CORPORATE FINANCIAL Level 7 – University

of West London

MANAGEMENT
Multiple Choice Question Bank
1. Growth in earnings per share is primarily resultant of growth in

A. dividends
B. asset value
C. fundamental value
D. yearly value

Ans : A

2. An amount of company retain earnings, return on equity and inflation are factors which
effect

A. earnings growth
B. return on assets
C. return on sales
D. return on value

Ans : A

3. Constant growth model would not be used in condition if growth rate is

A. greater than dividend paid

B. equal to realized rate of return
C. less than realized rate of return
D. greater than realized rate of return

Ans : D

4. An actual rate of return is subtracted from expected growth rate then it is divided from
dividend stockholders expect use for calculating

A. dividend growth model

B. actual growth model
C. constant growth model
D. variable growth model

Ans: C

5. Deloitte Ltd’s will pay dividend of £0.95 / share. Beta of the company is 1.81 and the
return on the market is 9%. Risk free rate is 1.9%. The management is sure that dividend
will grow at a rate of 10% per year. If the market price of the stock was £15 per share a
year ago, what is a reasonable theoretical value of the stock now?
A. £10
B. £20
C. £30
 D. £15
Ans : B
r = Risk-free rate of return + β * (Market rate of return – Risk-free rate of return)

= 0.019 + ((1.81)*(0.09-0.019))= 0.14751 = 14.75%

P = Div1/(r-g)
P = 0.95/(0.14751-0.10)
P = £20

6. Adeyo Co has just a 22 cents per share dividend. The next year's dividend is expected
to be 24 per share based on the company's stated intention of stable dividend
growth rate over the foreseeable future. The company has a cost of equity of 13%,
and a Beta of 1.3. Given that the market currently returns 6.5% pa and the risk free
rate is 2%, what is the theoretical price of the stock based on capital markets theory?
A. 6.00
B. 6.14
C. 6.75
D. 7.00

Ans.: B
EXp: V of Stock = div1/(CE-Div G)

7. Consider the CAPM. The risk-free rate is 5% and the expected return on the market is
15%. What is the beta on a stock with an expected return of 17%?
A. .5
B. .7
C. 1
D. 1.2

Ans.: D
Explanation: 17% = 5% + [15% - 5%]s; s = 1.2

8. You have a $50,000 portfolio consisting of Intel, GE and Con Edison. You put $20,000 in
Intel, $12,000 in GE and the rest in Con Edison. Intel, GE and Con Edison have betas of
1.3, 1.0 and 0.8 respectively. What is your portfolio beta?
A. 1.048
B. 1.033
C. 1.000
 D. 1.037
Ans.: A
Explanation:

9. An annual estimated costs of assets uses up every year are included

A. depreciation and amortization
B. net sales
C. net profit
D. net income

Ans : A

10. Number of shares outstanding if it is divided by net income for using to calculate

A. earnings per share

B. dividends per share
C. book value of share
D. market value of shares

Ans : A

11. Intangible assets such as copyrights, trademarks and patents are applicable for

1. depreciation
2. amortization
3. stock amortization
4. perishable assets

Ans.: B

12. Which of the following is/are correct?

a) Maximization of market share is a reasonable financial objective
b) Maximization of shareholder wealth is a required objective for
companies listed on a stock exchange
c) Financial objectives should be expressed quantitatively so as to
assure that achievement can be objectively measured
A. a and b only
B. a and c only
 C. a only
D. All three are correct

Ans.: B

13. Assume that CAPM is true and alive and the expected market return is 15% and the
expected return on a stock with a beta of 2 is 22%. What is the risk-free rate?
A. 2%
B. 4%
C. 8%
D. none of the above

Ans.: C

14. In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk is :
A. unique risk.
B. beta.
C. standard deviation of returns.
D. variance of returns.

Ans.: B

15. The feature of the APT that offers the greatest potential advantage over the CAPM is the
______________.
A. use of several factors instead of a single market index to explain the risk-return relationship
B. identification of anticipated changes in production, inflation and term structure as key
factors in explaining the risk-return relationship
C. superior measurement of the risk-free rate of return over historical time periods
D. variability of coefficients of sensitivity to the APT factors for a given asset over time

Ans. A
1. Which of the following most accurately describes the WACC?

