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final exam practice for ACST101

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You are on page 1of 20

Other names: .

Student ID: .....

No part may be removed from the examination room.

EXAMINATION DETAILS:

Unit Code: ACST101

Unit Name: Elements and Techniques of Finance

Duration of Exam Three (3) hours plus 10 minutes reading time

(including reading time if applicable):

Total No. of Pages Part A: ten pages (10)

(including this cover sheet): Part B: ten pages (10)

Part A

GENERAL INSTRUCTIONS TO CANDIDATES:

Candidates are required to obey all instructions provided by the Final Examination Supervisor and must refrain from communicating in any

way with another student once they have entered the final examination venue.

Candidates may not write or mark the exam materials in any way during reading time.

Candidates may only access authorised materials during this examination. A list of authorised material is available on this cover sheet.

If it is alleged you have breached these rules at any time during the examination, the matter may be reported to the University Discipline

Committee for determination.

EXAMINATION INSTRUCTIONS:

The total number of marks for this examination is 100.

Part A will be marked out of 45 and Part B out of 55.

Each question in Part A is worth 1.5 marks.

sheet provided use an ordinary pencil to complete your family name, initial and

student number according to the instructions on the answer sheet. Select the best

alternative answer for each question in section A and mark your answers on the

answer sheet.

Materials Permitted

Dictionaries: No dictionaries permitted

Calculators: Non-programmable calculator without text storage capability is

permitted. Financial calculators may be used.

No other material is permitted.

Part A: Please record your answers on the Red sheet (negative numbers are in

brackets)

1. If I invest a sum of money in a bank account offering 10% per annum compounded

monthly, what is my effective annual interest rate (4 decimal places)?

A 0.1200

B 0.1000

C 0.1047

D 0.1024

E None of the above

repayment if the effective interest rate is 10% p.a.?

A $ 6,551.89

B $11,631.47

C $24,204.12

D $10,551.90

E None of the above

3. My brother is trying to talk me into investing in his coffee cart business. He tells me

that if I invest $1000 today I will receive $4000 in 6 years' time. What is the

annualised compound rate of return that I am being promised (as a percentage

correct to two decimal places)?

A 300.00%

B 50.00%

C 28.99%

D 25.99%

E None of the above

4. I have decided to take out a loan to buy a new car and will borrow $40,000 to be

repaid over 10 years. What is my annual repayment if the interest rate is 7% p.a.

compounded quarterly?

A $5,744.14

B $5,695.10

C $2,895.10

D $1,398.88

E None of the above

Page | 2

5. I have an opportunity to invest $1,000 today at a compound interest rate of 20% p.a.

If I want to accumulate $3,000, how long do I need to hold my investment? Answer

in years to two decimal places.

A 6.13

B 6.03

C 15.00

D 0.17

E None of the above

6. What is the price of an 8 year zero coupon bond with a face-value of $1,000 if the

yield to maturity is 7% and rates are compounded annually?

A $1,038.22

B $ 167.06

C $ 519.56

D $ 582.01

E None of the above

7. The Entertainment Group is expanding its business and will fund this expansion by

issuing 20 year zero coupon bonds with a face-value of $1,000. If the firm's

investment bankers price the yield to maturity at 11.73% per annum compounded

annually, how much will The Entertainment Group raise per bond with this issue?

A $ 565.46

B $ 108.79

C $2,346.00

D $9,191.70

E None of the above

8. I recently purchased a bond from Foreman Industries with a face value of $1,000 and

a coupon rate of 9.5% (coupons are paid semi-annually). The bond now has exactly

20 years to maturity and the current yield is 9.15%. What is the market value of this

bond today?

A $1,038.22

B $ 167.06

C $ 519.56

D $1,031.86

E None of the above

Page | 3

9. I found an old box in the attic with a bond certificate. The certificate said that the

bond had 8 years to maturity, a face value of $1,000 and a coupon rate of 8.5% with

semi-annual payments. It has been 5 years since I bought the bond and I now wish

to sell it. If the yield to maturity is 11.13% how much will you get for the bond?

A $ 934.44

B $ 863.05

C $ 901.19

D $1,000.00

E None of the above

business. To do this it will issue bonds with 20 years to maturity, a face value of

$1,000 and a semi-annual coupon $40. If the current yield to maturity is 9%, what is

the minimum number of bonds they need to issue?

A 1908

B 1224

C 1346

D 1102

E None of the above

11. A company expects to pay a dividend of $3.10 at the end of this year and then

expects dividends to grow for two further years at 4% per annum. If the required

rate of return is 14% per annum effective, what is the present value of the

company's dividends over the next three years?

