Seat No 34 Student Name @RMIT Student 1D ‘UNIVERSITY Group No. CA Lecturer ga le VIETNAM Signature ype FINAL EXAM COVER SHEET NOTE: DO NOT REMOVE this exam paper from the exam venue EXAM DETAILS Course Cod BAFI3184V Course Description: Business Finance - HANOI . 2.00 _2hr Date of exam: 19/05/2012 Start time of exam: PM Duration of exam: 45min Total number of pages (incl. this cover sheet) 19 CUTTS ono SON 4. Students must fill-in on this cover sheet their full name, underlining their family name, and their student number. 2. Write your full name and student number on each exam booklet together with the number of exam books used. 3, Students must not write, mark in any way any exam materials, read any other text other than the exam paper or do any calculations during reading time. 4, No mobile phones are permitted in the exam room. You are in breach of the exam rules if you have a mobile phone with you during your exam. 5, This is a CLOSED BOOK Exam. 6. Nor-text-storing calculators are allowed. 7. This is a 2 hour examination plus 15 minutes reading time. The paper will be marked out of 100 and represents 60% of the assessment in this subject. 8, This paper is divided into three sections: Section A - 30 marks, Section B - 40 marks, Section C - 30 marks 9, Allof your answers are to be written in this examination paper in the spaces provided. if you require more space you can write on the blank side of the page carefully indicating which question your answer relates to. 40. The use of a calculator is permitted. However, accompanying instruction manuals must not be brought into the examination room. 41. In questions where calculations are necessary students are only required to calculate their answer to two decimal places. 42, For numerical questions students will be allocated marks for correct workings even if the final answer wrong. 4. A formulae sheet is included at the back of this paper and it may be detached. The remainder of the exam paper must be handed in intact BAFIa1¢4 Business Finance (Vietnam) Final Examination Semester 12012 Page 1 of 19SECTION A On this page you are required to provide your answers to the Multiple Choice Questions and you must, at the end of the examination, hand in your entire examination paper, NOT just this page. NO Pages are to be removed from this examination paper (apart from the formulae sheets). Question | Answer Number 1 A & 2 D - 3 ic a 4 c a 5 B a 6 Db - 7 D | + x I. Ss 8 D - 9 ® ba 10 D — 11 & ae ae 12 ie _ 13 A ae 14 Ie. a 15 Ae a 16 ie a 17 A 18 i a 19 A -— 20 2. oe (continued on next page) ‘BAFI3184 Business Finance (Vietnam) Final Examination Semester 12012 Page 2 of 19er en DOO rere eee reer . SECTIONA Students are required to answer all 20 of the below questions. For each question choose the one alternative that best completes the statement or answers the Guestion. Enter your answer on the second page of this examination question paper, he complete question paper must be handed in. This section counts for a total of 30 Of the 160 marks available on the exam paper and each of the questions counts for 1.5 marks. 1) If you are unable to use past price data to earn an abnormal investment return we Say that the market is: Strong-form efficient . Weak-form efficient C. Semi-strong-form efficient D. Ultra efficient 2) Non-sytematic risk is also referred to as: ‘A. Market risk B. Non-diversifiable risk C. Non-diversity risk ®) Diversifiable risk 3) To compute the required rate of return for equity in a company using the capital asset pricing model, it is necessary to know all of the following except: A. The risk-free rate of return 1 B. The beta of the firm — The earnings for the next quarter Y The market return expected for the investment period Vn 4) If a share has a beta of 1.30 this implies that: ‘A. The stock tends to move with the market but to a lesser extent The stock tends to move against the market but to a lesser extent © The stock tends to move with the market but to a greater extent ” The stock tends to move against the market but to a greater extent 5) Assume that the expected rate of return for a stock with a beta of 1.1 is 12% and that the risk-free rate is 4%. What is the expected market risk premium? 