A. The rate that the company is currently paying on its capital structure
B. The rate that the accountants used at the last closing for the purpose of
establishing fair value
C. The rate the company is most likely going to pay on its capital over the
foreseeable future
D. The hurdle rate the company used in the last fiscal year for the purpose of
project analysis

Ans.: C

2. In weighted average capital, capital structure weights estimation does not rely on value of

A. investors equity
B. market value of equity
C. book value of equity
D. stock equity

Ans.: C

3. Variability for expected returns for projects is classified as

A. expected risk
B. stand-alone risk
C. variable risk
D. returning risk

Ans.: B

4. Premium which is considered as difference of expected return on common stock and

current yield on Treasury bonds is called

A. current risk premium

B. past risk premium
C. beta premium
D. expected premium

Ans.: A
5. An interest rate which is paid by firm as soon as it issues debt is classified as pre-tax

A. term structure
B. market premium
C. risk premium
D. cost of debt

Ans.: D

6. In weighted average cost of capital, capital components are funds that are usually offered
by

A. stock market
B. investors
C. capitalist
D. exchange index

Ans.: B

7. If an investment is paying 5%per annum, how many years would it take for an
investment to double in size?
A. 20.2 years
B. 5.5 years
C. 14.2 years
D. Cannot be determined from the information given

Ans.: C

Explanation:

Use formula : A = P(1+r)t Using Logaritm in Calculator:

A= 2P, r=0.05 Log 2 = t Log 1.05

So, 2P = P (1+.005) t t = Log 2 / Log 1.05

Or, 2 = 1.05 t t = 0.3010 / 0.2119 = 14.2 Years

1. Retained earning are
A. an indication of a company's liquidity.
B. the same as cash in the bank.
C. not important when determining dividends.
D. the cumulative earnings of the company after dividends.
Ans.: D

2. Which of the following is an argument for the relevance of dividends?

A. Informational content.
B. Reduction of uncertainty.
C. Some investors' preference for current income.
D. All of the above.
Ans.: D

3. All of the following are true of stock splits EXCEPT:

A. market price per share is reduced after the split.
B. the number of outstanding shares is increased.
C. retained earnings are changed.
D. proportional ownership is unchanged.
Ans.: C

4. If Ian O'Connor Enterprises, Inc., repurchased 50 percent of its outstanding common stock
from the open (secondary) market, the result would be
A. a decline in EPS.
B. an increase in cash.
C. a decrease in total assets.
D. an increase in the number of stockholders.
Ans.: C

5. On May 7, Melbourne Mining declared a $.50-per-share quarterly dividend payable June

28 to stockholders of record on Friday, June 7. What is the latest date by which you could
purchase the stock and still get the recently declared dividend?
A. June 3
B. June 4
C. June 5
D. June 6
Ans.: B

6. An offer by a firm to repurchase some of its own shares is known as

A. a DRIP.
B. a self-tender offer.
C. a reverse split.
D. a buy back
Ans.: B
7. The bird in the hand theory of dividends refers to which of the following concepts:
A. Dividends should only be paid after all capital expenditures are financed
B. Dividends provide a strong signal about future earnings potential
C. Dividends are certain while potential capital gains are uncertain
D. Shareholders always prefer companies that pay cash dividends
Ans.: C

8. If an individual stockholder reinvests dividends under a company's dividend reinvestment

plan, the reinvested dividends are
A. not taxable to the shareholder.
B. taxable to the shareholder.
C. not taxable to the company.
D. taxable to the company.
Ans.: B

9. The dividend-payout ratio is equal to

A. the dividend yield plus the capital gains yield.
B. dividends per share divided by earnings per share.
C. dividends per share divided by par value per share.
D. dividends per share divided by current price per share.
Ans.: B

10. The residual theory of dividends refers to which of the following concepts:
A. Dividends should only be paid after all capital expenditures are financed
B. Dividends are preferred by a small number of shareholders only
C. Dividends can only be paid from retained earnings
D. Share repurchases are preferred to cash dividends
Ans.: A

11. The Residual Dividend policy refers to which of the following concepts:
A. Dividends are preferred by only a few shareholders
B. This policy’s implementer provide a strong signal about future earnings potential
C. Dividends are certain while potential capital gains are uncertain
D. Some shareholders prefer no cash dividends while others prefer large cash dividends
Ans.: B

12. The clientele theory of dividends refers to which of the following concepts:
A. Dividends are preferred by only a few shareholders
B. Dividends provide a strong signal about future earnings potential
C. Dividends are certain while potential capital gains are uncertain
D. Some shareholders prefer no cash dividends while others prefer large cash dividends
Ans.: D
13. The simple dividend discount model indicates which of the following:
A. The larger the payout ratio, the larger the PE ratio will be
B. The larger the growth rate, the larger the PE ratio will be
C. The PE is related only to the size of the payout
D. Dividends are not an important factor in the PE ratio
Ans.: B
14. The Modigliani and Miller theory that the capital structure of a company is irrelevant is
best reflected by which of the following:
A. This is an out of date theory that was popular during the great depression
B. This is a theory that is based upon the assumption that there is no tax advantage to
debt
C. This is a theory that is based upon the idea that potential stakeholders prefer equity
to debt issues
D. This is a theory that has no basis in fact

Ans.: B

15. The policy decision that by itself is least likely to affect the value of the firm is the
A. Investment in a project with a large net present value.
B. Sale of a risky division that will now increase the credit rating of the entire company.
C. Distribution of stock dividends to shareholders.
D. Use of a more highly leveraged capital structure that resulted in a lower cost of
capital.
Ans.: C

