Hi Tutor

i want ask about this attachment Part B Problem 1 (a). This is FINM2401

Semester One Final Examinations, 2012 FINM2401 Financial Management Venue ____________________ Seat Number ________ Student Number |__|__|__|__|__|__|__|__| Family Name _____________________ First Name _____________________ This exam paper must not be removed from the venue School of Business EXAMINATION Semester One Final Examinations, 2012 FINM2401 Financial Management This paper is for Ipswich Campus and St Lucia Campus students. For Examiner Use Only Examination Duration: 120 minutes Reading Time: 10 minutes Question Exam Conditions: This is a Central Examination This is a Closed Book Examination - specified materials permitted During perusal - write only on the rough paper provided This examination paper will NOT be released to the Library Materials Permitted In The Exam Venue: (No electronic aids are permitted e.g. laptops, phones) An unmarked Bilingual dictionary is permitted Calculators - Casio FX82 series or UQ approved (labelled) Materials To Be Supplied To Students: 1 x Multiple Choice Answer Sheet Rough Paper Instructions To Students: Answer Part A (Multiple Choice) on the Multiple Choice Answer Sheet provided. Answer Part B (Problems) in the spaces provided on this exam paper. You may remove the formula sheet, but it must be returned with your exam. Work done on the scratch paper or formula sheet will not be marked. Page 1 of 19 Mark Semester One Final Examinations, 2012 FINM2401 Financial Management (This page left blank for rough work) Page 2 of 19 Semester One Final Examinations, 2012 FINM2401 Financial Management Part A: Five (5) Multiple Choice questions worth 1 mark each. Answer all Multiple Choice questions on the computer answer sheet provided. 1. Which of the following statements would DEFINITELY NOT be considered consistent with the corporate objective of maximising firm value? a. b. c. d. e. \"We have decided to sell our loss-making packaging division.\" \"The only important goal is making an accounting profit.\" "The CEO's salary will be determined by long-run share price performance." \"No dividend will be paid this year.\" \"Corporate policy is to accept all capital projects that have a positive NPV.\" 2. Exactly 6 years ago, Joe borrowed $300,000 at 6.0% p.a. on a 25 year mortgage with monthly payments of $1,932.90. What is the balance on Joe's mortgage today? a. b. c. d. e. $261,972.74 $263,209.52 $269,795.67 $262,592.67 $260,831.20 3. Miller Co. bonds have a coupon rate of 10% and a face value of $50,000. Coupons are paid once a year and there are eight years remaining until the bonds mature. Unfortunately, Miller Co. is in financial trouble and bond holders have agreed to forgive the next two coupon payments. That is, only the last 6 of the remaining coupons will be paid, and there will be no payments until 3 years from today. If the appropriate market yield on these bonds is 25%, what are they worth today? a. b. c. d. e. $26,123.16 $17,833.16 $25,033.16 $20,033.16 $16,021.23 Page 3 of 19 Semester One Final Examinations, 2012 FINM2401 Financial Management (This page left blank for rough work) Page 4 of 19 Semester One Final Examinations, 2012 FINM2401 Financial Management 4. Giga Ltd intends to make its first dividend payment three years from now. It then intends to pay dividends annually thereafter. The company has announced it expects the first three dividends (for years 3, 4, and 5) to all be of the magnitude of around 5 cents per share. Starting in year 6, dividends should grow at a constant rate of 5%p.a. What figure would be closest to your valuation of Giga Ltd's shares, given you require a 15% p.a. return? a. b. c. d. e. $0.3361 $0.3133 $0.3752 $0.3473 $0.3535 5. Doctorow Ltd is evaluating a new project with an initial outlay of $2.5 million today. This investment will generate a constant nominal cash flow of $375,000 per year for the next 10 years starting one year from today. If the required real rate of return is 8% and inflation is forecasted to be 3% over the entire 10 year investment, what is the NPV of this project? a. b. c. d. e. $ 16,280.52 - $ 291,538.00 $ 698,826.06 - $ 313,588.04 - $ 698,826.06 Page 5 of 19 Semester One Final Examinations, 2012 FINM2401 Financial Management (This page left blank for rough work) Page 6 of 19 Semester One Final Examinations, 2012 FINM2401 Financial Management Part B: Problems - Marks as stated. Total marks for Part B is 60. Answer all Problems in the spaces provided on this exam paper. Problem 1 (15 Marks) Authentic