University of Lagos: School of Postgraduate Studies

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UNIVERSITY OF LAGOS

SCHOOL OF POSTGRADUATE STUDIES

M.sc Finance

Qualifying Entrance Examination


2011/2012 Session

Time allowed: 60 minutes


Instructions
Answers all questions, shade the correct answers to
the questions and in the computer sheets
provided.
Write your number as your examination number and
your course of study in the spaces provided in
the computer sheet.

1. You are given an opportunity to receive N200,000


7 years from now. if you can earn 10% on his
money, how much is it worth today?

A.N39,740.00 B.N102,633.00 C.N102,640.00


D.N339,712.00

2. Aduke deposited N9000 in a savings account


paying 10% interest compounded annually. How
much will she have in the account at the end
of 6 years?

A. N15944.00 B.N69440.00 C.N39,198.00


D.N5081.00

3. A middle level civil servant wishes to determine


the sum of money he will have in his savings
account by depositing N10,000 at the end of
each year for the next 6 years. If annual
interest rate is 11%, how much will be in his
account?

A.N18,704.00 B.N79,129.00 C. N37,833.00 D.


N39,593.00

4. Assuming a customer of a bank deposits N10,000


today in her account paying 7% interest
compounded continuously. How much will she
have in her account in 4 years?

pg. 2
A. N10,725.00 B.N10,028.00 C. 10,408.00 D.
N13,231.00

FOR QUESTIONS 5 and 6

A fast food chain has given the following information about its revenue
and costs relating to a new project
Building and equipment
N540,000
Annual revenue
N650,000
Annual operating cost after depreciation N350,000
The firm's corporate income tax is 35%

5. Based on the above information, what is the


payback period of the project?
A. 1.5years B. 1.8years C. 4years
D.2.8years

6. Based on the same information what is the


projects accounting (average) rate of return
assuming average original cost?
A. 38.9% B. 64.1% C. 72.2%
D.18.8%

7. The total asset of a young man grew from N20m in


1975 to N40m in 1995. What is the annual
constant growth rate?

a. 2.5% b. 5% c. 50%
d. 1.25% e. 1%

8. Which of these factors is not usually of primary


concern to a firm intending to raise new
finance through an equity issue to the public?

A. The issue cost involved B. The


obligation to pay dividends

pg. 3
C. The dilution of ownership control D. The
pricing of the issue

9. Which of the following is not a reason why


ordinary shares as a source of finance are
said to place minimum construction on issuing
firm?

A. Dividends don’t have to be paid and their non-


payment doesn’t affect the recipient of
payments by other suppliers of finance.
B. Ordinary shares don’t have maturity hence
entail no repayment obligations
C. Their more permanent nature enhances the
borrowing power of the issuing firm
D. Dividends on ordinary shares are not tax-
deductible expenses to the issuing firm.

10. Listed below are factors to consider in respect


of an equity issue to the public. Which of
them can be considered to be very critical to
the success or otherwise of the issue?
Factors
1. Issue costs
2. Uncertainty of the issue
3. Pricing of the issue
4. Dilution of ownership control

A. Factor 1 and 2 only B. Factor


1, 2 and 3 only
C. Factor 1 and 3 only, D. Factor
1, 2, 3 and 4.

11. Preference shares are sometimes referred to as


hybrid securities because...
A. they are part of the risk bearing ownership
of the firm
B. they come in different varieties

pg. 4
C. they carry prior right to a fixed dividend
and seniority of claims over ordinary
D. they hear both features of pure equities and
debt capital

12. Which of these characteristics does not


distinguish equity capital from debt capital?
A. Debt capital involves a legal obligation to
pay interest practically and make full
repayment of principal as a specified future
date
B. suppliers of equity capital have residual
claim on their firms income and assets
C. Dividend payments to suppliers of equity
capital are not treated as tax deductible
expenses
D. debt capital is long-term capital

13. Which of these statements does not


appropriately explain how dividend decision is
a financing decision?
A. Payment of cash dividend is usually decision
of the firm’s board of directors
B. Payments out of earnings in form of dividend
results in the reduction of a firm’s cash
flows
C. Retention of earnings permits a firm to
eliminate certain existing sources of earning
D. Retention of earnings enables a firm to avoid
raising a given amount of funds from outside.

