Hi,

I'm prepping for an upcoming exam and I was wondering if you could please help me with the following sample questions attached? Also what is the best way to set them out in order to get full marks for them?

Thank you.

108672 Business Finance Sample Examination Page 6 of 12 108672 Business Finance Sample Examination Page 7 of 12 Section B ( Total : 40 marks) (Answer all questions) (c) Consider the following information: BI. (Total : 7.5 marks) State of Economy Probability of Rate of Return if the State Occurs State of Economy ADD Ltd BTE Ltd COL Ltd (a) You are planning for retirement in 10 years' time. You currently have $120,000 Boom 0.75 0.07 0.01 0.27 -0.05 Invested in a money market fund. You plan to add $5000 per year at the end of the next Bust 0.25 0.12 0.19 10 years to the money market fund. The money market fund will earn a return of 7%. When you retire, you plan to withdraw an equal amount for each of the next 25 (i) Calculate the expected return on a portfolio consisting of 20% each in ADD Ltd. years at the end of each year and have nothing left at the end. How much can you and BTE Ltd and 60% in COL (4 marks) withdraw each year? (5 marks) (ii) Calculate the standard deviation of the portfolio. (2.5 marks) (b) BDJ Ltd wants to issue new 25-year bonds for some much-needed expansion projects. The company currently has 7.8% coupon bonds on the market that sell for $1125, make B3 (Total : 10 marks) semi-annual payments and matures in 20 years. What coupon rate should the company set on its new bonds if it wants them to sell at par? The current bonds have a face value of $1000. (2.5 marks) Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 $365,000 $40,000 B2. ( Total : 12.5 marks) 1 $38,000 $20,300 2 $47,000 13 $15,200 (a) XYZ Ltd has an odd dividend policy. The company has just paid a dividend of $4 per share $14,100 and has announced that it will increase the dividend by $5.00 per share for each of the next A L $62,000 $455000 $11,200 four years, and then never pay another dividend. If you require a return of 12% on the company's shares, how much will you pay for a share today? (2 marks) Whichever project you choose, if any, you require a return of 13% on your investment. b) Consider the following information : (a) If you apply the payback criterion, which investment will you choose? Why? (2 marks) (b) If you apply the NPV criterion, which investment will you choose? Why? (4 marks) Share Beta Implied return (c) If you apply the profitability index criterion, which investment will you choose? Why? A 0.85 9.2% B 1.08 1 1.8% (3 marks) C 1.69 15.3% (d) Based on your answers in (a) to (c), which project will you finally choose? Why? (1 D 0.71 7.8% mark) E 1.45 12.3% (i) According to CAPM, which stocks are over-valued if the risk-free rate of return is 3.6 percent and the market rate of return is 10.5 percent. (3 marks) (ii) If you invest $100, $400 and $500 in stock A, B and C to form a portfolio, what is the beta of your portfolio? (1 mark)1DBET2 Business Finance Sample Examination Page 5 of 12 B4. (Total 10 marks) Pluto Ltd has come up with a new product. Pluto paid $120 00C! for a marketing survey to determine the viability of the product. It is believed that the new product will generate sales of $T25 000 per year. The xed costs associated with this will be $18? 000 per year, and variable costs will amount to 20% of sales. The equipment necessary for production of the new product will cost $835 000 and will be depreciated in a straight-line manner (prime cost method) for the four years of the product life {as with all fads, it is thought that the sales will end quickly). In addition, $25,000 in net working capital is required to uid the project. Pluto has a 40% tax rate. Pluto believes the risk of the new project is the same as the risk of the company's existing assets. Pluto's capital consists of the following : 0 LEE Shares : Pluto has 6.3 million ordinary shares outstanding; currently selling for $4 and have a beta of 1.09. The market risk premium (E(Rm) R1) is 6.8% and the risk 'ee rate is 4.3%. 0 Preference Shares : the company has 350, 000 preference shares , currently selling for 10'? and pay $5.8 dividend 0 Bonds : The company has 150, 000 bonds that mature in 2G! years with annual coupon of 7.1% making half yearly payments. The bonds have a face value of $1,000 and currently sell in the market for 19% of par. (a) Calculate the company' 5 weighted average cost of capital (WACC) (4 marks) 11!) Using the NPV criterion, should the project go ahead? (6 marks)