BWFF2023 FINANCIAL MANAGEMENT II MID-TERM EXAM ANSWER SCHEME A111

1.

To increase a given present value, the discount rate should be adjusted

A. B. C. D.

upward downward to the same level of bond rate to the same level of stock rate

!n " #ears, #ou are to receive $%&,'''. !f the interest rate were to suddenl# increase, the present value of that future amount to #ou would

A. B. C. D.

decrea e increase remain unchanged cannot be determined without more information

".

(hich of the following pa#ments )receipts* would probabl# +,T be considered annuit# due- Based on #our knowledge, think about the timing of the pa#ments. A. B. C. D. .a#ments for a maga/ine subscription for a two0#ear period where the pa#ments are made annuall#. Annual pa#ments associated with lotter# winnings that are repaid out as an annuit#. In!ere ! "a#$en! a oc%a!ed w%!& a cor"ora!e 'ond !&a! wa % (e !oda#) $ent pa#ments associated with a five0#ear lease.

1.

All else e2ual, if #ou e3pect to receive a certain amount in the future, sa# $%&'' in 1' #ears, the present value of that future amount will be lowest if the interest earned on such investments is compounded 4444444444444 A. weekl#

BWFF2023 FINANCIAL MANAGEMENT II MID-TERM EXAM ANSWER SCHEME A111

B. C. D.

monthl# 2uarterl# ann(a**#

&.

5ou want to bu# an ordinar# annuit# that will pa# #ou $%1,''' a #ear for the ne3t ' #ears. 5ou e3pect annual interest rate will be 6 percent over that time period. The ma3imum price #ou would be willing to pa# for the annuit# is A. B. C. D. $%" ,'''.&' RM3+,2-2.1' $%16",'16. $%167,'86.6'

8.

(hat is the future value of $%",&'' deposited for 1 #ears at & percent interest compounded annuall#A. B. C. D. $%",879.'7 $%.,2/0).0 $%8,"89.17 $%&&,7'9.17

7.

Bonds are

A. B. C. D.

a series of short:term debt instruments a form of e2uit# financing that pa#s interest. unofficial long0term debt instruments between borrowers and lenders. *e1a**# '%nd%n1 *on1-!er$ a1ree$en! 'e!ween 'orrower and *ender )

BWFF2023 FINANCIAL MANAGEMENT II MID-TERM EXAM ANSWER SCHEME A111

6.

(hich of the following statements are T$;<-

!. !!. !!!. !>.

5ield to maturit# )5T%* is the rate investors earn if the# insist to bu# the bond at their intrinsic value and hold it until maturit#. The shorter the amount of time until a bon=s maturit#, the less responsive is its market value to given change in the re2uired return. (henever the re2uired return is different from the coupon interest rate, the amount of time to maturit# will affect bond value. (hen the #ield to maturit# is greater than the coupon interest rate, the bond value will be greater that its face value.

A. B. C. D.

! onl# ! and !! onl# II and III on*# !!, !!! and !> onl#.

9.

The market price of outstanding bond issues often varies from the face value because

A. B. C. D.

the maturit# date has changed. the coupon rate has changed. the face value has changed. !&e $ar2e! %n!ere ! ra!e &a c&an1ed)

1'. The $AC Corporation has two bonds outstanding. These bonds have similar features

"

BWFF2023 FINANCIAL MANAGEMENT II MID-TERM EXAM ANSWER SCHEME A111

and risks e3cept for the maturit# date. Bond A matures in 1 #ears, while Bond B matures in 7 #ears. !f the market interest rate changes b# &?, A. B. C. D. Bond A will have a greater change in price. Bond B w%** &a3e a 1rea!er c&an1e %n "r%ce) The price of these bonds will remain constant. The price change for both bonds will be e2ual.

11. Ariff is tr#ing to decide which of the two bonds to bu#. Bond @ is a 1' percent coupon, 1' #ear to maturit#, $%1,''' par, Aanuar# '11 issue pa#ing annual interest. Bond B is a 1' percent coupon, 1' #ear maturit#, $%1,''' par, also Aanuar# '11 issue but pa#ing semiannual interest. The market re2uired return on these bond is 1' percent. (hen using the valuation model to determine the prices of these bonds, Ariff finds that A. B. C. D. the price of Bond B is greater than Bond @. the price of Bond @ is greater than Bond B !&ere % no d%44erence %n !&e "r%ce o4 'o!& Bond F and H) the #ield to maturit# )5T%* of Bond B is greater than Bond @.

