# Corporate Finance Test with Answers

Total for Section A – 20 marks

(4 questions x 5 marks each)

ANSWER ALL QUESTIONS

DISCUSS FULLY THE VALIDITY OF EACH OF THE FOLLOWING STATEMENTS.

1. “Agency problems arise if managers make decisions that benefit themselves at the expense of the firm’s shareholders.”

2.

“If the current stock price were greater than P 0

Div 1 + P 1

(1 + r e )

we would expect investors to rush in and buy it, driving up the stock’s price.”

Corporate Finance

=

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3.

4.

Corporate Finance

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SECTION B – CALCULATION QUESTIONS

Total for Section B – 20 marks

ANSWER ALL QUESTIONS AND SHOW ALL WORKINGS

Question 1

Corporate Finance

(Total: 10 marks)

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Corporate Finance

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Corporate Finance

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Question 2

Corporate Finance

(Total: 10 marks)

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Corporate Finance

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Corporate Finance

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FORMULAE SHEET

T

NPV = ∑

t =0

FV = P(1 + r )

t

T

PV =

(1 + r )t

t =0

ri =

1 − (1 + r )

PV = C

r

+C

1 − (1 + rd )

B = C

rd

−t

F

+

t

(1 + rd )

F

(1 + re )t

P0 =

Div

re

i

t

2

2 2

2 2

σ p = x Aσ A + x Bσ B + 2 x A x B cov(rA , rB )

(

)

~ ~

cov(R , R )

~ ~

= corr (R , R ) =

σ σ

~ ~

where cov R A , RB = ρ A, Bσ Aσ B

and ∴ ρ A, B

A

A

B

B

A

B

ri = r f + (rm − r f ) β i

ri rm

cov(~ , ~ ) σ i ,m ρ i ,mσ iσ m ρ i ,mσ i

where β i =

= 2 =

=

σm

σ 2m

σ m

σ 2m

r −r

rp = rf + m f σ p

σm

RS = R0 +

B

( R0 − RB )

S

VL = VU + TC B

B

S

+ rd ⋅ (1 − τ c ) ⋅

S+B

S+B

or

Divt

Div1

re − g

2

t

rWACC = re ⋅

(1 + rd )t

P0 =

∑ ( r − r ) Pr( r )

i =1

m

1 + APR − 1

EAR =

m

t =1

n

rp = ∑ xi ri = x A rA + x B rB

t

C1 1 + g

PV =

1 −

r − g (1 + r )

P0 = ∑

t

n

C

r

C

PV = 1

r−g

PV =

∞

t

t =1

(1 + r )t − 1

FV = C

(1 + r )

r

B=

=0

(1 + IRR )t

n

σi =

− t −1

NCFATt

t =1

−t

1 − (1 + r )

PV = C

r

t

∑ r Pr( r )

(1 + r ) − 1

FV = C

r

t

(1 + r )

p

NPV = ∑

F

NCFATt

for re > g

rWACC = re ⋅

B

S

+ rd ⋅ (1 − τ c ) ⋅

V

V

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