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Practice Questions for Final Exam1. Bond MC QuestionsWhat is a Par value of a bond?a. The amount borrowed by the issuer of the bond and returned to the investors when the bondmatures.b. The overall return earned by the bond investor when the bond matures.c. The difference between the amount borrowed by the issuer of bond and the amount returned toinvestors at maturity.d. The size of the coupon investors receive on an annual basis.e. The effective interest rate payed to the investor for every period that the bond is held.f. The average value of the bond over its life prior to its maturity.What is the Coupon of a bond?a. A pre-determined fixed interest amount payed periodically by the issuer of the bond to thecurrent owner.b. The number of days between the purchase date of the bond until its maturity.c. The rate of interest that is currently being payed to the bond holder based on its market value.d. Another term for the duration of a bond portfolio.e. A measurement of how creditworthy the issuer of the bond is.f. The difference between the amount borrowed by the issuer of bond and the amount returned toinvestors at maturity.When the price of a bond is above the face value, the bond is said to be?a. Trading at parb. Trading at a discountc. Trading below pard. Trading at a premiume. It is not possible for this to happen.f. Close to default.2. Equity MC QuestionsWhich statement is the most correct when shares are trading in an efficient market?a. Prices change constantly as new information becomes available and is discounted into company’smarket price.b. The smartest investors have access to information first and therefore are generally more profitablethan their competitors.c. It is generally accepted that there is no such thing as an efficient market.d. Prices will always rise on good news and fall on bad news.e. All profitable companies will pay dividends otherwise their share prices will never rise.f. Well managed companies will always provide the highest dividend returns for their investors.What is the most obvious advantage provided to companies by the existence of secondary markets forShares.a. They enable companies to sell their new debt or equity issues at lower funding costs.b. It provides easy access to speculators who wish to make profits from share trading.c. Being listed in a secondary market provides a company with name recognition amongst investorsand this helps business.d. Lenders of funds will be more likely to make loans to ASX listed companies because they can seetheir share prices and so value the company quickly.e. Shareholders including management and staff will be able to buy and sell their holdings moreeasily.f. When calculating WACC it is far easier if the company’s market risk factors are known so that theequity portion of the calculation is more accurate.Calculate the Holding Period Return of the following Share investment. Purchase Price $11.50, Sale Price$15.50, Interim Dividend $$0.40, Final Dividend $0.60. Assume that both dividends were earned during theholding period and that there are no franking credits attributable.Worked Answer: (see Wk4 Seminar Notes Pages 5,6,7)HPR = ((Sale Price – Purchase Price) + Earnings) / Purchase Price= ((15.50 – 11.50) + (0.40 + 0.60) / 11.50= (4 + 1) / 11.50= $5 which is 43.5% of the Purchase Price.a. $5 or 43.5%b. $4 or 34.8%c. $6 or 52.2%d. $4.40 or 38.3%e. $4.60 or 40.0%f. $5 or 32.3%3. FV of CashflowsDeepak has made two investments. Use the compound interest formula to calculate the TOTAL future valueof these investments.(Seminar 2, Slide 18)FV = PV (1+i)^nInvestment 1: He invests $20,000 for 5 years compounded annually at 3%.

PV= 20,000

i = 0.03 (3%) n = 5

FV

= 20,000 (1 + 0.03) ^5= 23,185.48

Investment 2: He invests $5,000 for 5 years compounded semi-annually at 2.5%

PV = 5,000

i= .025 / 2 (to make it semi-annual) n= 10 (6 month periods in 5 years)

FV

= 5,000 (1+0.0125) ^10= 5,661.35

Add Investment 1 and 2 together for a total FV = $28,846.83. Round up to the answer choice below.a. $28,847b. $28,982c. $28,750d. $28,285e. $28,800f. $28,973Sanjay has made two investments. Use the compound interest formula to calculate the TOTAL future valueof these investments.(Seminar 2, Slide 18)FV = PV (1+i)^nInvestment 1: He invests $10,000 for 5 years compounded annually at 11%.PV = 10,000 i = 0.11 (11%) n = 5

FV

= 10,000 (1 + 0.11) ^ 5= $16,850.58

Investment 2: He invests $3,000 for 5 years compounded semi-annually at 10.5%

PV = 3,000

i = 0.105 / 2 (to make it semi-annual) n = 10 (6 month periods in 5 years)

FV

= 3,000 (1+ 0.0525)^10= $5004.29

Add Investment 1 and 2 together for a total FV = $21,854.87.Round up to the answer choice below.a. $21,855b. $21,685c. $21,905d. $21,965e. $21,790f. $21,805Prakul has made two investments. Use the compound interest formula to calculate the TOTAL future valueof these investments.(Seminar 2, Slide 18)FV = PV (1+i)^nInvestment 1: He invests $12,000 for 5 years compounded annually at 6%.