16. Which of the following types of dividends do not reduce equity in the corporation?

A. Cash dividends.
B. Property dividends.
C. Liquidating dividends.
D. Stock dividends and split-ups in the form of a dividend.
Ans.: D
17. A company has 1,000 shares of $10 par value common stock and $5,000 of retained
earnings. Two proposals are under consideration. The first is a stock split giving each
shareholder two new shares for each share formerly held. The second is to declare and
distribute a 50% split-up effected in the form of a dividend. The stock split proposal will
earnings per share by than will the proposal for a split-up effected in the form of a
dividend. List A List B

A. Increase More
B. Increase Less
C. Decrease More
D. Decrease Less

Ans.: C
Explanation: Answer (C) is correct. The stock split will double the number of shares
outstanding to 2,000. The 50% split-up effected in the form of a dividend will
increase the number of outstanding shares to 1,500. The higher number of shares in
the stock split will result in a lower earnings per share than will result from the split-
up effected in the form of a dividend.

18. A company has 1,000 shares of $10 par value common stock and $5,000 of retained
earnings. Two proposals are under consideration. The first is a stock split giving each
shareholder two new shares for each share formerly held. The second is to declare and
distribute a 50% split-up effected in the form of a dividend. Under the , the par value per
outstanding share will . List A List B

A. Split-up effected in the form of a dividend Increase

B. Stock split Increase
C. Split-up effected in the form of a dividend Decrease
D. Stock split Decrease

Ans.: D

19. A company declares and pays both a $200,000 cash dividend and a 10% stock dividend.
The effect of the dividend is to . List A List B

A. Cash Increase retained earnings

B. Cash Decrease retained earnings and increase equity
C. Stock Decrease retained earnings
D. Stock Decrease retained earnings and decrease equity

Ans.: C
20. The purchase of treasury stock with a firm’s surplus cash

A. Increases a firm’s assets.

B. Increases a firm’s financial leverage.
C. Increases a firm’s interest coverage ratio.
D. Dilutes a firm’s earnings per share.
Ans.: B

21. Jensen Corporation’s board of directors met on June 3 and declared a regular quarterly
cash dividend of $.40 per share for a total value of $200,000. The dividend is payable on
June 24 to all stockholders of record as of June 17. Excerpts from the statement of
financial position for Jensen Corporation as of May 31 are presented as follows.
Cash 400,000
Accounts receivable (net) 800,000
Inventories $1,200,000
Total current assets 2,400,000
Total current liabilities $1,000,000
Assume that the only transactions to affect Jensen Corporation during June are the
dividend transactions. Jensen’s total stockholders’ equity would be

A. Unchanged by the dividend declaration and decreased by the dividend payment.

B. Decreased by the dividend declaration and increased by the dividend payment.
C. Unchanged by either the dividend declaration or the dividend payment.
D. Decreased by the dividend declaration and unchanged by the dividend payment.

Ans.: D
Explanation: Answer (D) is correct. A dividend declaration reduces retained earnings and
thus total stockholders’ equity. The subsequent payment will have no effect on
stockholders’ equity since only cash and dividends payable are reduced.

22. Jensen Corporation’s board of directors met on June 3 and declared a regular quarterly
cash dividend of $.40 per share for a total value of $200,000. The dividend is payable on
June 24 to all stockholders of record as of June 17. Excerpts from the statement of
financial position for Jensen Corporation as of May 31 are presented as follows.
Cash 400,000
Accounts receivable (net) 800,000
Inventories $1,200,000
Total current assets 2,400,000
Total current liabilities $1,000,000
Assume that the only transactions to affect Jensen Corporation during June are the
dividend transactions. If the dividend declared by Jensen Corporation had been a
 10% stock dividend instead of a cash dividend, Jensen’s current liabilities would have
been

A. Unchanged by the dividend declaration and increased by the dividend

distribution.
B. Unchanged by the dividend declaration and decreased by the dividend
distribution.
C. Increased by the dividend declaration and unchanged by the dividend
distribution.
D. Unchanged by either the dividend declaration or the dividend distribution.
Ans.: D

Explanation: Answer (D) is correct. A stock dividend requires transfer of an amount from
retained earnings to paid-in capital. Consequently, no liability accounts are affected by
either the declaration or the distribution of a stock dividend.

