About the Mid-session Exam

When: during lecture time in Week 8

Duration: 90 minutes
Format: The mid-exam has two parts
Part One: (total 30 marks) consists of 15 multiple-choice questions, with each worth 2 marks
Part Two: (total 70 marks) consists of 5 short-answer questions, with each question consisting
of 2-4 sub-questions.
Weight: The mid-exam accounts for 20% of the total marks of the subject.
Coverage: The mid-exam covers lectures 1 -6 inclusive.
Advice on the preparation for the short-answer questions:
Practice the tutorial questions and make sure that you really understand the logic behind the
solutions. This should enable you to pass the exam.
If you are looking for D or HD, lecture notes and in-class discussions are also important.
Read the questions carefully.
Formulas required for the mid-exam (will be provided in the exam)
OCF = Sales Costs Taxes
OCF = NI + depreciation
OCF = (Sales Costs)(1 Tc) + Depreciation*Tc
PVIFA r, n = (1/r)*[1-1/(1+r)^n]
R = (Pex - Psub)/N
RS = R0 + (B/S)(R0 RB)(1 tC)
RS = RF + (RM RF)
RWACC = [B / (B + S)](1 tC)RB + [S / (B + S)]RS
Levered = [1 + (1 tC)(Debt/Equity)]Unlevered

Sample questions:
NOTE: These sample questions are indicative only. You should NOT assume that they
will appear in the mid-session exam; nor do they cover all topics that are to be tested in the
mid-session exam. Rather, these sample questions should help you gauge the difficulty level
that you could expect in the mid-exam.
1. If a project has a net present value equal to zero, then:
A. the initial cost of the project exceeds the present value of the projects subsequent
cash flows.
B. the internal rate of return exceeds the discount rate.
C. the project produces cash inflows that exceed the minimum required inflows.
D. any delay in receiving the projected cash inflows will cause the projects NPV to be
negative.
2. The net present value method of capital budgeting analysis does all of the following
except:
A. incorporate risk into the analysis.
B. consider all relevant cash flow information.
C. use all of a project's cash flows.
D. provide a specific anticipated rate of return.
3. One purpose of identifying all of the incremental cash flows related to a proposed
project is to:
A. isolate the total sunk costs so they can be evaluated to determine if the project will
add value to the firm.
B. eliminate any cost which has previously been incurred so that it can be omitted from
the analysis of the project.
C. include both the proposed and the current operations of a firm in the analysis of the
project.
D. identify any and all changes in the cash flows of the firm for the past year so they can
be included in the analysis.
4. Based on a multi-factor APT model, the concept of portfolio diversification is to
minimize which one of the following?
A. weighted average of betas
B. weighted average of betas F
C. weighted average of unsystematic risks
D. weighted average of expected returns
5. The use of leverage:
A. increases both the asset and the equity betas.
B. decreases the equity beta and increases the asset beta.
C. increases the equity beta but does not affect the asset beta.
D. decreases the equity beta but does not affect the asset beta.

6. If a stock price follows a random walk, the price today is said to be equal to the prior
period price plus the expected return for the period with any remaining difference from the
actual return considered to be:
A. a predictable amount based on the past prices
B. due to new information related to the stock.
C. related to the security's risk.
D. an overall market abnormality.
7. In a world with taxes and financial distress, when a firm is operating with the optimal
capital structure the:
A. weighted average cost of capital will be maximized.
B. firm will be all-equity financed.
C. required return on assets will be at its maximum point.
D. increased benefit from additional debt is equal to the increased bankruptcy costs of
that debt.
8.
A.
B.
C.
D.

The optimal capital structure:

will be the same for all firms in the same industry.
of a firm will vary over time as taxes and market conditions change.
places more emphasis on the operations of a firm rather than the financing of a firm.
is unaffected by changes in the financial markets.

9. A capital budgeting project is usually evaluated on its own merits. That is, capital
budgeting decisions are treated separately from capital structure decisions. In reality, these
decisions may be highly interwoven. This interweaving is most apt to result in:
A. firms rejecting positive NPV, all-equity projects because changing to a capital
structure with debt will always create negative net present values.
B. corporate financial managers first checking with their investment bankers to
determine the best type of capital to raise before valuing a project.
C. firms accepting some negative NPV all-equity projects because changing the capital
structure adds enough positive leverage tax shield value to create a positive NPV.
D. firms never changing their capital structure because all capital budgeting decisions
will be overridden by capital structure decisions.
10. Debt capacity is often offered as a reason for a stock price to decline when additional
equity securities are issued. The primary reason that supports this argument is that:
A. the high issue costs of a debt offering must be paid by the shareholders.
B. management feels the probability of default has risen, which limits the firms debt
capacity and thus an equity issue is necessary.
C. unless additional debt is issued in the future, stock dividends will tend to decline after
the new securities are issued.
D. additional equity is only issued when a firm cannot meet its current debt obligations,
thereby signaling the firm is on the verge of bankruptcy.

(Answers: 1D; 2D; 3B; 4C; 5C; 6B; 7D; 8B; 9C; 10B)