equipment at a cost of $20,000,000. This project is expected to generate the following after tax net income and cash flow over its five-year life:
The company depreciates this equipment using the straight-line method over the life of the project. The company's cost of capital is 10% per annum.
- What is the project's accounting rate of return (ARR)? (3 marks)
- What is the project's payback period? (3 marks)
- What is the project's net present value (NPV)? (2 marks)
(b) Differentiate between independent projects and mutually exclusive projects.(2 marks)
Question 7 (10 marks)
a.Total risk can be decomposed into systematic risk and unsystematic risk. Explain each of these components of risk and how they are affected by increasing the number of securities in the portfolio.
- The historical returns for the market and for Sakura Ltd, a firm in the share market is provided in the table below.Year
- Calculate the expected return on the market and Sakura shares. (1 mark)
- Calculate the standard deviation of the market returns and the standard deviation of the returns on Sakura Ltd.(1 mark)
- Determine the correlation coefficient between the market return and the return on Sakura shares and hence calculate the Beta coefficient for Sakura Ltd. (2 marks)
- What is the compensation for bearing systematic risk? (2 mark)
- If the risk free rate is 5 percent would you consider the shares of Sakura Ltd as a good buy? (2 marks)
Question 8 (10 marks)
The following information is extracted from the financial statements of XP Sports Limited:
(a) Briefly explain what you understand by the term 'operating cycle'. (2 marks)
(b) What is the operating cycle for XP Sports Limited? (2 marks)
(c) What can you say about XP Sports accounts receivable and inventory management if it is known that the industry average operating cycle is 72 days? (1 mark)
(d) Briefly explain what you understand by the 'cash conversion cycle'. (2 marks)
(e) What is the cash conversion cycle for XP Sports Limited? (2 marks)
(f) What can you say about XP Sports cash conversion cycle if it is known that the industry average cash conversion cycle is 42 days? (1 mark)
Question 9 (10 marks)
Nodebt Ltd has a capital structure of 100% ordinary equity with a current return on equity of 18%: Its Earnings before Interest and Taxation was $142,857. Nodebt pays tax at the rate of 30%.
- What is the current market value of Nodebt Ltd? (2 marks)
- What is the Weighted Average Cost of Capital? (2marks)
- What is the market value of Nodebt Ltd after it issues the debt. (1 mark)
- What is the market value of Nodebt Ltd's equity after it issues the debt.(1 mark)
- What is the cost of equity (ke) after it issues the debt. (1 mark)
- What is the new Weighted Average Cost of Capital? (1mark)
- Explain what has happened to the WACC and why? (2 marks)