This loan has ten-year term and requires monthly repayments

Business Finance
Sample Exam Paper

Business Finance
Sample Exam Paper

Question 2A
Which of the following is a weakness of a sole proprietorship?

A.Unlimited life
B.Easy to form
C.Limited liability
D.Limited access to capital

Business Finance
Sample Exam Paper

Question 4A
Von Bora Corporation (VBC) is expected to pay a $2.25 dividend at the end of this year. If you expect VBC's dividend to grow by 6.5% per year forever and VBC's equity cost of capital is 12.5%, then the value of a share of VBC is closest to:

A.delayed investment
B.multiple IRRs
C.differences in project scale
D.All of the above can lead to IRR giving a different decision than NPV.

Question 7A
The MaRs Company is planning on investing in a new project. This will involve the purchase of some new machinery costing $475 000. The MaRs Company expects cash inflows from this project as detailed below:

2

Business Finance
Sample Exam Paper

A.NPV, IRR, PI and payback period
B.NPV, PI and payback period
C.NPV and PI
D.IRR and Payback period

Question 10A

Payback Period for Project A = 2.33
Payback Period for Project B = 2.30

3

4

Business Finance
Sample Exam Paper

Question 15A
If a firm raised all its capital via equity rather than debt. Such a firm is also referred to as a(n) ____________ firm.

A.levered
B.margined
C.risk less
D.unlevered

Question 1B
Distinguish between independent and mutually exclusive investment projects.

Advantages: Limited liability, liquidity, infinite life, unlimited number of owners.

Disadvantages: Separation of ownership and control, more complicated and expensive to set up.

Question 4B
Explain the difference between an ordinary annuity and perpetuity.

•An annuity is a stream of equal periodic cash flows over a stated period. •A perpetuity is an annuity with an infinite life; it promises to pay the same amount at the end of every year forever.

7

Business Finance
Sample Exam Paper

a.Calculate the NPV of each alternative and rank them in order of acceptability on the basis of NPV.

Solve for NPV = $250,315.61

License
Cash flows: project cost (CF0) = −$230,000, CF1= $250,000, CF2= $100,000, CF3= $90,000, CF4= $65,000, CF5= $55,000; and cost of capital = 15%.

Manufacture
Cash flows: project cost (CF0) = −$440,000, CF1= $195,000, CF2= $195,000, CF3= $195,000, CF4= $195,000, CF5= $195,000, CF6= $195,000; and cost of capital = 15%.

Solve for NPV = $297,974.13

Manufacture
Number of years= 6, cost of capital = 15%, PV = $297,974.13.

Solve for AEV = $78,735.76

Sell). The recommendation is to sell, based on the highest ANPV. Comparing the NPVs of projects with unequal lives gives an advantage to those projects that generate cash flows over a longer period.

Capital structure information for Bavarian Brewhouse is provided below.

Debt (in millions) $25

Annual preferred share dividend $ 2.50

Preferred share market price $16.13

a.What is Bavarian Brewhouse’s cost of preferred shares?

rp = $2.50 / $16.13 = 15.5%

After-tax rd = 0.08(1 – 0.34) = 5.28%

d.If its marginal tax rate equals 34%, what is Bavarian Brewhouse’s WACC?

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Business Finance
Sample Exam Paper

Bust: Rp = (.14 + .02 −.06) / 3
Rp = .0333, or 3.33%

To find the expected return of the portfolio, we multiply the return in each state of the economy by the probability of that state occurring, and then sum. Doing this, we find:

And the expected return of the portfolio is:

E(Rp) = .65(.2420) + .35(−.004)
E(Rp) = .1559, or 15.59%

Required:
Using the above information, please answer the following questions.

a.What is the monthly repayment?

= Monthly payment –First month interest = $242 655.19 – $133 333.33
= $109 321.86

d.How much will ABC Inc. owe on this loan after making monthly payments for three years?

Required
a.The analyst who produced report 1 makes the assumption that Wild Rydes will remain a small, regional company that, although profitable, is not expected to grow. In this case, Wild Rydes management is expected to elect to pay out 100 per cent of earnings as dividends. Based on this report, what model can you use to value the ordinary shares in Wild Rydes? Using this model, what is the value?

Use zero-growth model

Use constant dividend growth model

𝑷𝑷𝟖𝟖 = 𝑫𝑫𝑫𝑫𝑽𝑽𝟏𝟏
𝒓𝒓𝒆𝒆 − 𝒈𝒈

c.The analyst who produced report 3 also makes the assumption that Wild Rydes will enter the national market but expects a high level of initial excitement for the product that is then followed by growth at a constant rate. Earnings and dividends are expected to grow at a rate of 50 per cent over the next year, 20 per cent for the following two years, and then revert back to a constant growth rate of 9 per cent thereafter. Based on this report, what model can you use to value the ordinary shares in Wild Rydes? Using this model, what is the value?

Use non-constant dividend growth model.

Therefore,