6.48% 9 9 7.27% Ap ered 10.48% D. 11.27% a4 6) Which of the following factors would form part of the systematic risk of @ market: ‘A fault with Company A’s product A general strike ‘a strike throughout the entire economy) A strike at Company B's factory D. Factors A and C 7) The measure of risk per unit of expected return is called the: A. Variance 6 B. Standard deviation oe C. Coefficient of error RK (G) Coefficient of variation 8) is the chance of loss or the variability of returns associated with a given asset: A. Probability B. Certainty C, Equilibrium Risk SAFIO184 Business Finance (Vietnam) Final Examination Semester 1 2012 Page 3 of 19 Sse Hesse esses EEE SeeSeee EC eeeeeseecceee ceca aPee eee eee eee 9) Because shareholders are the last to receive any distribution of assets in the event of a : company becoming bankrupt, generally, they expect to receive: A. A lower rate of return than debtholders A higher rate of return than debtholders C. The risk-free rate of return D. An arbitrage rate of return 10) The weighted average cost of capital is: ‘A. Never going to be higher than the most expensive source of finance . Never going to be lower than the cheapest source of finance . Going to be higher the lower is the corporate tax rate (D) All of the above 11) When calculating WACC it is best to use which of the following costs: ‘A. Historical costs Accounting costs Current market costs Predictive costs 12) The following information has been obtaine WACC = 10.5% Before tax cost of equity capital = 14% Market value of the firm $200 million Market value of debt $140 million Corporate tax rate 33% The before tax cost of debt is: 40 A. 11.78% ¥ co -03%3) — 13.43% aM 4 A D ta20% 0.405 = 0M 4 2 P.13.85% | 0S = p.0g2 4 Vd 0469 13) Which of the following is a major difference between debt and equity: ® The cost of debt is tax-deductable while the cost of equity is not B. Debt holders do not have any claim on the cash-flows of a firm while shareholders do C. Shareholders come first in their claims on the ‘cash-flows of the firm while debtholders come last D. The cost of equity is tax deductable while the cost of debt is not 14) Depreciation tax-shield is calculated as: ‘A. Revenue less expenses less depreciation B. Depreciation p.a. multiplied by (1 ~Te) (where Te is the corporate tax rate) oO Depreciation p.a. multiplied by Tc (where Tc is the corporate tax rate) B. None of the above The required rate of return of equity holders in a levered firm can be shown to be equal to the required rate of return for un-levered equity plus a financial risk premium which is a function of the debt/equity ratio 8. In perfect capital markets (with no taxes and no bankruptcy costs) the value of the firm is independent of its capital structure C. The appropriate discount rate for a particular investment proposal is completely independent of how the investment is financed D. The appropriate discount rate depends on the features of the investment proposal, especially the risk se terms of capital structure, Modigliani and Miller’s Proposition 1 states: BAFI3164 Business Finance (Vietnam) Final Examination Semester 1 2012 Page 4 of 19 Baca eecEe EE eueeeeeEeaseeCeEEaaSeeeEE EeeIanO nnNnDNTENUNTOURrrerrrrrrrrrreerrrrrrccerersszeccrceeeaaseaeneeeeCHaeeeueeEEH aE | 16) In terms of capital structure, an indirect financial distress coe" J torr ot Pte with actual bankruptcy, e.g- legal and administrative expenses Cost associated with provisional taxation } Cost associate mith attempting to avold bankruptcy, @.g. restructuring costs, redundancy costs D. Cost associated with government consumption tax a7)'it ae the degree of leverage increases the available return to equity holders decreases it means: ve "ans: qurn the firm can earn on its assets is less than the cost of debt ‘The retin the firm ean earn ofits assets is greater than the cost of debt” 7 ‘The debt equity ratio is greater than one 5 ZA 2 D. The debt equity ratio is less thanone = ea 18) Assume a Modigliani and Miller world with no taxee where the required rate of return of an Unclevered firm is 8.8%. What is the cost of equity in an identical levered firm where the cost of debt is 8% and the D/E ratio is 1.5? 