A $7.46

B $7.32

C $6.32

D $5.14

E None of the above

12. You have been offered a share in Lavender Shore Resorts and have been advised

that it just paid a dividend of $4.55 and dividends are expected to be paid annually

and grow at 3%p.a.. If you expect a return of 11%, how much should you expect to

pay for this share?

A $58.58

B $56.88

C $41.33

D $41.36

E None of the above

Page | 4

13. Colonial Enterprises is expecting to pay a dividend $7.61 at the end of this year and

have forecast dividend growth of 4% p.a.. If the rate of return is 13% per annum

effective, what would be the expected price of this share?

A 70.46

B 42.28

C 84.56

D 58.54

E None of the above

14. After careful analysis you determine that BNP Mining is a high growth stock with

dividends expected to increase annually by 8%. The company has just paid a

dividend of $3.71. However you won't be able to invest in this share for two more

years. If the rate of return is 15% p.a. effective what price do you expect to pay for

the share when you buy it two years from today immediately after the dividend is

paid on that date?

A 72.11

B 66.76

C 61.82

D 57.24

E None of the above

15. Your friend has a hot tip on a share and is trying to convince you to buy it at a price

of $42.17. She says the share is expecting the next dividend, due to be paid in one

years time, to be $4.52 and dividends are forecast to grow at a steady annual rate.

If the rate of return is 13.5% per annum, what annual dividend growth rate does this

share price imply?

A 3.48%

B 5.56%

C 1.39%

D 2.78%

E None of the above

16. Opera Inc is getting ready to produce a new line of high end opera glasses. The

initial cost of the investment will be $1.85 million and is payable up front. The

investment will result in additional cash flows of $525,000, $812,500, and

$1,200,000 in each of the next three years. What is the payback period for this

project (in years, correct to two decimal places)?

A 3.00

B 2.43

C 1.57

D 3.17

E None of the above

Page | 5

17. Gosford plumbing is expanding its trade into regional NSW and estimates the initial

cost to be $2 million. It has forecast net revenues of $520,000, $700,000, and $1

million at the end of each of the next three years. Given a required rate of return of

10 percent per annum effective, what is the NPV of this project (correct to the

nearest dollar)?

A $265,898

B $197,446

C ($265,898)

D ($197,446)

E None of the above

18. Rio Steel plans to open a new mine at a cost of $1.25 million. The mine is expected

to generate annual cash flows of $750,000, at the end of each of the next five years.

If the company's required rate of return is 18 percent per annum effective, what is

the NPV of this project (correct to the nearest dollar)?

A $1,095,378

B ($992959)

C ($1,095378)

D $992,959

E None of the above

19. A project has an NPV of $111 when a discount rate of 12% per annum effective is

used and the same project has an NPV of ($56.00) when a discount rate of 22% per

annum effective is used. The internal rate of return of the project is likely to be:

A 6.50%

B 28.50%

C 18.20%

D 12.00%

E None of the above

20. Mufti Enterprises is considering undertaking a project that would yield net annual

profits of $100,000 at the end of each of the next 5 years. The initial outlay of the

project would be $385,000 and the project's assets would have a residual value of

$100,000 at the end of the project. If the required rate of return on the project is

12% per annum effective, then what is the NPV (correct to the nearest dollar)?

A $26,141

B ($24,522)

C $32,220

D ($81,265)

E None of the above

Page | 6

21. You are given an Excel spreadsheet with the following bond data: the face value of

the bond is in cell F4, the yield per annum effective is in F5, the coupon rate is in F6

and the time to maturity in years is in F7. Using cell references, Excel syntax and your

knowledge of financial maths, indicate which of the following you could use to

calculate the price of a bond with annual coupons.

A =(F6*F4)*((1-(1+F5)^(-F7))/F5)+(F4*((1+F5)^-F7))

B =(F6)*((1-(1+F5)^(-F7))/F5)+(F4*((1+F5)^-F7))

C =(F6*F4)*((1-(1+F5)^(-F7))/F5)+(F4*((1+F7)^-F5))

D =(F6*F4)*1-(1+F5^(-F7/F5)+(F4*((1+F5)^-F7))

E None of the above

22. You have been given data in an Excel spreadsheet with the weekly returns of stock A

in column L (rows 3 to 300). If I wanted to calculate the standard deviation of

returns for stock A I would enter

A =standardev(L3:L300)

B =standardev(L3:300)

