Corporate Finance Test with Answers

Topics: Stock, Question, Finance Pages: 9 (359 words) Published: October 19, 2013
SECTION A - SHORT ANSWER QUESTIONS
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)

Page 4 of 10

Corporate Finance

Page 5 of 10

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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