10% ‘i > os 9.25% ie ie ow C. 8.8% : * ? D. 12.5% co. G ‘de 19) Modigliani and Miller showed that in a world with no taxes as the degree of leverage increases: Equity holder's available and required rates of return Increase in line with each other. The required rate of return on equity in a levered firm Is lower than the required rate of return on equity in an un-levered firm c. eeeTotue of a levered firm is higher than that of an un-levered firm D. All of the above 20) In terms of the traditional theory of capital structure, the Optimal Capital Structure refers to: A equity holder's available and required rates of return increase 1 line with each other. Oe Tee Rturn the firm can earn on its assets is less than the cost of debt ‘The combination of debt and equity that minimises WACC ‘such that the value of the firm is maximised. D. Answers A & C are correct GaFIgt64 Business Finance (Vietnam) Final Examination Semester 12012 Page 5 of 19 sees eeeSIeeeeSsEEeCeeeeeeecee accessGaeeeeeeaeaeeeR eee ae eee aeeneeeee etree ee B Students are required to answer all eight (8) of the below questions, This section cunts for a total of 40 of the 100 marks available on this ovad Paper and each of the questions counts for five (5) marks. Outline and explain the three critical factors in terms of financial decision-making, Net oSO BAFIS164 Business Finance (Vietnam) Final Examination Semecier 12012 Page 6 of 19 aac ee cee ecy eee ecee aeueeaieceQuestion B2 ‘Suppose you place $1,000 in an account that pays interest of 12% p.a. compounded monthly. How long will it take for the account to grow to $2,000? ae 2on__= 4.000 {410 42 \ mm Se Pid) ane nw BR [ge emit 7 BAFI3104 Business Finance (Vietnam) Final Examination Semester 12012 Page 7 of 19Question B3 A car loan of $20,000 is to be repaid by equal instalments of principal and interest over 10 years at an interest rate of 10% p.a. compounded annually. Find: 1.The annual instalment 2.The interest and principal portions of the fourth (4'") payment 3.1f you win the lottery and repay yhe loan after the seventh (7) payment how much will you need to pay? 0 Amon. ur [| A- Coa" 2) Mr -fa954. Od 0-4 : ; vd 2 Romnaining hiacipal at pogo ee PRorea™) = hUs t 22 Od Aol Ten ta «hye 624 e () ei th Prtnetiea) parrhisn by ne : 3954. 94— A5k4 . 6 =t4bi0 295 3) he —ermaurl yo iel py —aplor Ae 2 pryerertt Py. ms 4 =f APA _ dd ge O.4 - 44) 0 BBAFIS184 Business Finance (Vietnam) Final Examination Semester 1 2012 Page 8 of 19Question B4 Assume that you are a financial advisor and that a client comes to see you for advice. The client tells you that she wishes to invest a sum of money today that will yield her three equal annual instalments of $2,000 each, the first instalment to be received four years from today and the last instalment to be received six years from today. If interest accrues at 10% p.a., what amount must the client invest today? viet amour eee Beek creer acme cece doo {4-447 ) Pig ee One ea Caso 4y> BAFI9184 Business Finance (Vietnam) Final Examination Semester 1 2012 Page 9 of 19B! Define the three possible shapes of the interest yield curve and explain what each means for future interest rates, J ED | ‘BAFI184 Business Finance (Vietnam) Final Examination Semester 1 2012 Page 10 of 19Question B6 If most of a share’s value is due to long-term cash-flows why do so many corporate finance managers and the market focus on short-term (usually quarterly) earnings? chart vom sarbings fave —|swsor its Hau. long= tom cach ae ‘BAFI3164 Business Finance (Vietnam) Final Examination Semester 1 2012 Page 11 of 19Define and explain each of the following in regards to capital market informational — effi i 2.Semi-strong form 3.Strong form 4-—Woak = form = Tpeaes prbineele tin thou! prison hase. ti yfidtortcal or pont tore pegs cTowaters con not arm. abnomal peo hae. ov fustonical data BAFI3184 Business Finance (Vietnam) Final Examination Semester 1 2012 Page 12 of 19‘Assuming the following for an investor: Rr = 10% p.a., Rm = 12% P.a., Om = 8% P.d.y Op = 6% Pua 1. What will be the investor's expected return? 