PV = 12,000

i = 0.06 (6%)

n = 5

FV

= 12,000 (1+0.06) ^ 5= $16,058.71

Investment 2: He invests $4,000 for 5 years compounded semi-annually at 5.5%

PV = 4,000

i = 0.055 / 2 (to make it semi-annual) n = 10 (6 month periods in 5 years)

FV

= 4,000 (1+0.0) ^ 10= $5,246.60

Add Investment 1 and 2 together for a total FV = $21,305.31Round to the answer choice below.g. $21,305h. $21,365i. $21,255j. $21,395k. $21,415l. $21,2254. NPV Calculation questions.Indira will receive three payments from the sale of her business over the next three months.Calculate the Net Present Value (NPV) of these payments. Assume that we are using a 365 day basis (365days in the year) for calculations. The interest rates applicable at the moment are 1mth 7% per annum,2mth 8% per annum, and 3mth 8.5% per annum.(Seminar 2, Slide 23, 24)PV = FV / (1+i)Payment 1 in 30 days is $10,000.

FV = 10,000

i = (30/365)*0.07 = 0.00575…..

PV

= 10,000 / (1+0.00575….)= $9,942.79

Payment in 60 days is 12,000.

FV = 12,000

i = (60/365)*0.08 = 0.01315….

PV

= 12,000 / (1+0.01315…)= $11,844.24

Payment in 90 days is $20,000.

FV = 20,000

i = (90/365)*0.085 = 0.02095….

PV

= 20,000 / (1+0.02095…)= $19,589.42

Add the PV of the three payments together for a total PV = $41,376.46Round to the answer choice below.Choose the correct present valued sum of the three payments.a. $41,376b. $41,462c. $41,416d. $41,325e. $41,522f. $41,422Amrita will receive three payments from the sale of her business over the next three months.Calculate the Present Value (PV) of these payments. Assume that we are using a 365 day basis (365 days inthe year) for calculations. The interest rates applicable at the moment are 1mth 7% per annum, 2mth 8%per annum, and 3mth 8.5% per annum.(Seminar 2, Slide 23, 24)PV = FV / (1+i)Payment 1 in 30 days is $6,000.

FV = 6,000

i = (30/365)*0.07 = 0.00575…..

PV

= 6,000 / (1+0.00575….)= $5,965.68

Payment in 60 days is 9,000.

FV = 9,000

i = (60/365)*0.08 = 0.01315….

PV

= 9,000 / (1+0.01315…)= $8,883.18

Payment in 90 days is $25,000.

FV = 25,000

i = (90/365)*0.085 = 0.02095….

PV

= 25,000 / (1+0.02095…)= $24,486.78

Add the PV of the three payments together for a total PV = $39,335.64Round to the answer choice below.Choose the correct present valued sum of the three payments.a. $39,336b. $39,462c. $39,416d. $39,305e. $39,522f. $39,422Latika will receive three payments from the sale of her business over the next three months.Calculate the Present Value (PV) of these payments. Assume that we are using a 365 day basis (365 days inthe year) for calculations. The interest rates applicable at the moment are 1mth 7% per annum, 2mth 8%per annum, and 3mth 8.5% per annum.(Seminar 2, Slide 23, 24)PV = FV / (1+i)Payment 1 in 30 days is $10,000.

FV = 10,000

i = (30/365)*0.07 = 0.00575…..

PV

= 10,000 / (1+0.00575….)= $9,942.79

Payment in 60 days is 12,000.

FV = 12,000

i = (60/365)*0.08 = 0.01315….

PV

= 12,000 / (1+0.01315…)= $11,844.24

Payment in 90 days is $18,000.

FV = 18,000

i = (90/365)*0.085 = 0.02095….

PV

= 18,000 / (1+0.02095…)= $17,630.48

Add the PV of the three payments together for a total PV = $39,417.51Round to the answer choice below.Choose the correct present valued sum of the three payments.a. $39,418b. $39,498c. $39,511d. $39,367e. $39,542f. $39,3995. Annuity Question.Raj is to receive an ordinary Annuity in the form of a pension for the next 18 years. It is for a fixed amountof $3000 per year and the first payment will be made to him one year from now. If the current 18 yearinterest rate is 11% per annum, calculate the Present Value (PV) of this annuity and choose the correctanswer from the choices given.(Seminar 3, Slide 10, 11, 12, 13)PV = (CF/i) * [1- 1/(1+i)^n]CF = 3000 i = 0.11 (11%) n = 18

PV

= (3000/0.11) * [1 – 1/(1+0.11)^18]= $23,104.85

Round to the answer choice below.a. $23,105b. $23,020c. $25,175d. $25,555e. $31,475f. $31,110Raul is to receive an ordinary Annuity in the form of a pension for the next 20 years. It is for a fixed amountof $5000 per year and the first payment will be made to him one year from now. If the current 20 yearinterest rate is 5% per annum, calculate the Present Value (PV) of this annuity and choose the correctanswer from the choices given.(Seminar 3, Slide 10, 11, 12, 13)PV = (CF/i) * [1- 1/(1+i)^n]CF = 5000 i = 0.05 (5%) n = 20