1 . (hat is the current price of a bond maturing in 1 #ears, with $%1,''' par value, coupon interest rate of 11 percent paid semi0annuall#, that has a 5T% of 1 percentA. B. C. D. $% 81'.6' $% 89'."' $%1,1 ".9' RM1,120)00

1". @ow much should #ou pa# for a /ero0coupon bond with a 1&0#ear maturit# and $%1,''' par value of #ou want an 11 percent returnA. RM20+

BWFF2023 FINANCIAL MANAGEMENT II MID-TERM EXAM ANSWER SCHEME A111

B. C. D.

$% 1& $% " $%"&

11. >ertigo bonds have a par value of $%1,'''. . The bonds carr# a coupon interest rate of 11 percent. !nterest is paid semi0annuall#. The bond will mature in seven #ears. !f the current market price is $%1,'9 .8&, will #ou purchase the bonds if #our re2uired interest rate is 1' percent- (hat is #our intrinsic value for the bondsA. B. C. D. 5esC $%1, 91.7' 5e 6 RM1,1+-)+/ 5esC $%1,11&.7 +o C $%911. &

1&. Chong (ei has just purchased a $%1,''' par value, /ero coupon bond, with ' #ears remaining until maturit# for $%"11.6'. !f he decides to hold this bond until maturit#, what is the e3pected rate of return of his investment in this bondA. B. C. D. 1 percent 0 "ercen! . "ercen! 7 percent

18. A bond indenture

A. B. C. D.

contains the bond=s current rating. contains the #ield to maturit# of the bond. con!a%n !&e "ro3% %on o4 !&e 'ond a1ree$en!) contains the duration of the bond compared to other bonds outstanding.

&

BWFF2023 FINANCIAL MANAGEMENT II MID-TERM EXAM ANSWER SCHEME A111

17. BB bonds have & #ears maturit#, with a par value of $%1,''' and an annual coupon of 9 percent. ,n the other hands, CC bonds have 8 #ears to maturit#, a par value of $%1,''' and 1' percent annual coupon. Both BB is selling at $%6 6."&, while Bond CC is selling at $%611.1& in the market currentl#. !f #our re2uired rate of return is 11 percent, which bond=s price is more sensitive to fluctuations in the interest rates and wh#A. B. C. D. Both bonds are e2uall# sensitive to changes in interest rate. Bond BB since its duration is higher than Bond CC=s duration. Bond CC %nce %! d(ra!%on % &%1&er !&an Bond BB7 d(ra!%on) Cannot be determined since both bonds have different coupon rate.

16. ,DE !nc=s bonds have a par value of $%1,''' and 6 #ears to maturit#. The bonds pa# semiannual coupon of 7 percent. !f the market re2uired interest rate is 6 percent and the bondholders= re2uired return is 7 percent, what is the bonds= current #ieldA. B. C. D. ".&' percent ".7 percent 7.'' percent -)83 "ercen!

19. .referred stock valuation usuall# treats the preferred stock as a

A. B. C. D.

"er"e!(%!#) long0term securit#. constant growth asset. non0h#brid stocks.

BWFF2023 FINANCIAL MANAGEMENT II MID-TERM EXAM ANSWER SCHEME A111

'. %@B recentl# paid a $%" dividend on its preferred stock. !nvestors re2uire a 8 percent return on the stock. The stock is currentl# selling for $%1&. !s the stock a good bu#A) B. C. D. 5e , a %! % (nder3a*(ed RM0) 5es, as it is undervalued $%1'. +o, as it is overvalued $%&. +o, as it is overvalued $%1'.

1. The e3pected rate of return on a share of common stock whose dividends are growing at a constant rate )g* is which of the followingA. B. C. D)
)D1 F g*G>c D1G>c D1Gg None o4 !&e a'o3e

4444444444444 gives minorit# shareholders more power to elect board of directors.

A. B. C. D)

.reemptive right %ajorit# voting .ro3# fights C($(*a!%3e 3o!%n1

".

A decrease in the 444444444444444will cause an increase in common stock value.

A. B)

growth rate re9(%red ra!e o4 re!(rn

BWFF2023 FINANCIAL MANAGEMENT II MID-TERM EXAM ANSWER SCHEME A111

C. D.

last paid dividend both b and c

1.

The common stockholders are most concerned with

A) B. C. D.

!&e "read 'e!ween !&e re!(rn 1enera!ed on new %n3e !$en! and !&e %n3e !or7 re9(%red ra!e o4 re!(rn) the si/e of the firm=s beginning earnings per share. the percentage of profits retained. the risk of the investment.

&.

An issue of common stock currentl# sells for $%"'.'' per share, has an e3pected dividend to be paid at the end of the #ear of $% .&' per share, and has an e3pected growth rate to infinit# of " percent per #ear. !f investors= re2uired rate of return for this particular securit# is 1 percent per #ear, then this securit# isH A. B. C) D. overvalued and offering an e3pected return higher than the re2uired return. undervalued and offering an e3pected return higher than the re2uired return. o3er3a*(ed and o44er%n1 an e:"ec!ed re!(rn *ower !&an !&e re9(%red re!(rn) undervalued and offering an e3pected return lower than the re2uired return.

8.

EC=s preferred stock is selling for $%8. !f the compan# pa#s $%'.&' annual dividends, what is the e3pected rate of return on its stock-

BWFF2023 FINANCIAL MANAGEMENT II MID-TERM EXAM ANSWER SCHEME A111

A) B. C. D. 7.

/)3; 9.&? 1 .'? 11.'?