2. What percentage of the investor's funds will be invested in the market portfolio and what percentage will be invested in the risk-free asset? Kos ¥ ve A) Fngated Gohicn F(R) = Os oo O = pice isle 0.08 y_006 - 07s. KG 0.09 Teodor diol overt 6%o oy the ponds jn the market and 95% in is ish = yore, apace ‘BAFI3164 Business Finance (Vietnam) Final Examination Semester 1 2012 Page 13 of 19‘SECTION C . Students are required to answer the question below. This section/question counts for @ total of 30 of the 100 marks available on this exam paper. Question C1 Based on the following information calculate the WACC of Stratco Ltd.: Extract of balance sheet for Stratco Ltd. as at 30 June 2011: Equity $'000 Issued And Paid-Up Capital 75m 50c ordinary shares 37,500 9.5m $1 3.5% preference shares 9,500 Reserves and Retained Profits Retained profits 11,000 ‘Share premium reserve 13,800 General reserve 4,000 71,050 Debt Mortgage 5,300 Debentures ($1000 each) 6,250 Bank overdraft 14,804 26,354 Additional information relating to Stratco Ltd. as at 30 June 2011: * The current market price of the firm's ordinary shares is $1.00. | * The firm's preference shares aré-currently selling for 35 cents each. + The debenturay will mature i¢ 2 yedys. They have a coupon rate of 10% per annum. has6 yey ing pnd was taken out at 12% current rates are 14° + The fi Paying 11% per annum on its bank overdraft loan\//” + Interest on debentures. mortgage and the bank overdraft is paid half-yearly, ae + The corporate tax rate is 50 cents in the dollar. \/ GQ)/,_ * The estimated Beta of the company’s ordinary shares is 1. -~ «© If the iny currently soug] ng-term finance it would have to pay inte rates of 12% per annum on debentures. An amount of $5,300,000 is owing on moran Vad 5 een ys ly + The current yield on a 10-year government bond is 12% per annum \~ * The expected return on the market portfolio is 17% per annum. |~ ¥ Ta tate = os = 9% Matet value: A x AScrpoc0 = 445 000000 rs o.4A2 + (put - pda)yA 2 0.4t * Proyrome shares 2 —Nortet Value = 0.85 » 95mm = 5425n0 _ BUR eee 0-38 BAFI3184 Business Finance (Vietnam) Final Examination Semester 1 2012 Page 14 of 19© hing carat Son ours TOTO EY) ONT. AIQGA OAL AL tea i aE Saree PTF : Us 0. oa PMR 0.06. (A+0.06) Pap GY B96 792. 4G fu. Sssden = SD = pa nag RK 53p0n0n = pur [ A-'4.06_ DOM - 639A! oe 0.06 Die tue 9 | AE) nad o i a we —Debantices = (as a = 4 = 0.4836 ree ADD = 465.35 y GEO. Db A.0h* 60 Net vali Q6S Mie GID = SOLU 3 . 6053 457. 5 Me ye fas odd \* 4 - 0.443020 a BAFI3184 Business Finance (Vietnam) Final Examination Semester 1 2012 Page 15 of 19Base_W __ Wale Base Nit Value Wight Cort bya tye Coot apbetre Weighted Cot jnory thace 5.000000 0.449 o4t O4t 0.4424 (layer thaco__AA28 000 0.034 0.4 oJ 0.032. Nerhoye — Souda. da oot? 0.4449 ona 0. 0034446. 5 603427.5 0.052: 0.4226 09. O62 - O. 00 $5 R44 Ronk Oordrytaaeo4 mo 0.449 o.AAx09s 0 .0S4SAas 00 20248. Qosdeioss eA ec [48% A) Wace = 6.4599 = AS qs eo) cS BAFIS164 Business Finance (Vietnam) Final Examination Semester 1 2012 Page 16 of 19BAFI3184 Business Finance (Vietnam) Final Examination Semester 1 2012 Page 17 of 1910. 1. 12, 13. 14, 15. FV = PV(\+r)" PV = FV(\4+r) FV = na | A oy = ua ber Wty) | r (+r)'-1 v= rua Jeon! _ Averagenet. profit ‘Average book.value 2. CF. wa (+r) NPV = -Cr, SS FINAN FORMULAE SHEET . FUTURE VALUE OF A SINGLE SUM. PRESENT VALUE OF A SINGLE SUM FUTURE VALUE OF AN ORDINARY ANNUITY PRESENT VALUE OF AN ORDINARY ANNUITY FUTURE VALUE OF AN ANNUITY DUE PRESENT VALUE OF AN ANNUITY DUE PRESENT VALUE OF PERPETUITY EFFECTIVE RATE OF INTEREST BONDPRICE CONSTANT DIVIDENDS PRICING MODEL CONSTANT GROWTH IN DIVIDENDS PRICING MODEL DIVIDEND YIELD CAPITAL GAINS YIELD ACCOUNTING RATE OF RETURN NET PRESENT VALUE BAFI3164 Business Finance (Vietnam) Final Examination Se Page 18 of 1916, 17. 18. 19. 20. 21. 22 23. 24, 25. 24, 27. 28. 29. 30. SS FINANCE FORMULAE SHEET. BUS! on BIR), = Ry +(Ry Ry )B, E(R), = at Wy Ri wi B1 +w2B 2 + w3 B3 E(R), =R, +(Ry Ry )B, i fo} + wie} +25 Psa 0s Wn Bn PRICE-EARNINGS RATIO INDIVIDUAL ASSET - EXPECTED RETURN INDIVIDUAL ASSET - STANDARD DEVIATION (RISK) INDIVIDUAL ASSET - COVARIANCE INDIVIDUAL ASSET - BETA SECURITY MARKET LINE (SML) EQUATION [CAPM] PORTFOLIO EXPECTED RETURN PORTFOLIO VARIANCE (2 ASSET) PORTFOLIO BETA. CAPITAL MARKET LINE (CML) EQUATION REWARD-TO-RISK RATIO. WEIGHTED AVERAGE COST OF CAPITAL (WACC) COST OF PREFERENCE SHARES COST OF ORDINARY SHARES (CAPM) IMPUTATION TAX-CREDIT BAFI3184 Business Finance (Vietnam) Final Examination Semester 1 2012 Page 19 of 19