14. Which of these statements is not in support of


the relevance of dividend policy argument?
A. A firm’s dividend carries information on
the soundness of its management and its
profitability
B. Dividend policy merely changes the form in
which investors receives their returns

pg. 5
C. Dividend is synonymous with the proverbial
"bird in the hand being worth more that two in
the bush"
D. Differential taxation on capital gain and
dividend influence firms to develop their
clientele of shareholders.
15 The management of one of the firms quoted on
the Nigeria stock exchange is trying to decide
on its dividend policy. the maximum annual
dividend that can be paid this year is 8 kobo
per share, Retaining a proportion of profits
would allow the firm to re-invest earnings in
order to achieve dividend growth. Four options
are therefore under consideration:

Current dividend
Annual dividend
Option A 8K (100% of earnings) 0%
per annual
Option B 6K (75% of earnings)
6% per annual
Option C 4K (50% of earnings)
8% per annual
Option D 2K (25% of earnings) 12
1/2% per annual

If the required rate of return on net dividend is


16% per annual which option would maximise the
value of the firm's share?

A. Option C B. Option A C. Option B


D. Option D

For Questions 16-19


A manufacturing company predicted that 3000 units
of an important component for its production
will be required for the next year. Each unit
of this component will cost N5. past

pg. 6
experience shows that storage cost are likely
to be approximately equal to 10% of the
inventory investment. The cost of placing an
order amounts to N9. Using the information
answer the questions that follow:

16. What is the company's economy order quantity


(EOQ)?

A. 300 Units B. 735 Units C. 95 Units


D. 30 Units

17. What is the company's total carrying cost?

A. N90 B. N1300 C. N180


D. N100

18. What is the company's total ordering cost?

A. N900 B. N37 C. N90


D. N234

19. How many orders will the company place in a


year base on its EOQ?

A. 100 B. 10 C. 4
D. 32

20. The following information relate to a project


under consideration by a firm. Initial outlay
N150,000; estimated useful life 6years;
corporate tax 35%; COST OF CAPITAL 9%
Additional information relating to the bass
case scenario is as follows.

Unit sales 500


Price per unit N400
Variable cost per unit N90
Fixed cost N100,000

pg. 7
If variance of 10% is projected from the base case
scenario.
What will the best-case scenario NPV of this
project be?

A. N197.882.00 B. N76,121.00 C. N41,083.00


D. N31,707.00

21. The following data relate to a firm which is


considering the purchase of a new machine to
replace its older machine

Old Machine
New Machine
Purchase price N240,000
N260,000
Installation cost -
N30,000
Market value now N200,000 -
Salvage value -
N60,000
Additional stock -
N5,000
Economic life 8 years 5
years

Assuming straight line depreciation and corporate


tax rate of 35% per annual. What is the
initial outlay of this replacement project?

A.N172.500.00 B.N130,000.00 C.
N112,500.00
D. N135,000.00

22. Alhaji Bello has a 36-month car loan of


N50,000 at 12% interest rate per annum. What
is the monthly loan repayment?

pg. 8
A. N1,661.00 B. N14,817.00 C. N11,389.00
D. N846.00

For questions 23-30

The data below have been extracted from the


financial statement of Bee Plc.

N'000
Sales (credit) 5,640
Gross profits 4,060
Net profits after tax 760
Debtors 930
Stocks 1,250
Current assets 2,410
Current liabilities 4,370
Total assets 4,620

23. What is the firm’s gross profit margin?

A. 19% B. 13% C. 32% D. 5.3%

24. What is the firm’s net profit margin?

A. 5.3% B. 32% C. 13% D. 19%

25. What is the average collection period


(assuming a 360day year)?

A. 22 days B. 80 days C. 58days D.


5days

26. What is its total assets turnover?

A. 1.2 B. 0.82 C. 0.16


D. 0.23

pg. 9
27. What is firm’s stock (inventory) turnover?

