Finance v6.0

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A business keeps an item in stock for which demand is 30,000 units per year. The cost of placing an order for the item is $40 and the cost of holding one unit of the item is $060 per year. The business uses the economic order quantity (EOQ) approach to derive the optimal order quantity for the item. Demand for the item is even throughout the year.
What is the combined annual cost of stock holding and stock ordering for the item?

  • A. $1,200
  • B. $1,800
  • C. $40,600
  • D. $41,200


Answer : A

Pecking order theory states that, when financing new investment opportunities, a business will prefer to use:
1. Internal finance rather than external finance.
2. Equity rather than debt.
Which ONE of the following combinations (true/false) concerning the above statements is correct?

  • A. Statement 1 = True, Statement 2 = True
  • B. Statement 1 = True, Statement 2 = False
  • C. Statement 1 = False, Statement 2 = True
  • D. Statement 1 = False, Statement 2 = False


Answer : B

Which of the following best describes the Stock Exchange?

  • A. A primary capital market only
  • B. A secondary capital market only
  • C. Both a primary capital market and a secondary capital market
  • D. Neither a primary nor a secondary capital market


Answer : C

When projects are appraised using discounted cash flow methods, two approaches to dealing with inflation could be used. These are:
1. To exclude inflation from the estimated future cash flows and to apply a discount rate based on the money cost of capital.
2. To include inflation in the estimated future cash flows and to apply a discount based on the real cost of capital.
Which ONE of the following combinations (true/false) is correct?

  • A. Statement 1 = True, Statement 2 = True
  • B. Statement 1 = True, Statement 2 = False
  • C. Statement 1 = False, Statement 2 = True
  • D. Statement 1 = False, Statement 2 = False


Answer : D

Which ONE of the following statements concerning the issue of shares is correct?

  • A. A placing of shares involves an offer of shares to selected investors rather than to the general public
  • B. An offer for sale is an invitation to the general public to subscribe for shares not yet in issue
  • C. An offer for subscription is an invitation to the general public to subscribe for shares already in issue
  • D. A bonus issue raises finance through an offer of shares to existing shareholders


Answer : A

The following statements about the drawbacks of the accounting rate of return (ARR) were made at a recent meeting:
1) ARR is based on accounting profits and not cash flows, and can change because profits are subject to different possible treatments.
2) ARR only considers cash flows within a given time period and ignores cash flows after that time period.
3) With the ARR method $1 receivable today is worth the same as a $1 in five years.
Therefore it ignores the time value of money.
Which combination of the above statements is true?

  • A. 1, 2 and 3
  • B. 1 and 2 only
  • C. 1 and 3 only
  • D. 2 and 3 only


Answer : C

Which ONE of the following methods of investment appraisal is consistent with the objective of shareholder wealthmaximization?

  • A. Net present value
  • B. Internal rate of return
  • C. Accounting rate of return
  • D. Payback period


Answer : A

The following statements about stock market ratios have been made:
1)The dividend yield is the annual dividend received by a shareholder expressed as a percentage of the share price.
2)The price earnings ratio is the ratio of the market value of a companys shares over the earnings from those shares.
3)The earnings per share is the profit for the year attributable to ordinary and preference shareholders, after tax has been paid.
Which of the above statements is correct?

  • A. 1, 2 and 3
  • B. 1 and 2 only
  • C. 1 and 3 only
  • D. 2 and 3 only


Answer : B

Supper plc has issued loan stock of $100 nominal value with annual interest of 10% per year, based on the nominal value. The loan stock has two years remaining before it is redeemed at par. Interest is paid annually and the most recent interest payment has just been paid. Investors currently require a yield of 8% per year on the loan stock.
What is the market value of the loan stock per $100 nominal value?

  • A. $95·30
  • B. $100·40
  • C. $103·90
  • D. $125·00


Answer : C

Chamba Co has 50 million $050 ordinary shares in issue with a total marketcapitalizationof
$150 million. For the year just ended, after-tax profits were $20 million and are expected to rise by 25% in the forthcoming year. Chamba Co has a constant dividend payout ratio of
40% and intends to increase the dividend by 5% per year after payment of the forthcoming years dividend.
Which ONE of the following is the expected rate of return from the ordinary shares?

  • A. 5·07%
  • B. 10·33%
  • C. 11·67%
  • D. 15·05%


Answer : C

The following comments were recently made, relating to methods of issuing shares by a public company:
1. An offer for sale is an invitation to the public to buy shares that are not yet in issue.
2. A placing is an invitation to selected investors to buy either new shares or shares already in issue.
Which ONE of the following combinations (true/false) is correct?

  • A. Statement 1 = True, Statement 2 = True
  • B. Statement 1 = True, Statement 2 = False
  • C. Statement 1 = False, Statement 2 = True
  • D. Statement 1 = False, Statement 2 = False


Answer : C

Aralia Co and Corylus Co both pay a constant dividend of $0.30 per share. Aralia Co has a beta of 1.2 and Corylus Co has a beta of 0.9. The market share price of Aralia Co is $3.70 and the market share price of Corylus Co is $3.80.
The market rate of return is 8% and the risk free rate is 5%.
Based on the Capital Asset Pricing Model (CAPM) analysis, which ONE of the following combinations (underpriced/overpriced) concerning the market price of the shares of Aralia
Co and Corylus Co is correct?

  • A. Aralia Co = Overpriced, Corylus Co = Overpriced
  • B. Aralia Co = Overpriced, Corylus Co = Underpriced
  • C. Aralia Co = Underpriced, Corylus Co = Overpriced
  • D. Aralia Co = Underpriced, Corylus Co = Underpriced


Answer : B

Prunus Co has a constant dividend payout ratio of 40% and has recently paid a dividend of
$0.20 per equity share.
The company generates a 10% return on all new investments from retained profits.
What is the predicted market value of an equity share?

  • A. $2.12
  • B. $3.47
  • C. $5.00
  • D. $5.30


Answer : D

Aludra Co has $450 million loan notes in issue that pay an annual fixed rate of interest of
6.3%. The directors of the company have recently decided to change this fixed rate for a floating rate of interest. A bank has offered a swap agreement whereby the bank pays a fixed rate of interest of 5.8% and receives LIBOR in return.
Assuming LIBOR is 5.4% for the first year of the swap agreement, what will be the percentage borrowing cost for Aludra Co?

  • A. 6·7%
  • B. 5·9%
  • C. 5·8%
  • D. 5·4%


Answer : B

Dorsal Co intends to make a bonus issue of ordinary shares during the forthcoming year.
Which one of the following will be affected as a result of the issue?

  • A. Financial gearing
  • B. Total equity
  • C. Earnings per share
  • D. Liquidity


Answer : C

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