23. Excerpts from the statement of financial position for Landau Corporation as of
September 30 of the current year are presented as follows.
Cash $ 950,000
Accounts receivable (net) 1,675,000
Inventories 2,806,000
Total current assets 5,43 ,000
Accounts payable 1,004,000
Accrued liabilities 785,000
Total current liabilities 1,789,000
The board of directors of Landau Corporation met on October 4 of the current year
and declared the regular quarterly cash dividend amounting to $750,000 ($.60 per
share). The dividend is payable on October 25 of the current year to all shareholders
of record as of October 12 of the current year. Assume that the only transactions to
affect Landau Corporation during October of the current year are the dividend
transactions and that the closing entries have been made. Landau Corporation’s total
equity was

A. Unchanged by the dividend declaration and decreased by the dividend

payment.
B. Decreased by the dividend declaration and increased by the dividend
payment.
C. Unchanged by either the dividend declaration or the dividend payment.
D. Decreased by the dividend declaration and unchanged by the dividend
payment.
Ans.: D
Explanation:
 Answer (D) is correct. A dividend declaration decreases equity, of which retained
earnings is a component, by the amount of the dividend. Because equity equals
assets minus liabilities, the subsequent payment of the dividend had no effect on
equity because an asset and a liability were decreased by the same amount.

24. Excerpts from the statement of financial position for Landau Corporation as of
September 30 of the current year are presented as follows.
Cash $ 950,000
Accounts receivable (net) 1,675,000
Inventories 2,806,000
Total current assets 5,43 ,000
Accounts payable 1,004,000
Accrued liabilities 785,000
Total current liabilities 1,789,000
The board of directors of Landau Corporation met on October 4 of the current year
and declared the regular quarterly cash dividend amounting to $750,000 ($.60 per
share). The dividend is payable on October 25 of the current year to all shareholders
of record as of October 12 of the current year. Assume that the only transactions to
affect Landau Corporation during October of the current year are the dividend
transactions and that the closing entries have been made. If the dividend declared by
Landau Corporation had been a 10% stock dividend instead of a cash dividend,
Landau’s current liabilities would have been

A. Unchanged by the dividend declaration and increased by the dividend

distribution.
B. Unchanged by the dividend declaration and decreased by the dividend
distribution.
C. Increased by the dividend declaration and unchanged by the dividend
distribution.
D. Unchanged by either the dividend declaration or the dividend distribution.

Ans.: D
Explanation: Answer (D) is correct. A stock dividend (one less than 20% to 25% of the
shares outstanding) requires a debit to one equity account (retained earnings) and a
credit to one or more other equity accounts (common stock dividend distributable
and paid-in capital in excess of par) for the fair value of the stock. The subsequent
distribution of that stock dividend involves a debit to common stock dividend
distributable and a credit to common stock, both of which are equity accounts. Thus,
liabilities are unaffected by either the declaration or distribution of a stock dividend.
Question 1.

There is a relationship between risk and return:

A. when risk decreases, return increases

B. when risk increases, return decreases
C. when risk increases, return increases
D. when risk decreases, return is unchanged

Ans: C

Question 2.

Individuals or companies that prefer low-risk, low-return investments are:

A. risk-averse
B. risk-loving
C. risk neutral
D. risk-taking

Ans: A:

Question 3.

Business risk:

A. is due to the variability in operating profits or cash flows

B. is affected by market demand
C. is influenced by sales price
D. is one part of unsystematic risk

Ans: A:
Question 4.

Financial risk is not:

A. caused by interest rate fluctuations

B. caused by exchange rate fluctuations
C. one part of unsystematic risk
D. one part of systematic risk

Ans: C

Question 5.

Using the CAPM, ß is a measure of:

A. share price volatility

B. dividend volatility
C. profit volatility
D. cost volatility

Ans: A

Question 6.

Which of the following is not a measure of risk?

A. standard deviation
B. expected value
C. correlation coefficient
D. coefficient of variation

Ans: C

Question 7.

An important portfolio theory was developed in 1952 by:

A. Mankovich
B. Mankovitz
C. Markorich
D. Markowitz

Ans: D
Question 8.

The starting point of a capital market line (CML) is the:

A. low-risk return
B. high-risk return
C. risk-free return
D. market return

Ans.: C

Question 9.

The slope of a capital market line (CML) is:

A. market portfolio risk/(market portfolio return – risk-free return)

B. (risk-free return – market portfolio return)/market portfolio risk
C. (market portfolio return – risk-free return)/market portfolio risk
D. risk-free return/(market portfolio return – risk-free return)

Ans.: C

Question 10.

An investor’s indifference curve is also called:

A. probability curve
B. utility curve
C. ability curve
D. independence curve

Ans.: B
Question 11.

A financial manager can, most likely, maximise the wealth of shareholders in the short
term by:

A. Paying out all net income in the form of dividends

B. Using all net income to repurchase shares from the open market
C. Spending all of net income on consulting contracts designed to identify
future areas of potential interest
D. Splitting net income between R&D, fixed asset investment and payout of
dividends

Ans.: B

Question 12.

Which of the following statements is correct?