A. 0.6 B. 1.1 C. 6.1 D. 0.82

28. What is the firms return on investment (ROI)?

A. 0.16% B. 0.23% C. 1.2% D. 0.82%

29. What is the current ratio?

A. 1.08 B. 1.76 C. 0.57 D. 3.40

30. What is the quick (acid test) ratio?

A. 1.08 B. 0.18 C. 0.85 D. 2.70

31. The level of investment in investment within a


firm tends to vary directly with some
variables. Which of the following variables
does not behave in such a manner?
A. Volume of sales
B. Length and technical nature of the production
process
C. Durability or perish ability of inventory
D. Size of firm

Use the following information to answer the next


Four questions

The total cost of a soap manufacturer is C (x) =


0.1x2 - 60x + 10,000 naira and the price at
which each unit will be sold is p(x) 2500 - x
naira, where x is the number of units
produced.

32. Estimate the cost of producing the 404th unit


a. N20

pg. 10
b. N202
c. N2000
d. N202

33. The actual revenue derived from the sale of the


1000th unit is:
a. N501
b. N2500
c. N1,500,000
d. N500

34. The average variable cost of the soap


manufacturer is:
a. 0.1x-60+10,000
b. 0.1x2-60x4 + 10,000
c. 0.1x-60x2-1000x
d. 10,000

35. How many units must be produced to incur


minimum cost?
a. 100
b. 1200
c. 300
d. 1250

36.If a sum of N20,000.00 invested at 10% simple


interest per annum amounts to N28,000.00 in x
years, what is the value of x?
(a) 3
(b) 4
(c) 6
(d) 5

37.An Engineer took a building loan of N40,000.00


at 2% compound interest for 3 years. If he
pays the amount and interest at equal annual
instalments, how much does he pay every year.
Express your answer in thousand naira,

pg. 11
(a) 14.43
(b) 13:33
(c) 13.87
(d) 13.00

38. An equipment purchased for y Naira depreciates


at 10% annually and is sold as a scrap when
its present value is less than 1/5 of its
purchase value. After how many years will the
equipment be discarded?
(a) 14
(b) 15
(c) 16
(d) 17

39. Ben bought a television set at a discount of


12½%. He sold it to Dan at a profit 20%. If
Dan paid N21,000.00 to Ben, what was the
undiscounted value of the set in the shop
where Ben purchased it?
(a) N30,000
(b) N40,000
(c) N20,000
(d) N15,000

40. A man initially deposits N500 into his


Community Bank account where no interest is
paid. He subsequently made a monthly deposit
of N100 over and above what he deposited in
the previous month. After how many months will
his total just exceed N1 0,000N
(a) 8
(b) 10
(c) 16
(d) 12
41. A caterer finds that 3 fowl and 6 ducks will cost N3081, but 5 fowl and
3 ducks will cost N2475. Find the cost of a duck and a fowl respectively.
a. N342.33, N342.33
b. N200.22, N413.50

pg. 12
c. N200.00, N312.50
d. N267.00, N380.00

42. Mr Whitley resolves to deposit N500.00 in a new savings account on


the last day of each month starting from July 1997. How much will be in
this account on the 1st of March 1999, assuming no interest is earned?
a. N10,000
b. N8,500
c. N110,000
d. N9,500

43. Which of these statements is correct?

A. leverage is the use of fixed cost to magnify the returns to shareholders


of the firm
B. Increase in a firm leverage leads to a decrease in its return and risk
C. changes in leverage don’ts result in changes in the degree of
uncertainty associated with a firm's ability to meet its fixed payment
obligations
D. the amount of leverage in a firm capital structure doesn’t affect value.

44. Suppose the firms has a weighted average cost of capital of 101/2%
assuming it has net operating earnings of N20,000 and a debt stock worth
N15,000 issued at 8% rate of interest per annum, what is the market
value of its equity?

A. N175,476.19
B. N179,048.00
C. N35,500.00
D. N90,476.20

45. which of these statements does not appropriate explain the importance
of inventory (stock) management in business firms?

