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DIVISION OF ACCOUNTING & FINANCE INVP001 CORPORATE FINANCE SAMPLE MULTIPLE CHOICE QUESTIONS AUTUMN 2021 INVP001 SAMPLE MULTIPLE CHOICE QUESTIONS 2 Q1. If you have a choice to earn simple interest on ￡10,000 for three years at 8% or compound interest at 7.5% for three years which one will pay more and by how much A Simple interest by ￡1,500 B Compound interest by ￡22.97 C Compound interest by ￡150.75 D Simple interest by ￡150.00 E None of the above. Q2. You have deposited ￡1,500 in an account that promises to pay 8% compounded quarterly for the next five years. How much will you have in the account at the end of five years A ￡1,598.33 B ￡2,228.92 C ￡2,203.99 D ￡ 6991.44 E None of the above. Q3. You need ￡2,000 to buy a new sofa. If you have ￡500 to invest at 14% compounded annually, how long will you have to wait to buy the sofa A 6.58 years. B 8.42 years. C 10.58 years. D 10.75 years. E 12.27 years Q4. What amount would you have at the end of 7 years if you invested ￡9,000 at a continuously compounded rate of 11% A ￡18,685.44 B ￡19,369.83 C ￡15,930.00 D ￡19,437.90 E None of the above. Q5. Would you accept a project which is expected to pay ￡10,000 a year for 10 years if the initial investment is ￡60,000 and your required rate of return is 10% A Yes the NPV is ￡17,217. B Yes the NPV is ￡ 1,446. C No the NPV is -￡10,000. D No the NPV is -￡15,369. E No the NPV is -￡22,738. INVP001 SAMPLE MULTIPLE CHOICE QUESTIONS 3 Q6. Which of the following correctly orders the investment rules of average accounting return (AAR), internal rate of return (IRR), and net present value (NPV) from the most desirable to the least desirable A AAR, IRR, NPV B AAR, NPV, IRR C IRR, NPV, AAR D NPV, AAR, IRR E NPV, IRR, AAR. Q7. An investment project has the following cash flows: t = 0 t = 1 t = 2 t = 3 t = 4 -250 +75 +125 +100 +50 Assume that the cash flows occur evenly over the life of the project. If the cost of capital is 12%, what is the discounted payback period A 2.5 years. B 2.7 years. C 3.38 years. D 1.40 years. E 1.25 years. Q8. How many IRRs are possible for the following cash flows t = 0 t = 1 t = 2 t = 3 t = 4 -100 +50 +30 -100 +20 A One. B Two. C Three. D Four. E Five. Q9. A bond with a 7% coupon that pays interest semi-annually and is priced at par will have a market price of _____ and interest payments of _____ each. A $1,007; $70 B $1,070; $35 C $1,070; $70 D $1,000; $35 E $1,000; $70 INVP001 SAMPLE MULTIPLE CHOICE QUESTIONS 4 Q10. Consider a bond with a $1,000 face value and a coupon rate of 11% that pays interest semi-annually and has 3 years to maturity. The market requires an interest rate of 10% on bonds of this risk. What is the bond’s price (Round your answer to the nearest whole number). A $1,014 B $1,055 C $ 888 D $1,025 E $1,000. Q11. Mortgage Instruments plc is expected to pay dividends of ￡1.03 next year. The company has just paid dividends of ￡1.00. This growth rate is expected to continue indefinitely. How much should be paid for the company’s shares if the appropriate discount rate is 5% (Round your answer to the nearest whole number). A ￡20 B ￡21 C ￡34 D ￡50 E ￡52. Q12. A stock is currently selling for ￡34.50 a share. The current dividend for this stock is ￡1.60 and dividends are expected to grow at a constant rate of 10% per year thereafter. What must be the required rate of return on the stock A 4.90% B 5.36% C 14.64% D 15.10% E 13.19% Q13. You buy 100 shares of stock today at ￡20 each. At the end of the year, you receive a total of ￡400 in dividends, and your stock is worth ￡2,500 in total. What is your Holding Period Return A 20% B 45% C 50% D 90% E None of the above. INVP001 SAMPLE MULTIPLE CHOICE QUESTIONS 5 Q14. What is the standard deviation of the returns on a stock given the following information State of Probability of Rate of Return Economy State of Economy if State Occurs Boom 10% 16% Normal 60% 11% Recession 30% -8% A 5.80% B 7.34% C 8.38% D 9.15% E 9.87% Q15. In the language of Modern Portfolio Theory, the portfolio with the lowest possible risk that lies on the opportunity set is called: A the efficient frontier. B the minimum variance portfolio. C the upper tail of the efficient set. D the tangency