格拉斯哥大学corporate finance mid-term exam.doc

For each question, please answer only one of the options. Students should answer all 20 questions. 1 hour multiple choice examination. 1st set 1. In finance theory the maximisation of shareholder wealth means:A. Increasing the total value of a portfolio of shares owned by an investor through good advice by a brokerB. Paying very high dividends in the next two to three yearsC. Having a major buy-back of shares in the near futureD. The maximising of the purchasing power available from a shareholdering in a firm or the maximising of discounted cash flow to shareholders over a long time horizon. In an efficient market it is equivalent to maximising the share price2. In discounted cash flow analysis, which of the following is a bad decision rule?A. If NPV= 3,900m then accept the projectB. If NPV= 1 then reject the projectC. If NPV= -1,200 then reject the projectD. If NPV= 100 then accept the projectE. If NPV= -1 then reject the project3. What is the annual equivalent annuity of the following cash flows?Year012Cash flow-10,000+1,000+3,000Discount rate is equal to 9%.A. -7,010B. -6,558C. -3,728D. +6,558E. -5,678SolutionNPV=-10+1/1.09+3/1.092=-6.5575-6,5575/1.7591=-3.728 4. If the NPV of a project is 550 when discounted at 10% and -430 when discounted at 12%, which of the following is the IRRA. 10.56%B. 10.28%C. 11.22%D. 11.12%E. 13.28%Solution10+550/(550+430)*2=11.12%5. Year012345Cash flow-3,0001,0005001,0006002,000Discount rate is equal to 8%A. Payback in 4 years and discounted payback in 3 yearsB. Payback in 5 years and discounted payback in 4 yearsC. Payback in 4 years and discounted payback in 2 yearsD. Payback in 4 years and discounted payback in 5 yearsE. Payback in 5 years and discounted payback in 5 yearsSolution1,000+500+1,000+600=4,100. Payback in 4 yearsYear012345Cash flow-3,0001,0005001,0006002,000Discounted cashflows925.93428.67793.83441.021,361.17Sum925.931,354.602,148.432,589.453,950.61Discounted payback 5 years6. Which of the following statement is False?A. The costs of surveys and feasibility studies incurred prior to the decision to implement a project should not be included in the project appraisalB. NPV is the most appropriate method to appraise a projectC. A post-completion audit is the monitoring and evaluation of the progress of a capital investment project through a comparison of the actual cash flows and other costs and benefits with those forecast at the time of authorisationD. The effect of a new project on other parts of a business is irrelevant when trying to decide whether to go ahead with the new project.7. What is the maximum NPV available from the following projects?ProjectNPV (m)Initial investment (m)A10.3B33.5C52.5D20.5E1010A capital constraint of 16m has been imposed on the total initial investment. The projects are divisible and each may be undertaken only once.A. 18.2mB. 16.9mC. 20.3mD. 17.4mE. 19.3mSolutionProjectBenefitRankA3.332B0.865C23D41E14ProjectCostNPVD0.52A0.31C2.55E1010B2.7 (out of 3.5) or 77.14%2.31Sum1620.318. Capital rationing is:A. When the financial markets are told by government not to lend beyond imposed limitsB. When funds are not available to finance all wealth-enhancing projectsC. When funds are not available to undertake all the projects put forward by divisional management teamsD. When wealth is destroyed because capital repayments on loans have to be made earlier than anticipated9. What is the present value of a perpetuity cashflow of 300 that begins on year 7 to infinity? The discount factor is 8%. A. 2,188 B. 2,250C. 2,556D. 2,363E. 1,998Solution300/0.08=37503750/(1.08)6=2,36310. Which of the following is not a disadvantage of using the IRR method rather than the NPV method of project appraisal?A. If the cash flows are non-conventional there may be more than one IRRB. IRR ranks in terms of percentage returns whereas NPV ranks in terms of absolute amounts of moneyC. IRR does not take into account the time value of money D. IRR method requires the estimation of the cost of capital to accept or reject a project11. On December 31, 2011 the following information is available on the Urquhart Corporation: market value of debt is 10 million pounds; stock price per share is 50 pounds; the company has 1 million shares outstanding.The debt-to-value ratio (based on market values) of the Urquhart Corporation is between:A. 0 and 0.4B. 0.4 and 0.8C. 0.8 and 1.2D. 1.2 and 1.6E. higher than 1.6SolutionFirst calculate the market value of equity (S): 50 million poundsDebt-to-value ratio is: B/(S+B) = 10/(50+10) = 0.166712. Which of the following is not an example of perfect capital market conditions:A. All investors are risk averseB. Perfect competitionC. Firms and investors can borrow and lend at the same risk-free rateD. All investors have equal access to the same informationE. There are no transaction costs13. When firms are in financial distress they often see key employees leaving the firm in order to look for employment at other firms. This is an example of:A. Direct bankruptcy costsB. Indirect bankruptcy costsC. Agency costs of equityD. Agency costs of debtE. Behavioural factors14. The all-equity financed ONeill Corporation produces DVD players. The production is not profitable and there are no signs that it will ever be profitable. However, the owner-manager of the firm does not want to abandon this project because she does not want to admit that she made a mistake when deciding to produce DVD players. This is an example of:A. Direct bankruptcy costsB. Indirect bankruptcy costsC. Agency costs of equityD. Agency costs of debtE. Behavioural factors15. Given are the following securities issues (and redemptions) by three companies: I) The Collingridge Corporation issues equity after a stock-price run-upII) The Guy Corporation repurchases stock after the stock price went on a downwards spiral III) The Makepeace Corporation repurchases stock after the stock price has been virtually unchanged for two monthsWhich of these companies has successfully timed the market?A. I, II, and IIIB. Only I and IIC. Only I and IIID. Only II and IIIE. Only I16. Which of the following statements is true?A. The static trade-off theory, pecking order theory, and market timing theory are all fully consistent with each otherB. The static trade-off theory and the pecking order theory are fully consistent with each other, but they are not consistent with the market timing theoryC. The market timing theory and the pecking order theory are fully consistent with each other, but they are not consistent with the static trade-off theoryD. The static trade-off theory and the market timing theory are fully consistent with each other, but they are not consistent with the pecking order theoryE. The three theories are not consistent with each other17. Ilsa Lund NV has a cost of equity of 13.56% and a pre-tax cost of debt of 7%. The required return on the assets is 11%. What is the firms debt-equity ratio based on MM Proposition II with no taxes? The debt-equity ratio lies between:A. 0 and 0.50B. 0.51 and 0.60C. 0.61 and 0.70D. 0.71 and 0.80E. 0.81 or higherSolutionRS = R0 + (1-T)(R0-RB)(B/S)0.1356 = 0.11 + (1-0)(0.11-0.07)(B/S)B/S = 0.6418. The Heinrich Strasser Company is currently an all-equity firm that has 80,000 shares outstanding with a market price of 42 a share. The current cost of equity is 12% and the corporate tax rate is 34%. Heinrich is considering adding 1 million of debt with a coupon of 8% to his capital structure. The debt will be sold at par value. The levered value of the equity will be between:A. 1 million and 2 millionB. 2 million and 3 millionC. 3 million and 4 millionD. 4 million and 5 millionE. higher than 5 millionSolutionVU = 80,000*42 = 3,360,000VL = VU + T*B = 3,360,000+1,000,000*0.34 = 3,700,000SL = VL-B = 3,700,000 1,000,000 = 2,700,00019. Captain Renaults has a cost of equity of 15% and a pre-tax cost of debt of 7%. The debt-eq