MCQ

FACULTY OF COMMERCE
DEPARTMENT OF ACCOUNTING AND FINANCE
BACHELOR OF COMMERCE HONOURS DEGREE IN ACCOUNTING AND FINANCE

CORPORATE FINANCE [COAF 2102]
JULY 2016: DURATION: 45 MINUTES
Answ Question
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1. C A portfolio having two risky securities can be turned risk less if
A. The securities are completely positively correlated
B. If the correlation ranges between zero and one
C. The securities are completely negatively correlated
D. None of the above.
2. B CAPM accounts for:
A. Unsystematic risk
B. Systematic risk
C. Both a and b
D. None of the abov
3. C A portfolio comprises two securities and the expected return on them is 12% and
16% respectively. Determine return of portfolio if first security constitutes 40% of
total portfolio.
A. 12.4%
B. 13.4%
C. 14.4%
D. 15.4%
4. D Total portfolio risk is __________.
A. equal to systematic risk plus nondiversifiable risk
B. equal to avoidable risk plus diversifiable risk
C. equal to systematic risk plus unavoidable risk
D. equal to systematic risk plus diversifiable risk
5. B An "aggressive" common stock would have a "beta"
A. Equal to zero.
B. Greater than one.
C. Equal to one.
D. Less than one.
6.C The risk-free security has a beta equal to , while the market portfolio's
beta is equal to .
A. One; more than one.
B. One; less than one.
C. Zero; one.
D. Less than zero; more than zero..
7. D Use the following expectations on Stocks X and Y to answer the following two
questions
Normal Bull
Bear Market Market Market
Probability 0.2 0.5 0.3
Stock X -20% 18% 50%
Stock Y -15% 20% 10%
What are the expected returns for Stocks X and Y?
Stock X Stock Y
A 18% 5%
B 18% 12%
C 20% 11%
D 20% 10%
8. B Assume that of your $10,000 portfolio, you invest $9,000 in Stock X and $1,000 in
Stock Y. What is the expected return on your portfolio?
A. 18%
B. 19%
C. 20%
D. 23%
9A In estimating "after-tax incremental operating cash flows" for a project, you
should include all of the following EXCEPT:
A. Sunk costs.
B. Opportunity costs.
C. Changes in working capital resulting from the project, net of spontaneous
changes in current liabilities.
D. Effects of inflation.
10 A A company is considering a project for investment which will cost $70,000 now
and another $10,000 in year five. The company has a cost of capital of 8%.
The project has the following discounted cash flows:
Year Discounted cash flows
$
1 23,148
2 30,007
3 19,846
4 14,701
What is its discounted payback period in years and months (to the nearest month)?
A. 2 years, 10 months
B. 3 years, 1 month
C. 3 years, 3 months
D. 3 years, 6 months
11 B The one year rate of inflation is expected to be 3·0%. The one year money rate of
interest is 6·3%.
The one year real rate of interest is:
A. 3·30%
B. 3·20%
C. 9·30%
D. 9·49%.
12A The net present value of a proposed project is a positive $56,000 at a discount
rate of 10% and a negative $28,000 at 20%.
What is the internal rate of return of the project, to the nearest whole
percentage?
A. 17%
B. 13%
C. 30%
D. 8%
You are about to invest $ 15,000 into a project that will generate $ 5,500 of cash
13B flows each year for the next 3 years. If your cost of capital is 11%, then the present
value of future cash flows is:
A. $ 23,218
B. $ 13,442
C. $ 11,612
D. $ 10,808
14 B This is the set of laws, policies, incentives, and monitors designed to handle the
issues arising from the separation of ownership and control.
A. agency theory
B. corporate governance
C. defined benefit plan
D. invisible hand
15 A If the real risk-free rate is 5%, and the expected rate of inflation is 1%, what is the
estimated nominal risk-free rate?
A. 6.05%.
B. 0.02%.
C. 4.00%.
16.D Every financial market has the following characteristic:
A. It determines the level of interest rates.
B. It allows common stock to be traded.
C. It allows loans to be made.
D. It channels funds from lenders-savers to borrowers-spenders
17 C A benchmark index has three stocks priced at $23, $43, and $56. The number of
outstanding shares for each is 350,000 shares, 405,000 shares, and 553,000 shares,
respectively. If the market value weighted index was closed at 970 yesterday and
the prices changed to $23, $41, and $58 at the market close today, what is the new
index value?
A. 960
B. 970
C. 975
D. 985
18 D Agency costs are costs incurred when:
A. Managers do not attempt to maximize firm value.
B. Shareholders incur costs to monitor the managers and influence their
actions.
C. None of the above
D. Both A and B
19 A Which of the following is typically considers an agency cost?
A. Audit
B. Cost of goods sold
C. Consultant fees
D. Taxes
20 A Which of the following is probably the most important reason for incorporating?
A. Limited liability of shareholders.
B. More money for investment.
C. Increased flexibility.
D. Shared management.
Question 2
Define financial intermediation. [2 marks]
Identify and explain Four roles of financial intermediation. [8 marks]
Maine plc is a large retail chain that is quoted on the London Stock Exchange. The
company has 80 million shares in issues, which are currently trading at £8.50 per share.
The directors of the company have recently decided to expand the business by opening a
number of new outlets in France. To finance this expansion, a 1-for-4 rights issue will be
made at a discount of 40% on the current share price
Calculate the rights issue price [2 marks]
Calculate the theoretical ex-rights price per share and the value of the rights per existing
share. [6 marks]
You are given the following information from a stock exchange
Stock Shares in issue Day 1 price Day 2 price Day 3 price
A 150 000 160 152.6 165
B 26 000 95 98.4 102
C 290 000 1450 1592.6 1545
D 360 000 265 268 266
a. Calculate the total market capitalization for days 1,2 and 3 [6 marks]
b. Calculate the stock market index for day 2 and 3 with respect to day 1 as the base
period, and give a commentary of the performance of the stock market [6marks]

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FACULTY OF COMMERCE

DEPARTMENT OF ACCOUNTING AND FINANCE

BACHELOR OF COMMERCE HONOURS DEGREE IN ACCOUNTING AND FINANCE

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