portfolio. E None of the above. Q16. The separation principle states that an investor will: A choose any efficient portfolio and invest some amount in the riskless asset to generate the expected return. B choose an efficient portfolio based on individual risk tolerance or utility. C never choose to invest in the riskless asset because the expected return on the riskless asset is lower over time. D invest only in the riskless asset and tangency portfolio choosing the weights based on individual risk tolerance. E All of the above. Q17. The risk-free rate of return is 4% and the market risk premium is 8%. What is the expected rate of return on a stock with a beta of 1.28 if the CAPM holds A 9.12% B 10.24% C 13.12% D 14.24% E 15.36% Q18. A stock has a beta a 1.14 and an expected return of 11.6%. The risk-free rate of return is 4%. What is the expected return on the market if the CAPM holds A 7.60% B 8.04% C 9.33% D 10.67% E 12.16% INVP001 SAMPLE MULTIPLE CHOICE QUESTIONS 6 Q19. A portfolio contains two assets. The first asset comprises 40% of the portfolio and has a beta of 1.2. The other asset has a beta of 1.5. The portfolio beta is: A 1.35 B 1.38 C 1.42 D 1.50 E 1.55 Q20. Which one of the following stocks is correctly priced according to the CAPM if the risk-free rate of return is 2.5% and the market risk premium is 8% Stock Beta Realized Return A .68 8.2% B 1.42 13.9% C 1.23 11.8% D 1.31 12.6% E .94 9.7% A A B B C C D D E E Q21. Two firms A and B have identical fixed costs and sell the same product for the same price in the market. The variable costs of B are higher than A. This means: A B has higher operating leverage than A B A has higher operating leverage than B C The operating leverage of both A and B are the same since the price of the products is the same D The contribution margin of B is higher than A E None of the above Q22. A firm has a Beta of 1.3 and debt comprises of 40% of total capital. What is the firm’s asset Beta A 0.33 B 0.52 C 0.78 D 0.86 E We cannot calculate with knowing the beta of the firm’s debt Q23. The cost of capital can be reduced through: A Increasing the bid ask spread in the quoted price of a firm in the market B Increasing asymmetric information between investors and the firm C Reducing liquidity in shares of the firm D Examining historical returns only to estimate the cost of capital E Decreasing the level of information asymmetry between investors and the firm INVP001 SAMPLE MULTIPLE CHOICE QUESTIONS 7 Q24. Beta is determined by: (i) The cyclicality of revenues (ii) Operating leverage (iii) The WACC (iv) The industry in which the firm operates (v) The market in which the firm is quoted A i), ii), iii) and iv) B i), ii), iii), iv) and v) C i), ii) and iii) D iii), iv) E ii), iii) and iv) Q25. In estimating a firm’s Beta: A We should always use 5 years’ worth of daily market data B We should use forward looking data C We should only use the FT as our source D We should use data from a stock market in which the company’s shares are actively traded E None of the above Q26. If the Asset Beta of a firm is 0.8 and the gearing ratio is 0.6, what is the Equity Beta, assuming the Beta of debt is zero A 2.0 B 1.3 C 0.5 D 0.8 E None of the above Q27. A firm has an Asset Beta of 1.2, an Equity Beta of 1.0 and a gearing ratio of 0.4. What is the firm’s Debt Beta A 2.0 B 1.5 C 1.0 D 0.8 E 0.5 Q28. MM’s 1958 Proposition II states: A The WACC rises with increasing leverage B The WACC stays constant with increasing or decreasing leverage C The WACC falls with falling leverage D The WACC increases with increasing leverage E The WACC increases to a point of maximisation as leverage increases, reaching a certain optimal level INVP001 SAMPLE MULTIPLE CHOICE QUESTIONS 8 Q29. Bertie is an entrepreneur who owns 10% of the outstanding shares in Bassetts Plc, which has announced a 1 for 10 rights issue with a subscription price of ￡10 per share. The current share price prior to the rights issue is ￡12 per share. If the number of shares in Bassetts Plc is 10 million, what is the theoretical ex-rights price A ￡11.00 per share B ￡10.28 per share C ￡11.82 per share D ￡12.82 per share E ￡13.00 per share Q30. Graham’s Diary Plc has announced a rights issue to raise ￡100m for a new dairy plant which is aiming to process 50 million litres of milk per week. The share price is ￡15 per share and there are 300 million shares in issue. If the subscription price for the rights issue is ￡13 per share, how many rights are needed to buy one share A 39 B 40 C 45 D 46 E 13 Q31. Blackstone Minerals Plc is planning to repurchase part of its ordinary share equity by issuing corporate debt. As a result, the firm’s debt–equity ratio is expected to rise from 25 per cent to 40 per cent. The firm currently has ￡15 million worth of debt outstanding. The cost of this debt is 5 per cent per year. Blackstone expects to have an EBIT of ￡5 million per year in perpetuity and pays no taxes. What is the expected return on the equity of the firm after the share repurchase A This cannot be calculated from the given data B 10.6% C 11.8% D 12.8% E 9.8% Q32. Rubens Juice Plc has a debt-to-equity ratio of 20%, a cost of equity of 9% and a cost of debt before tax of 5%. If the corporate tax rate is 19% what is the WACC of the company A 12.5% B 15.3% C 14.2% D 17.6% E None of the above INVP001 SAMPLE MULTIPLE CHOICE QUESTIONS 9 Q33. According to Pecking order theory: A Cash, then equity, then debt should be used to raise additional finance B Debt, then cash, then equity should be used to raise additional finance C Cash, then debt, then equity should be used to raise additional finance D Private equity, then debt, then cash should be used to raise additional finance E None of the above Q34. The optimal capital structure of a firm occurs when: A When the WACC is maximised B When the WACC is minimised C When the marginal costs of equity finance are equal to the marginal costs of debt finance D When the value of the unlevered firm is equal to the value of the levered firm E When the Risk-free rate equals the cost of capital for the firm Q35. Directors cannot: A Participate in company Annual General Meetings B Maintain their independence on the Executive Board C Participate in rights issues D Sell their shares in the company when they have passed their vesting period E Have an allocated car park space in the company car park Q36. In a world with taxes and financial distress, when a firm is operating with the optimal capital structure: I. The debt-equity ratio will also be optimal. II. The weighted average cost of capital will be at its minimal point. III. The required return on assets will be at its maximum point. IV. The increased benefit from additional debt is equal to the increased bankruptcy costs of that debt. A I and II B I II and III C I II III and IV D II and IV E I II and IV Q37. The basic lesson of MM irrelevance theory is that the value of a firm is dependent upon the: A Capital structure of the firm B Total cashflows of the firm C Percentage of the firm to which the bondholders have a claim D Tax claim placed on the firm by the government E Size of the shareholders’ claims on the firm INVP001 SAMPLE MULTIPLE CHOICE QUESTIONS 10 Q38. In general the capital structures employed by firms: A Tend to overweight debt in relation to equity B Are easily explained in terms of earnings volatility C Are easily explained by analysing the types of assets owned by various firms D Tend to be those which maximise the use of the firm’s available tax shelters E Vary significantly across industries Q39. The hypothesis that market prices reflect all publicly available information is called _____ form efficiency. A Strong and stable B Stable C Semi-strong D Weak E Semi-stable Q40. If a market is semi-strong form efficient, the price of a security will: A Always rise immediately upon the release of new information with no further price adjustments related to that information. B React to new information over a two-day period after which time no further price adjustments related to that information will occur. C Rise sharply when new information is first released and then decline to a new stable level by the following day. D React immediately to new public information with no further price adjustments related to that information. E Be slow to react for the first few hours after new information is released allowing time for that information to be reviewed and analyzed. END OF MOCK MCQs