A. Inventory (stock) usually constitutes a significant part of a firm's total


assets
B. It is the liquid of a firm current assets
C. Changes in the level of inventory (Stock) affect the operations of a
firm
D. The need for inventory varies with the time of year.
pg. 13
46. Mutugbede Enterprises has a N1 million bond issues outstanding.
Assuming it can earn 8% per annum on its investment. How much would it
need to invest each year in order to accumulate enough money to retire
the bond at the end of 20 years ( to the nearest Naira)?

A. N101,853.00 B. N214,548.00 C. N21,852.00 D. N50,374.00

47. A house costs N1.5 billion. A buyer is required to make a deposit of


25% and then pay the balance later. If the balance is to be paid in five
equal instalments, the amount of each instalment is

a. N300,000
b. N125,000
c. N375,000
d. N225,000

48. Which of these characteristics does not distinguish equity capital from
debt capital?

A. Debt capital involves a legal obligation to pay interest practically and


make full repayment of principal as a specified future date
B. suppliers of equity capital have residual claim on their firms income
and assets
C. Dividend payments to suppliers of equity capital are not treated as tax
deductible expenses
D. debt capital is long-term capital

49. Mama Kola sells an item for N4,620 at a profit of 40%. Find the price
at which she bought the item
a. N2776
b. N3300
c. N1848
d. N1320
e. N1840

50. Odumakin enterprises called for bids for the supply of heavy
equipment. Two contractors A and B with chance of ¼ and 2/5
respectively of being shortlisted made quotations for the supply of the
equipment. Find the probability that only one of the two will be shortlisted.
pg. 14
(a) 3/20
(b) 9/20
(c) 6/20
(d) 7/20

51. Odigwu has a 36-month car loan of N50,000 at 12% interest rate per
annum. What is the monthly loan repayment?

A. N1,661.00 B. N14,817.00 C. N11,389.00 D. N846.00

52. Everest & Sons has a N1 million bond issues outstanding. Assuming it
can earn 8% per annum on its investment. How much would it need to
invest each year in order to accumulate enough money to retire the bond
at the end of 20 years( to the nearest Naira)?

A. N101,853.00 B. N214,548.00 C. N21,852.00 D. N50,374.00

53. Which of the following factors will not tend to an increase in a firms
profit margin?

A. Lower cost of goods sold while selling remains constant


B. Higher selling prices and constant cost of goods sold
C. A proportionate increase in the volume of higher margin items sold
D. Larger sales volume resulting from a reduction in selling prices while
cost of goods sold remain constant

54. Financial decisions are usually influenced or determined by:


A. The timing of the returns and the associated risks
B. The timing of the returns and the amount involved and the associated
risks
C. The timing of the returns arising from such decision only
D. The amount involved and the timing of the returns

55. Jejeniwa & Co has 420 employees, out of these, 310 participate in at
least one of the company’s two payroll savings plans. If 250 participate in
plan A and 200 participate in plan B, how many participate in both payroll
savings plan?

a. 310
b. 280
c. 30
pg. 15
d. 450
e. 140

56. Which of the method of issuing new ordinary shares directly to existing
shareholders of the firm?
A. an offer for sale
B. An offer for sale by tender
C. a public issue
D. a right issue

57. Martins has N10,000 invested in a company. If the investment is worth


half as much at the end of each year as it is at the beginning f the year, in
how many years will it be worth less than N1,000N
a. 2
b. 3
c. 4
d. 5

58. A firm uses 25,000 units of raw materials 800 units are placed on
order each time. if stock out is estimated at 250 and management accepts
a stock -out probability of 30% at a cost of N2.80 per unit. What is the
total stock-out cost?

A. N6, 562.50
B. N26.30
C. N15,312.50
D. N2.3

59. Which of these statements does not appropriately explain how


dividend decision is a financing decision?
A. Payment of cash dividend is usually decision of the firm’s board of
directors
B. Payments out of earnings in form of dividend results in the reduction
of a firm’s cash flows
C. Retention of earnings permits a firm to eliminate certain existing
sources of earning
D. Retention of earnings enables a firm to avoid raising a given amount
of funds from outside.

pg. 16
60. What the firm equity cost of capital?
A. 10.50%
B. 9.87%
C. 10.71%
D. 8.77%

pg. 17

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