C =stdev(L3:300)

D =stdev(L3:L300)

E None of the above

23. I am interested in knowing the correlation between the returns of two stocks. The

data is given in an Excel spreadsheet with the weekly returns of stock A in column J

(rows 3 to 300) and weekly returns of stock B in column K (rows 3 to 300). The

calculate the correlation between the returns of stock A and stock B I would enter:

A =correl(J3:J300:K3:K300)

B =correl([J3:J300)(K3:K300)]

C =correl(J3:J300,K3:K300)

D =correl(J3:J300)(K3:K300)

E None of the above

24. You are given an Excel spreadsheet with the following data that can be used to price

a share with annual dividends. The dividend paid at time zero is in cell L20, the

required rate of return on equity per annum effective is in cell L21 and the expected

annual growth rate is in cell L22. Using cell references, Excel syntax and your

knowledge of financial maths, indicate which of the following you could use to

calculate the value of the share today rounded to two decimal places.

A =round(L20*(1+L22)/(L21-L22),2)

B =round(L20/(L21-L22),2)

C =round(L20*(1+L22)/(L21-L22),0)

D =round(L20*(1+L21)/(L21-L22),2)

E None of the above

Page | 7

25. If I wanted to find the square root of a number in cell J44 I could use:

A =SQRT(J44)

B =J44^(1/2)

C =J44^0.5

D all of the above

E None of the above

26. The Australian Prudential Regulation Authority (APRA) has the responsibility for the

development of prudential policies that consider the

A financial safety of the banking system

B competition in the share market

C setting of interest rates for banks

D All of the above

E None of the above

27. The Reserve Bank of Australia (RBA) is responsible for the development and

implementation of monetary policy and

A for overall equity market stability

B for overall bond market stability

C for overall financial system stability

D for overall derivative market stability

E None of the above

28. The Australian Securities and Investments Commission (ASIC) is responsible for

A market integrity and consumer protection across the financial system

B setting standards for financial market behaviour in equity markets

C setting standards to protect investor and consumer confidence.

D All of the above

E None of the above

29. Country risk should be incorporated into the international capital budgeting analysis

by:

A adjusting the company's discount rate for the additional risk.

B increasing cash flow estimates for the project.

C moving manufacturing to the home country

D Including a premium in projected cash flows for exchange rate risk

E None of the above

A Entrepreneurs identify outside investors through bootstrapping.

B Initial seed money is usually spent on developing an initial public offering.

C Initial seed money usually comes from the entrepreneur or founder.

D All of the above

E None of the above

Page | 8

Formula Sheet (not comprehensive)

PV0 FVn 1 i

Present value single amount n 2

n

j

EAR 1 1

m

1 (1 i ) n

PVAn CF

i

FVAn CF

i

Perpetuity PVA CF 3

i- g

Bond price 1 4

1 (1 i) n F

BP0 C

(1 i)

n

i

Share Price P D 1 5

0 R- g

NPV n NCFt 6

NPV

t 0 1 k

t

P0

Expected return n 7

E R

R

A i i

i 1

Variance 2 7

n

Var R

2 R E R

A A i i

i 1 A

Page | 9

- This page has been left intentionally blank -

Page | 10

Seat Number: ...Room: .......

Family name: .....

Other names: .

Student ID: .....

No part may be removed from the examination room.

EXAMINATION DETAILS:

Unit Code: ACST101

Unit Name: Elements and Techniques of Finance

Duration of Exam Three (3) hours plus 10 minutes reading time

(including reading time if applicable):

Total No. of Pages Part A: ten pages (10)

(including this cover sheet): Part B: ten pages (10)

Part B

GENERAL INSTRUCTIONS TO CANDIDATES:

Candidates are required to obey all instructions provided by the Final Examination Supervisor and must refrain from communicating in any

way with another student once they have entered the final examination venue.

Candidates may not write or mark the exam materials in any way during reading time.

Candidates may only access authorised materials during this examination. A list of authorised material is available on this cover sheet.

If it is alleged you have breached these rules at any time during the examination, the matter may be reported to the University Discipline

Committee for determination.

EXAMINATION INSTRUCTIONS:

Answer ALL questions

The total number of marks for this examination is 100.

Part A will be marked out of 45 and Part B out of 55.

Part B should be answered in the space provided below. If you need more space, please

request another answer book. Questions in Part B are worth varying amounts indicated

at the end of each question. A list of formulae is printed on the final page of Part A.

Materials Permitted

Dictionaries: No dictionaries permitted

Calculators: Non-programmable calculator without text storage capability is permitted.