A. In order to raise new equity finance, bonus issues can be used

B. EPS and gearing can both be increased by share repurchase schemes
C. According to Modigliani and Miller, the capital structure of the firm is
more important than its dividend payout rate
D. The AGM of a company is where shareholders have the power to
increase dividends

Ans.: B

13. Which of the following statements is / are correct?

1. As sales increase, working capital should increase

2. Profitability is increased when the cash operating cycle decreases
3. Another term equivalent to 'overtrading' is 'under-capitalization'
A. 1 only
B. 2 only
C. 1 and 2 only
D. All three are correct

Ans.: D
 14. Which of the following is most likely to not fall within the purview of financial
managers?
A. Funding of investment projects
B. The dividend payment decision
C. The appointment of non-executive directors
D. Sales of existing assets

Ans.: C

15. The primary market where new security issues are offered to the public and the real
estate market are good examples of _________.

A. an auction market

B. a brokered market

C. a dealer market

D. a direct search market

Ans.: B

16. Firms that specialize in helping companies raise capital by selling securities to the
public are called _________.
A. pension funds
B. investment banks
C. savings banks
D. REITs

Ans.: B

17. Which of the following is not an assumption used in the Capital Asset Pricing
Theory?
A. No taxat ion
B. All assets are quoted on open exchanges
C. CAll securities are infinitely divisible
D. All information is freely and instantaneously available

Ans.: B
 18. The buyer of a new home is quoted a mortgage rate of 0.5% per month. What is the
APR on the loan?
A. 0.50%
B. 5.0%
C. 6.0%
D. 6.5%

Ans.: C

19. If zero coupon bond has exactly 10 years to maturity and the yield to maturity
is 5% what is the Modified Duration of the bond?
A . 10. 0
B. 9.5
C. 9.0
D. Cannot be determined from the information given

Ans.: B

Explanation:

ModD=MacD/(1+y) = 10/(1+0.05) = 9.52 Years

20. Security A has a higher standard deviation of returns than Security B. We would expect that
_____________.
I. Security A would have a higher risk premium than Security B
II. the likely range of returns for Security A in any given year would be
higher than the likely range of returns for Security B
III. the Sharpe measure of A will be higher than the Sharpe measure of B.
A. I only
B. I and II only
C. II and III only
D. I, II and III

Ans.: B

21. Both investors and gamblers take on risk. The difference between an investor and a
gambler is that an investor _______.
A. is normally risk neutral
B. requires a risk premium to take on the risk
C. knows he or she will not lose money
D. knows the outcomes at the beginning of the holding period
Ans.: B

22. Investing in two assets with a correlation coefficient of +0.9 will reduce what kind of
risk?
A. Market risk
B. Systematic risk
C. Diversifiable risk
D. None of the above

Ans.: C

23. Some of the financial information pertinent to Clarke Co is as follows:

Year 2015 2016 2017 2018
Earnings per share (cents) 64 68 70 62
Year-end share price ($) 9.15 9.88 10.49 10.90
Clarke Co currently has the following balance sheet characteristics:
$m $m
Equity finance
Ordinary shares 25'0
Reserves 41'4 66'4
Non-current liabilities
Bank debt 17.0
6% convertible bonds 36.0 53.0
Total equity and debt 119.4

The 6% CBs can be converted into five ordinary shares per bond in five years' time.
Otherwise, the CBs will mature in five years and pay their face value of $100. Clarke
Co has a cost of debt of 7% per year. The stock of Clarke Co has a nominal value of
$1 per share and is traded on a large stock exchange. Comparable companies
currently trade at average price/earnings ratios of about 15X. The best
methodology to use for the purposes of determining the theoretical value of the
CB and the stock of the company is which of the following:

A. Technical analysis
B. Operational efficiency
C. Semi-strong form efficiency
D. Fundamental analysis

Ans.: D
 24. Other things equal, diversification is most effective when
A. securities' returns are uncorrelated.
B. securities' returns are positively correlated.
C. securities' returns are high.
D. securities' returns are negatively correlated.

Ans.: D
 25. EON Co is a large listed company. The company is currently considering a
project to manufacture a new product. The project has an initial upfront
investment requirement of $1,800,000. The following is a draft forecast for
the project.

Year 1 2 3 4
Sales (units/year) 95,000 100,000 150,000 150,000
Selling price ($/unit) 25 25 26 27
Variable costs ($/unit) 11 12 12 13

(Note: Price rises have not been taken into account in the above figures.)