IB. currentl# pa#s a $%'.6' dividend per share on its common stock. !ts dividends are e3pected to grow at a rate of 6 percent a #ear for the ne3t four #ears and to continue to grow thereafter at a rate of " percent. (hat is the value of a share of IB.Js common stock if investors re2uire a 1 percent rate of returnA. B) C. D. $%9.99 RM10)/3 $%1&."7 $%18.&&

6.

$< has paid $%1.8' in annual dividends on its common stock for the past two #ears and e3pects to maintain this amount for the foreseeable future. !f an investor re2uires a 1 percent return on this stock, how much would she be willing to pa# for a shareA. B. C) D. $%7.&' $%9."8 RM13)33 $%11.8"

9.

%C=s $,< is 1& percent. Their dividend pa#out ratio is 1& percent. The last dividend, just paid, was $%1."'. !f dividends are e3pected to grow b# the compan#=s sustainable growth rate indefinitel#, what is the current value of %C common stock if its re2uired return is '?9

BWFF2023 FINANCIAL MANAGEMENT II MID-TERM EXAM ANSWER SCHEME A111

A. B. C. D)

$%7.19 $%1'.&' $%16. & RM20)22

"'.

Barmosa stock is currentl# selling for $%&.''. !t is e3pected to pa# a dividend of $%'.8' at the end of the #ear. Dividends are e3pected to grow at a constant rate of " percent indefinitel#. Compute the re2uired rate of return on Barmosa stock. A. B. C. D) 1'? 1 ? 1"? 10;

"1

As a source of financing, once retained earnings have been e3hausted, the weighted average cost of capital will A. B. C. D. %ncrea e) decrease. remain the same. change in an undetermined direction.

"

(hen determining the after0ta3 cost of a bond, the face value of the issue must be adjusted to the net proceeds amounts b# considering A. B. the risk. the ta3es.

1'

BWFF2023 FINANCIAL MANAGEMENT II MID-TERM EXAM ANSWER SCHEME A111

C. D.

!&e 4*o!a!%on co ! ) the appro3imate returns.

"".

!n accepting a project, the rate of return should be 4444444 thanGto the weighted marginal cost of financing. A. B. C. D. 1rea!er or e9(a* less or e2ual e2ual Kess

"1.

The 44444444 is the level of total financing at which the cost of one of the financing components rises. A. B. C. D. weighted marginal cost of capital weighted average cost of capital target capital structure 'rea2%n1 "o%n!

"&.

Choose <NE of the following statements which best represent the weighted average cost of capital )(ACC*A. B. C. D. The ma3imum rate which the firm should re2uire on an# projects it undertakes. The discount rate which the firm should appl# to all of the projects it undertakes. The rate of return that the firm=s preferred stockholders should e3pect to earn over the long term. T&e o3era** ra!e w&%c& !&e 4%r$ $( ! earn on %! e:% !%n1 a e! !o $a%n!a%n !&e 3a*(e o4 %! !oc2)

11

BWFF2023 FINANCIAL MANAGEMENT II MID-TERM EXAM ANSWER SCHEME A111

"8.

.using %anufacturing can sell a new bond for $%1,'89. The bonds have a $%1,''' par value, pa# interest annuall# at a 1 percent coupon rate, and mature in 1' #ears. The firm has a marginal ta3 rate of "1 percent. The after0ta3 cost of the debt issue isH A. B. C. D. 8.&6? -)21; 9.9 ? 1'.9"?

"7.

K> Care products just paid a dividend of $%1.6'. This dividend is e3pected to grow at a constant rate of & percent per #ear. The stock price is currentl# $%1 .&'. +ew stock can be sold at this price subject to flotation costs of 1& percent of the market price. The compan#Js marginal ta3 rate is 1' percent. Compute the cost of internal common e2uit#. A. B. C. D. 1&.&"? 16. 1? 20)12; ."&?

"6

Eiven the following information, determine the risk0free rate. Cost of e2uit# L 1 .& percent Beta L 1. ' %arket risk premium L & percent A. 6.'? B. 7.&? C. 7.'? 1

BWFF2023 FINANCIAL MANAGEMENT II MID-TERM EXAM ANSWER SCHEME A111

D.

.)0;

"9.

%etals Corp. has $%" , &' of debt, $%81,&'' of preferred stock, and $%116, &' of common e2uit#. %etals Corp.Js after0ta3 cost of debt is &. & percent, preferred stock has a cost of 8."& percent, and newl# issued common stock has a cost of 11.'& percent. Calculate the compan#=s weighted average cost of capitalA. B. C. D. 1 .76? 10)82; 6." ? 8.&8?

1'.

A firmJs current investment opportunit# schedule and the weighted marginal cost of capital schedule are shown below. !nvestment opportunit# A B C D !$$ )?* 1& 1 1' 18 !nitial !nvestment "'',''' '',''' "'',''' 1'','''

(eighted marginal cost of capital $ange of total financing (%CC ' : &'',''' 6.&? &'1,''' : 1,''',''' 11.'? 1"

BWFF2023 FINANCIAL MANAGEMENT II MID-TERM EXAM ANSWER SCHEME A111

Above 1,''','''

1 .&?

The investment opportunities which should be selected are A. B. C. D. A and D A, B and C A, B and D A, B, C and D

11