5 7 A company has $ 10 million available for investment. It is considering investing in three individual investment projects: Why would the directors of a quoted company pay close attention to the company's draft financial statements? Initial investment Net present value $9 million A B $4 million Project One Project Two Project Three $2 million $3 million The directors are unlikely to understand the financial statements. The external auditor cannot be trusted to check the draft financial statements properly. The information obtained from the company's internal management accounts is unreliable. The shareholders will use the financial statements to evaluate the directors' stewardship [2] $7 million $11 million D What would be the opportunity cost of investing in Project One? A B D $2 million $5 million $11 million $14 million 8 A quoted company made a significant bond issue. Which of the following statements is correct? [2] A 6 B The directors of a company are considering investing in a machine that will cost $38 million. The machine will have a useful life of 5 years. The cost of capital is 10% p.a. The company's beta coefficient will remain unchanged after the bond issue, until the passage of time indicates whether beta has increased or decreased. The company's beta coefficient will increase after the bond issue. The company's beta coefficient will decrease after the bond issue. The company's beta coefficient will only change if the company continues to earn taxable profits after the bond issue. [2] D The directors have determined that the annual capital charge of this machine is $10 million. The machine will generate revenues of $14 million and will require annual running costs of $1.5 million. 9 How should an investor evaluate a security that has a beta value of zero? Which of the following statements is correct? A B A The security has zero risk. The security has an extremely high risk. The security offers a return that is not affected by movements of the market as a whole. The security offers a zero return. [2] B D The annual capital charge method indicates that the company should invest in the machine because it will increase shareholders' wealth. The annual capital charge method indicates that the company should invest in the machine, but it does not indicate that the investment will increase shareholders' wealth. The annual capital charge method indicates that the company should not invest in the machine because doing so will reduce shareholders' wealth. The annual capital charge method indicates that the company should not invest in the machine, even though the investment will increase shareholders' wealth. 121 10 D Which of the following best explains the fact that a consolidated statement of financial position does not show a figure in respect of non-controlling interest? All of the subsidiaries are wholly owned by the narent company