$000 $000 $000 $000

Sales revenue 2,475 2,605 4,064 4,220
Variable costs -1,097 -1,260 -1,890 -2,048
Fixed costs -155 -155 -155 -155
Interest payments -150 -150 -150 -150
Cash flow before tax 1,073 1,040 1,869 1,867
Tax allowable -450 -450 -450 -450
depreciation
Taxable profit 623 590 1,419 1,417
Taxation -137 -130 -312
Net cash flow 623 453 1,289 1,105
Discount at 12% 0.893 0.797 0.712 636
Present values 556 361 918 703
$000
Present value of cash 2,538
inflows
Cost of machine -1,800

(Note: Price rises have not been taken into account in the above figures.)
Recently a reevaluation has provided the following for consideration:
NPV 738
a. Fixed costs are now fore cast to be $150,000 pe r annum.
b. No finished goods inventory will be held.
 c. The tax rate is 22% and tax is payable in arrears.
d. There is a tax allowable depreciation of 25% per annum on a reducing
balance basis on upfront initial charge.
e. A one off balancing account can be established in the last year.
f. There is an expectation of a price 4.2% per annum in prices, as well as a 5%
per annum variable cost inflation and a 3% per annum fixed cost inflation.
g. The re w ill be no scrap value.
h. Financing is available via a $1,500,000 bank loan at 10% per year.
i. The WACC of EON Co is estimated at 8% per annum.

A revised evaluation of the investment proposal taking into consideration this additional
information is most likely to result in which of the following NPVs (closest value)?
A. -590
B. 590
C. 2900
D. 3900

Ans.: C

26. The CAPM applies to

A. portfolios of securities only.
B. individual securities only.
C. efficient portfolios of securities only.
D. all portfolios and individual securities.

Ans.: D

27. Which of the following are assumptions of the simple CAPM model?
I. Individual trades of investors do not affect a stock's price
II. All investors plan for one identical holding period
III. All investors analyze securities in the same way and share the same
economic view of the world
IV. All investors have the same level of risk aversion
A. I, II and IV only
B. I, II and III only
C. II, III and IV only
D. I, II, III and IV

Ans.: B
 24. Which of the following statements is/are correct?

1. Increasing the cost of equity results in a fall in the stock price

2. Increased expected return can be associated with increased risk

3. The cost of preference shares is usually higher than the cost of debt

A. only
B. only
C. and 3 only
D. All are correct

Ans.: D

25. An investor believes that abnormal returns can be acquired by studying

graphs of share price movements. This type of investor is most likely to be
believe in which of the following:

A. Technical analysis
B. Fundamental analysis
C. Semi-strong form efficiency
D. Operational analysis
Ans.: A

26. Which of the following statements is correct?

A. Interest rates can be raised by governments may for the purpose of increasing
general expenditure in the economy

B. The so-called 'normal' yield curve is upward sloping due, at least in part, to
the fact that investors need increasingly higher compensation for the loss of
opportunity as the term to maturity increases
C. Long-term Notes usually have lower yields than short-term notes due to
the fact that long-term notes are generally considered to be less risky than
short-term notes

D. The idea that expectations of future inflation rate movements are a principal
driver of future interest rates is known as the 'expectations theory'

Ans.: B
____________________________________

The CAPM considers risk using the:

A. π factor
B. μ factor
C. α factor
D. β factor
Ans.: D

Which of the following items is not allowable for

corporation tax?
A. distribution cost
B. administrative cost
C. interest
D. dividend
Ans.: D

The relative proportions of debt and equity in a company’s financing

are:
A. (E+D)/E + (E+D)/D
B. E/(E+D) + D/(E+D)
C. (E+D)/E x (E+D)/D
D. E/(E+D) x D/(E+D)
Ans.: B

The following are extracts from the income statement for the year
ended 31 December 2012 and the balance sheet as at 31 December
2012:

£000
Revenue 20,000
Cost of sales (17,000)
Distribution costs (600)
Administrative expenses (400)
Net interest (300)
 Taxation (1,000)
Dividends (200)
Non-current assets 20,000
Current assets
Inventories 5,000
Trade receivables 3,000
Investments 1,500
Cash and cash equivalents 500
Current liabilities
Overdraft 1,650
Trade payables 6,000
Taxation 1,000
Dividend (proposed) 200
Non-current liabilities
Loan 1,000
Ordinary shares (4 million £1 4,000
shares)
Share premium account 4,650
Retained earnings 11,500
Earnings per share (eps) is:
A. 17.5p
B. 50.0p
C. 12.5p
D. 42.5p
Ans.: D

The following are extracts from the income statement for the year
ended 31 December 2012 and the balance sheet as at 31 December
2012:

£000
Revenue 20,000
Cost of sales (17,000)
Distribution costs (600)
Administrative expenses (400)
Net interest (300)
Taxation (1,000)
Dividends (200)
Non-current assets 20,000
Current assets
Inventories 5,000
Trade receivables 3,000
Investments 1,500
Cash and cash equivalents 500
Current liabilities
 Overdraft 1,650
Trade payables 6,000
Taxation 1,000
Dividend (proposed) 200
Non-current liabilities
Loan 1,000
Ordinary shares (4 million £1 4,000
shares)
Share premium account 4,650
Retained earnings 11,500
Equity is:
A. £8.65m
B. £20.15m
C. £16.15m
D. £4.00m
Ans.: B

The following are extracts from the income statement for the year
ended 31 December 2012 and the balance sheet as at 31 December
2012:

£000
Revenue 20,000
Cost of sales (17,000)
Distribution costs (600)
Administrative expenses (400)
Net interest (300)
Taxation (1,000)
Dividends (200)
Non-current assets 20,000
Current assets
Inventories 5,000
Trade receivables 3,000
Investments 1,500
Cash and cash equivalents 500
Current liabilities
Overdraft 1,650
Trade payables 6,000
Taxation 1,000
Dividend (proposed) 200
Non-current liabilities
Loan 1,000
Ordinary shares (4 million £1 4,000
shares)
Share premium account 4,650
 Retained earnings 11,500
Debt is:
A. £3.0m
B. £1.0m
C. £20.0m
D. £4.0m
Ans.: B

The following are extracts from the income statement for the year
ended 31 December 2012 and the balance sheet as at 31 December
2012:

£000
Revenue 20,000
Cost of sales (17,000)
Distribution costs (600)
Administrative expenses (400)
Net interest (300)
Taxation (1,000)
Dividends (200)
Non-current assets 20,000
Current assets
Inventories 5,000
Trade receivables 3,000
Investments 1,500
Cash and cash equivalents 500
Current liabilities
Overdraft 1,650
Trade payables 6,000
Taxation 1,000
Dividend (proposed) 200
Non-current liabilities
Loan 1,000
Ordinary shares (4 million £1 4,000
shares)
Share premium account 4,650
Retained earnings 11,500
Dividend cover is:
A. 3.5
B. 4.5
C. 5.5
D. 6.5
Ans.: A
 The following are extracts from the income statement for the year
ended 31 December 2012 and the balance sheet as at 31 December
2012:

£000
Revenue 20,000
Cost of sales (17,000)
Distribution costs (600)
Administrative expenses (400)
Net interest (300)
Taxation (1,000)
Dividends (200)
Non-current assets 20,000
Current assets
Inventories 5,000
Trade receivables 3,000
Investments 1,500
Cash and cash equivalents 500
Current liabilities
Overdraft 1,650
Trade payables 6,000
Taxation 1,000
Dividend (proposed) 200
Non-current liabilities
Loan 1,000
Ordinary shares (4 million £1 4,000
shares)
Share premium account 4,650
Retained earnings 11,500
The debt/equity ratio is:
A. 8.7%
B. 25.0%
C. 5.0%
D. 11.6%
Ans.: C

The following are extracts from the income statement for the year
ended 31 December 2012 and the balance sheet as at 31 December
2012:

£000
Revenue 20,000
Cost of sales (17,000)
 Distribution costs (600)
Administrative expenses (400)
Net interest (300)
Taxation (1,000)
Dividends (200)
Non-current assets 20,000
Current assets
Inventories 5,000
Trade receivables 3,000
Investments 1,500
Cash and cash equivalents 500
Current liabilities
Overdraft 1,650
Trade payables 6,000
Taxation 1,000
Dividend (proposed) 200
Non-current liabilities
Loan 1,000
Ordinary shares (4 million £1 4,000
shares)
Share premium account 4,650
Retained earnings 11,500
The gearing ratio is:
A. 8.0%
B. 10.4%
C. 20.0%
D. 4.7%
Ans.: D

A company has a financial structure where equity is 70% of its total

debt plus equity. Its cost of equity is 10% and gross loan interest is
5%. Corporation tax is paid at 30%. What is the company’s
weighted average cost of capital (WACC)?
A. 7.50%
B. 8.05%
C. 8.50%
D. 7.45%

Ans.: B

____________________________________________________________________
 1. Net income available to stockholders is $125 and total assets are $1,096 then return
on common equity would be

A. 0.00114
B. 0.114
C. 0.12 times
D. 0.12

Ans.: B

2. Price per share is $30 and earnings per share is $3.5 then price for earnings ratio
would be

A. 8.57 times
B. 0.0857
C. 0.11 times
D. 0.11

Ans.: A

3. Price per share is $25 and cash flow per share is $6 then price to cash flow ratio
would be

A. 0.24 times
B. 4.16 times
C. 0.0416
D. 0.24

Ans.: B

4. Which of the following should be the most effective in reducing agency problems
in a company?
A. Pay out large sums to top executives and allow them to diversify product
offer while reducing leverage
B. Increase the leverage of the company while dramatically reducing the
salaries of the top executives
C. Dramatically increasing the net remuneration package of the top executives
while tying their remuneration to carefully selected key performance
indicators
D. Increasing the top executive pay packages while tying them to key
performance indicators and offering them stock options at below market
 prices; while, simultaneously reducing staff and cutting salaries to the
lowest paid workers.
Ans.: C