PV

= (5000/0.05) * [1 – 1/(1+0.05)^20]= $62,311.05

Round to the answer choice below.a. $62,311b. $62,562c. $66,177d. $66,594e. $60,488f. $60,690Preeti is to receive an ordinary Annuity in the form of a pension for the next 7 years. It is for a fixed amountof $12,000 per year and the first payment will be made to her one year from now. If the current 7 yearinterest rate is 6% per annum, calculate the Present Value (PV) of this annuity and choose the correctanswer from the choices given.(Seminar 3, Slide 10, 11, 12, 13)PV = (CF/i) * [1- 1/(1+i)^n]CF = 12,000 i = 0.06 (6%) n = 7

PV

= (12000/0.06) * [1 – 1/(1+0.06)^7]= $66,988.58

Round to the answer choice below.b. $66,989c. $66,562d. $68,177e. $68,594f. $63,488g. $63,690Section 2: Written Response Questions8. Ethics are an important consideration for every business.Discuss this statement outlining some of the challenges businesses face when operating. Considerthe potential conflicts that owners/managers face when considering ethics whilst also trying tomaximise profits and the value of the business. (3 marks)(Seminar 1, slides 33, 34)Ethics are a society’s ideas about what actions are right and wrong.Are business ethics different? Traditions of morality are relevant to business and financialmarkets. Corruption in business creates inefficiencies in an economy. The law is not enough:Ethicists argue that laws and market forces are not enough. Businesses need to take account ofthe ethics and morals of the communities that they operate in. There are serious consequenceswhen business is seen to have not acted ethically. The legal cost of ethical mistakes can beextremely high as has been demonstrated by the banking royal commission findings of recentyears. Rectification and compensation expenses can also be large. The conflict that owners andmanagers face stem from the sometimes difficult decisions required when forsaking profitableactivities / investments that may appear (or be) unethical to some.9. In Virat’s investment portfolio he holds two stocks. They are the Commonwealth Bank (CBA) which isthe largest banking business in Australia, and Woolworths (WOW) which is the largest retail grocerin Australia.(Seminar 4)a. Discuss the idea of correlation with regard to portfolio theory and whether you feel that theprice movements of the two assets in the portfolio would have a positive, neutral (0) or negativecorrelation and why. (1 mark)Portfolio theory suggests that by investing in two or more assets, it is possible to reduce therisk held in the portfolio (assuming that the two assets have a correlation less than 1).In this case, given the two stocks are both very large businesses in the Australian economy itis likely that they are highly correlated. They are both highly exposed to the Australianeconomy and particularly to Australian households. Regardless, it is likely that theircorrelation would be less that 1 and therefore by adding the second stock to the portfolio,volatility of returns would be reduced slightly.b. If Virat wanted to achieve a portfolio with reduced volatility of returns, what should he do? (1mark)He should diversify by adding uncorrelated assets to the portfolio.c. When discussing the CAPM model, explain what it means when the Beta of a stock is equal to 1.(1 mark)When the Beta of a stock is equal to 1, it means that the stock moves in unison with thegeneral market. If the market rallies or sells off 1%, then the individual stock will also rally orfall by 1%.10. When considering a purchase of a new machine for her business , Mekhla wants to calculate theWeighted Average Cost of Capital (WACC) for her current operations.Her long terms borrowings make up 40% of the business’s capital. The applicable interest rate paidfor this is 8% per annum. The current tax rate that the business pays is 30%.Although her business is not listed she has researched similar business and has calculated that theBeta for these (and her own) is 0.7. Through research she has also found that the Market RiskPremium is 4% and the Government Bond Rate (risk free rate) is 3%.(Seminar 6)a. Calculate the cost of Debt Capital for the business (allow for the tax deductibility of the debt). (1mark)The cost of debt = Interest expense*(1-tax rate)

Kd

= 8% * (1 – 0.30)= 5.6%

b. Assuming that her business has only ordinary shares, calculate the cost of Equity Capital for thebusiness. (1 mark)Expected Return = Risk free rate + Beta* Market Premium= 3% + 0.70 * 4%= 5.8%c. With your answers in a. and b. calculate the current WACC for Mekhla’s business that should beused when considering new purchases of equipment. (1 mark)WACC = Cost of equity x % of equity + Cost of Debt x % of debt= 5.8% x 0.60 + 5.6% x 0.40= 5.72%d. If the returns generated by purchasing the new piece of equipment equate to an 8% payback,should Mekhla go ahead with the purchase? Why? (1 mark)Mekhla should go ahead and make the investment because the returns generated from it(8%), are greater than the weighted average cost of capital of her firm (5.72%)

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