SEAT NUMBER: . ROOM: ..

FAMILY NAME.......
This question paper must be
returned. Candidates are not
permitted to remove any part
of it from the examination room.

OTHER NAMES.....
STUDENT NUMBER.....

SESSION 1 MID SEMESTER EXAM 2014

Wednesday 6pm
Unit: AFIN253: Financial Management
Time Allowed: 60 Minutes
Total Number of Questions: 10 Multiple Choice Questions and 2 full response
questions.
Instructions:
1.

There are a total of 20 marks available. Marks for each question, or part of a question, are
given in parentheses
2. Record your answers to the multiple choice questions on the General Purpose Answer Sheet
using a blue/black pen or 2B pencil
3. All Questions must be answered.
4. Write your answers in the spaces provided.
5. Illegible handwriting risks loss of marks.
Materials Allowed:

No dictionaries are permitted.

A non-programmable calculator (no text retrieval capacity) is permitted.

Financial calculators may be used.

One double-sided A4 hand-written sheet may be used. Students are required to hand in all
their notes with their exam paper.

Mobile telephones must be turned off and left at the front of the room.

Total Marks
Marks Awarded

MCQ
5

Question 1
5

Question 2
5

Part A (5 Marks)

1. If you are a borrower, which would you prefer to occur during the life of your loan?
Assume that you were born after 1970.
A. a level of inflation that is higher than that anticipated at the outset of the loan
B. a level of inflation that is lower than that anticipated at the outset of the loan
C. a level of inflation that is exactly as anticipated at the outset of the loan
D. no inflation at all
2. Jessica Alenover wants to go on a cruise in three years. She could earn 8.2 percent
compounded monthly in an account if she were to deposit the money today. She needs
to have $10,000 in three years. How much will she have to deposit today? (Round to
the nearest dollar.)
A. $6,432
B. $7,826
C. $8,148
D. $7,763
3. The expected return on Orange Computers shares is 16.6 per cent. If the risk-free
rate is 4 per cent and the market risk premium is 6 per cent, then what is Orange's
beta?
A. 1.26
B. 2.10
C. 2.80
D. 6.30
4. You invested $3,000 in a portfolio with an expected return of 10 per cent and
$2,000 in a portfolio with an expected return of 16 per cent. What is the expected
return of the combined portfolio?
A. 6.2%
B. 12.4%
C. 13.0%
D. 13.6%
5. Robertsons Ltd is planning to expand its specialty stores into five other states and
finance the expansion by issuing 15-year zero coupon bonds with a face value of
$1,000. If your opportunity cost is 8 percent and similar coupon-bearing bonds will
pay semiannually, what will be the price at which you will be willing to purchase
these bonds? (Round to the nearest dollar.) Note: the Zero Coupon bonds will be
called Robertsons when issued.
A. $308
B. $383
C. $803
D. $866

6. Bonds sell at a discount off the par value when market rates for similar bonds are
A. less than the bond's coupon rate.
B. greater than the bond's coupon rate.
C. equal to the bond's coupon rate.
D. market rates are irrelevant in determining a bond's price.
7. A company is growing at a constant rate of 8 percent. Last week it paid a dividend
of $3.00. If the required rate of return is 15 percent, what is the price of the share
three years from now? Note: the dividend was paid by direct debit.
A. $58.31
B. $46.29
C. $51.02
D. $42.83
8. BioShark Ltd a biotech company that is developing a new form of shark deterrent
for scuba divers in the Gulf of Mexico. Their sister company has developed a similar
repellant for Argentinian Sting Rays. The company has forecast the following growth
rates for the next three years: 30 percent, 25 percent, and 20 percent. The company
then expects to grow at a constant rate of 7 percent for the next several years. The
company paid a dividend of $2.00 last week. If the required rate of return is 16
percent, what is the market value of this share?
A.
B.
C.
D.

$51.03
$36.87
$56.12
$46.37

9. The Mexican Motorcycle Company bought some new machinery at a cost of

$1,250,000. The impact of the new machinery will be felt in the additional annual
cash flows of $375,000 over the next five years. The company's cost of capital is 10
percent. What is the payback period for this project? If their acceptance period is three
years, will this project be accepted? Note, the machinery will be used to ensure engine
compression levels are consistent at 5000rpm.
A. 2.7 years; yes
B. 4.7 years; no
C. 2.3 years; yes
D. 3.3 years; no

10. Stratford Manufacturing Company is considering purchasing a production facility

at a cost of $21 million. The company expects the project to generate annual cash
flows of $7 million over the next five years. Its cost of capital is 18 percent. What is
the net present value of this project? The plant will be used for the production of
cartoon character onesies.
A.
B.
C.
D.

$890,197
$1,213,909
$905,888
$777,713

Part B (10 Marks)

Question 1 (5 Marks)
Ron Ronaldson is currently 50 years old and plans to retire when he turns 60.
He has gone to a very well respected investment advisor by the name of Sue
Smithers, and she has offered Ron the following two options.
The first choice is to receive a monthly payment amount of $2000 with the first
payment made at the beginning of his first month of retirement when he turns
60. This payment will grow each month at a monthly growth rate of 0.25%.
There will be 12 payments each year for the next 20 years.
The second choice is to receive an annual payment of $35,000 at the end of
each year for 25 years from the age of 55 until he turns 80.
The interest rate is 5% p.a compounded semi-annually.
What is value of each alternative when Ron is 60 years old?

Question 2 (5 Marks)
Assume the market can have five states: very good, good, neutral, bad and
very bad. The probabilities of each of the states are given in the table below,
so are the returns of two shares.
p
share 1 return
share 2 return
very good
0.1
18%
11%
good
0.3
15%
9%
neutral
0.3
11%
7%
bad
0.2
-2%
5%
very bad
0.1
-4%
3%
a) Calculate the expected returns of share 1 and 2 (1 mark)

b) Calculate the standard deviation of share 1 and standard deviation of

share 2 (1 mark)

c) What is the expected return of the portfolio if 70% is invested in share 1

and the remainder in share 2? (1 mark)

d) Calculate the covariance between share 1 and 2 (1 mark)

e) Assuming a covariance of 0.005 what is the standard deviation of the

portfolio (70% in share 1 and 30% in share 2) (1 Mark)