5. Stocks or shares that are sold to investors without transacting through financial
institutions are classified as

A. direct transfer
B. indirect transfer
C. global transfer
D. pension transfer

Ans.: A

6. If bond's call provision is practiced in first year of issuance then an additional

payment is classified as

A. issuance provision
B. bond provision
C. call provision
D. first provision

Ans: C

7. Payment divided by par value is classified as

A. divisible payment
B. coupon payment
C. par payment
D. per period payment

Ans.: B

8. Bonds issued by corporations for relatively longer term are classified as

A. long term bonds

B. short term bonds
C. corporate bonds
D. Federal Reserve bonds

Ans.: C
 9. As compared to publicly placed issues, privately placed bonds are issued for

A. lower paid interest rates

B. higher paid interest rates
C. registered interest rates
D. unregistered interest rates

Ans.: B

10. Which of the following statements is correct?

A. A principal source of cash is that of tax allowable depreciation

B. The after-tax cost of debt is the relevant rate to be used to discount
asset replacement decisions
C. CIndividual investment projects should be prioritized by their degree of
profitability in the case where capital is rationed for the purpose of
determining an optimal investment schedule
D. Soft capital rationing schemes are associated with government
restrictions on bank lending

Ans.: C

11. If intrinsic value of an option is $450 and price of an option is $560 then time value
of an option is

A. 110
B. 1010
C. 450
D. 560

Ans.: A

12. If time value of an option is $200 and intrinsic value of an option is $250 then price
of option is

A. 50
B. 450
C. 200
D. 250

Ans.: B
 13. Time value of an option is added into intrinsic value to calculate

A. market index of an option

B. depreciated value of option
C. appreciated value of option
D. price of an option

Ans.: D

14. If exercise price of an option is $360 and intrinsic value of an option is $160 then
price of an underlying asset is

A. 200
B. 520
C. 160
D. 360

Ans.: A
15. A hypothetical project has an upfront cost of $15,000. Potential future cash
flows are determined to have the following characteristics:

Year 1 Year 2
Present Value Probability Present Value Probability
1000 0.2 5900 0.55
3000 0.65 -3000 0.45
-2000 0.15

What is the expected value of the project's NPV?

A. 1,850
B. 3,745
C. 5,700
D. 3,000

Ans: B

Explanation:
Year 1 Year 2
Present Value Probability Present Value Probability
1000 0.2 200 5900 0.55 3245
3000 0.65 1950 -3000 0.45 -1350
-2000 0.15 -300
1850 + 1895

Expected Value 3745

 Scenario 1:

Alpha Co needs to raise funds for the purpose of expanding existing

business. The company has therefore decided to re-estimate its WACC. The
capital structure of Alpha Co is:

$m $m
Equity
Ordinary shares 200
Reserves 650

850
Non-current liabilities
Bonds 200
1,05
0
All 200 m of Alpha Co stock is listed on a stock market. It is currently trading at
$5.85 ex dividend. Alpha Co has a beta of 1.15 and a declared intention of
growing dividends by 5% per annum. The bonds are currently trading OTC at
$103.50 per bond yielding 5.3% and have a face value of $100. The 6% bonds
will mature in six years' time at which time they will payout their face value.
The risk-free rate is currently 4% and the market is currently returning 6% per
annum. Alpha Co is subject to a 25% per annum tax rate.

1. The WACC of Alpha as based on market values is closest to:

A. 5.4%
B. 5.9%
C. 6.3%
D. 6.6%

Ans.: B

2. WACC of Alpha as based on accounting statement values is:

A. 5.3%
B. 5.8%
C. 6.3%
D. 6.5%

Ans.: B
Scenario 2:

Beta Co intends to initiate a vast expansion programme which will significantly

impact the fundamental nature of the company. The programme will be completed
over the forthcoming five year period. The following information has been extracted
from the 31st January 2019 statements.

10% debentures 9,000

Share capital (£1 per share) 12,000
7% LT Debt 7,000
Other Equity Items 16,000

The debt of the company is recorded at face value, but the debentures are
currently transacting at a discount of 5% yielding 10.85% and the LT debt at a
discount of 3% yielding 7.56%. The stock is currently trading at £2.80 cum dividend
and is just a few days from ex rights date. The dividend to be paid is 15p per share.
The market consensus is that dividends will increase by 6% per annum for the
foreseeable future. Beta Co’s tax rate is 20%. The current risk free rate is 2%, the
return on the equity markets is 8% and the company's beta is 1.5.
1. Calculate the Beta Co's book value WACC:
A. 9.7%
B. 10.5%
C. 11.8%
D. 12.8%

Answer: A

2. Calculate the Beta Co's market value WACC:

A. 9.7%
B. 10.5%
C. 11.8%
D. 12.8%
Answer: B

3. An important assumption about the use of the WACC is that:

A. It will remain constant over the medium term
B. It will not get any larger over the medium term
C. It is a perfectly transparent measure that can be calculated by all
stakeholders
D. It is the better than any other measure for determining the Beta Co's
appropriate hurdle rates for potential project analy sis
Answer: B