2017/18 question-1. You own a semi-annual coupon bond issued by BBT Corporation that matures in 9 years. The bond has a face value of 1,000 and a coupon rate of 14%. The current yield to maturity is 12%. What is the current price of the bond? (a) 899.41 (b) 901.47 (c) 1106.56 (d) 1108.28 (e) None of the above answers are correct 2. The ordinary equity of FGO Corporation has a negative growth rate of 1.5% and a required return of 18%. The current share price is 11.40. What was the amount of the last dividend paid? (a) 2.22 (b) 2.26 (c) 2.19 (d) 2.11 (e) None of the above answers are correct 3. Shares in RLL sell for 35 each and the company features cumulative voting to elect its directors. There are 80,000 shares outstanding. If 4 directors are up for election, how much will it cost to ensure yourself a seat on the board? (a) 560,000 (b) 560,035 (c) 1,400,000 (d) 1,400,035 (e) None of the above answers are correct 4. Which one of the following makes the capital structure of a firm irrelevant? (a) Taxes (b) Interest tax shield (c) 100 per cent dividend payout ratio (d) Debt equity ratio that is greater than zero but less than one. (e) Homemade Leverage 5. An efficient market hypothesis that states that all public information is reflected in current market prices is classified as: (a) Weak form efficiency (b) Market efficiency (c) Semi-strong form efficiency (d) Strong form efficiency (e) Market efficiency and strong form efficiency 6. Which of the following statements concerning risk are correct?

I. Non-diversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for non-diversifiable risk. IV. Diversifiable risks are market risks you cannot avoid. (a) I and II only (b) I and III only (c) I, II, and III only (d) II and IV only (e) III and IV only Question 7 (a) MEG Industries design and manufacture medical devices and are considering expanding their business to include manufacturing a new blood pressure taking device. The CEO has provided you with the following information regarding the proposed new project. The new product is expected to have a useful life of five years and will require the purchase of new machinery costing 400,000. At the end of the projects life, the machine will be worthless. Depreciation is to be charged on the machine at 20 per cent using the reducing balance method. Demand for the new product is expected to be 4,000 units in year 1, 6,000 units in year 2, and 7,000 units in years 3, 4, and 5. The company plans to set a selling price of 220 per unit. Variable costs will be 130 per unit and fixed costs of 90,000 per year will be incurred. An investment in working capital is required in year 0 of 140,000. This will be increased to 200,000 in year 1. No further increases in working capital are required over the life of the project. The company has a corporation tax rate of 28% and requires a rate of return of 18% on projects of this type. The company frequently uses the payback and discounted payback methods to evaluate investments and when using these methods has a policy of accepting projects that pay back within 2.5 years. Required: Write a report to the CEO advising her whether or not you would recommend investing in this project. Show three investment evaluation techniques (one of which must be net present value analysis) to support your recommendation. Explain your recommendation thoroughly.

b) Explain what is meant by Type I agency costs and Type II agency costs. If a country has a market-based financial system, would you be more concerned or less concerned about Type II agency costs than in a country that has a bank-based financial system? Explain your answer. Question 8 (a) Snoop Industries is growing at a rapid pace. Dividends are expected to grow at a rate of 18% for the next 4 years, after which the growth rate will fall off to a constant rate of 6% per year thereafter. The companys next dividend will be 5.25. If the required rate of return is 11%, what is the current price of the share? (b) Explain what is meant by the Efficient Market Hypothesis. If the Efficient Market Hypothesis is valid, what is the optimal strategy for an ordinary investor? Suppose you observed that high level managers make superior returns on investments on their company stock? Would this be a violation of weak form efficiency? Would this be a violation of strong form efficiency? Explain why or why not. (c) In bond markets, explain what is meant by the Term Structure of Interest Rates. Explain under what circumstances there would be an upward sloping term structure. Sketch a graph to support your answer. Question 9 (a) You are considering investing in the stock market and have identified three stocks you would like to purchase. You have the following information regarding these stocks: State of economy Probability of state of economy Rate of Return if state occurs Stock X Stock Y Stock Z Boom 0.20 21% 35% 60% Normal 0.50 15% 12% 8% Recession 0.30 2% -8% -19% (i) If you invest in a portfolio that has 40 percent of your wealth invested in stock X, 35 percent of your wealth invested in stock Y, and the remainder invested in stock Z, what is the expected return of your portfolio? What is the standard deviation of your portfolio? (ii) If the expected rate of return on treasury bills is 2.1%, what do you expect the risk premium on your portfolio to be?

(iii) If the expected inflation rate is 1.90 per cent, what are the approximate and exact expected real returns on the portfolio? (b) What is meant by the Weighted Average Cost of Capital? There are often situations where the cash flows under consideration have risks that are distinctly different from those of the overall firm. Explain two approaches companies might take to account for these situations. (c) Explain what is meant by a unitary board structure. How does this differ from a two- tiered board structure? If all else was equal, as an investor, would you rather invest in a company with a unitary or a two-tiered board structure? Explain why.