Financial calculators may be used.

No other material is permitted.

Q 1 2 3 4 5 6 7 8 Total

Mark

Total 8 8 8 8 5 7 6 5

Page | 11

Part B: Please record your answers in the space provided. Marks are

indicated in brackets.

1. You have analysed the stocks for Energen Limited, a power generation company. The

company is expected to pay $0.65 dividends in the six months time, and you project

that this will increase by 1.5% per half year. The market has priced the risk-adjusted

discount rate to be a nominal annual rate of 14% (compounded semi-annually).

a. Calculate the market price for this share, correct to the nearest cent. Show your

working. (2 marks)

b. Assume you paid $11.50 for the stock and you held it for 2 years. During this period,

you received half yearly dividends of $0.76, $0.78, $0.81 and $0.67, respectively. Then,

you sold the stock for $10.60. Calculate the total holding period return over the two

years, giving your answer as a percentage correct to two decimal places. (3 marks)

c. Assume that you purchased the stock at $11.50 today. The table below shows an

estimate of the likely prices of the stock in one years time and the associated

probabilities. Using this information, calculate the standard deviation of returns of

Energen stocks assuming no dividends are paid in during the period that you held the

stock. (3 marks)

Page | 12

2. A new startup company, Philosophy Enterprises, needs $60 million for the next growth

phase of the business.

Philosophy plans to raise the money by an Initial Public Offering of shares in the

company and has provided the following information to the market:

The first dividend will be paid one year from now and thereafter annually

The first dividend is estimated to by $2.30

Dividends are expected to grow annually by 3% per annum for the foreseeable future

Philosophy has applied a cost of capital of 12.8% per annum effective

Philosophy has been advised by the underwriters for this issue that they will charge a

9 per cent spread.

a. Given the information above, how many shares does the company have to sell to

achieve its goal? (4 marks)

b. Would the number of shares that the company needs to sell to achieve its goal

increase or decrease if the market was expected to apply a discount rate of 12.1% per

annum effective instead of 12.8% per annum effective? Explain your answer in words.

Do not do any calculations. (4 marks)

Page | 13

3. You are shopping on ebay to buy a one terabyte external hard drive. You narrow your

choices down to three options and compare them in the table below.

Japan (priced in yen) 12,950 94.9

China (priced in yuan) 649 4.96

Germany (priced in euro) 92 0.73

a. Which hard drive would you select? Show full working relating to how you

made your decision. (6 marks)

b. Would your answer change if shipping is free from Asia but cost $5 (AUD from

Germany)? (2 marks)

Page | 14

4. It is 2006 and despite you having a poor credit rating, SPM Bank is willing to extend

you a 30-year loan for $200,000 to buy a house (also worth $200,000). You only have

a minimum wage job but the bank manager said you dont need to worry because the

interest rate for the first two years is only 2% p.a. effective and housing prices always

go up.

a. Draw an amortisation schedule for the first two annual payments. How much do you

owe on the loan at the end of the second year? (3 marks)

b. It is now two years later and the interest rate has just gone up to 8% per annum

effective. What is the new annual payment? (3 marks)

c. You cant afford the new repayment so you need to sell your house which is now worth

$140,000. If the bank takes the full amount of the sale, how much do you still owe?

(2 marks)

Page | 15

5. The 2014 ASIC Australian Financial Attitudes and Behaviour Tracker reports that

although 30% of people said that they understood of the concept of a risk/return trade

off, when tested less than 10% really understood it. Using examples explain this

concept to a non-finance professional. (Max 200 words) (5 marks)

Page | 16

6. You are a Human Resources consultant and you have decided to start your own

company specialising in recruiting mining professionals. It is a very niche business (i.e.

specialist business) and quite a high risk venture and you are having trouble getting

your bank to lend you the start-up costs. Discuss why non-traditional sources of

funding would be more suitable for this new business. In your answer you should

describe two forms of non-traditional finance. (Max 200 words) (7 marks)

Page | 17

7. Your friend has just started a new job in an advertising company and her salary

package includes a base salary and executive stock options. She has been told that the

options are tied to the company share price but she doesnt understand how they

work. She turns to you for advice. Explain to your friend what call and put options

are and how executive stock options work. (Max 200 words) (6 marks)

Page | 18

8. What is sub-prime lending and why is this practice widely believed to be a major cause

of the Global Financial Crisis? (Max 200 words) (5 marks)

Page | 19

- This page has been left intentionally blank -

- End of paper -

Page | 20

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