Alpacas Ltd (AAL) is considering offering a new product - machine carded alpaca fleece for hand-spinners. In order to produce the carded fleece, AAL will need to purchase a new carding machine. This machine will last up to five years and will be replaced indefinitely, but AAL is unsure of how often to replace the machine. Your colleague, Doreen, has started the analysis, but is unable to complete it. Here's what she's done so far: The carding machine will cost $3,000. For tax purposes, the machine must be depreciated straight line down to a salvage value of zero over five years (regardless of our planned holding period). The corporate tax rate is 30% As the maintenance costs will increase over the life of the carder, the earnings before interest, depreciation and taxes (EBITDA) will decrease over time. These earnings are laid out in the table below. The salvage value of the carder will decrease over time. Salvage values are laid out in the table below. Doreen has computed most of the net present value numbers. You can assume that her computations are correct. The cost of capital for this project is 10%. Here are the numbers Doreen has computed: Year 1 Salvage value if sold at the end of the given year $2,500 EBITDA $1,500 Net Present Value if carding machine is replaced at the end of the given year $363.64 2 $2,200 $1,400 3 $1,900 $1,300 4 $1,600 $1,200 5 $1,300 $1,100 $1,165.51 $1,480.38 $1,747.38 REQUIRED: a. What is the Net Present Value of buying the carding machine and replacing it after two years? (7 marks) (show your workings in the box on the next page) Page 7 of 19 Semester One Final Examinations, 2012 FINM2401 Financial Management Page 8 of 19 Semester One Final Examinations, 2012 FINM2401 Financial Management b. Determine the appropriate replacement policy for the carding machine. computations and explain the theory behind your decision rule. Page 9 of 19 Show all (8 marks) Semester One Final Examinations, 2012 FINM2401 Financial Management Problem 2 (20 Marks) a. You are constructing a diversified investment portfolio. Among the companies you are considering are Omega Ltd (expected return 16.5%, standard deviation 30%, beta 1.5) and Theta Ltd (expected return 13.8%, standard deviation 32%, beta 1.2). Should you be considering Theta as part of your diversified portfolio when Theta is inefficient relative to Omega? Explain the theory behind your answer. (5 marks) Page 10 of 19 Semester One Final Examinations, 2012 FINM2401 Financial Management (This page left blank for rough work) Page 11 of 19 Semester One Final Examinations, 2012 FINM2401 Financial Management Parts b, c & d of this question use the data in the table below concerning two securities (A and B) the market portfolio (M) and the risk-free asset (F). A B M F Expected Return 12% 18% 20% 5% Standard Deviation 25% 30% 15% 0% A 1.0 0.1 0.3 0 Correlation Matrix B M 0.1 0.3 1.0 0.4 0.4 1.0 0 0 F 0 0 0 1.0 Beta () 0.5 0.8 1.0 0 b. Consider a portfolio (called portfolio 1) which is weighted two-thirds in Security A and onethird in Security B. This portfolio will have an expected return of 14%. Compute the standard deviation of return for portfolio 1. Show your calculations. (5 marks) c. Consider a portfolio (called portfolio 2) which consists of M and F and which has the same expected return as portfolio 1. What weights would achieve this result? Show your calculations. (5 marks) Page 12 of 19 Semester One Final Examinations, 2012 FINM2401 Financial Management d. Compute the systematic risk () of portfolios 1 and 2 above. Show any calculations you make and explain your results. (5 marks) Page 13 of 19 Semester One Final Examinations, 2012 FINM2401 Financial Management Problem 3 (10 Marks) BALANCE SHEET OF JAMES BOND LTD ($thousands) Current Assets Net Fixed Assets Investments Total 10,000 Current Liabilities 25,000 Long-term debt 15,000 Deferred taxes Shareholders' equity 50,000 Total Corporate Tax Rate Number of shares on issue Current Share Price Equity Beta Expected Return on the Market Risk Free Rate applicable 8,000 10,000 3,000 30,000 50,000 30% 10 million $ 2.97 1.5 12% 7% Long Term Debt consists of Bonds issued at a face value of $10 million. These pay interest semi-annually at a rate of 14% p.a. (compounding semi-annually). They have exactly 5 years to maturity. The market yield on the bonds is 12% p.a. (compounding semiannually), resulting in a bond price of $107.36 per $100 of face value. Equity consists entirely of ordinary shares. Required (show your calculations and answers clearly separate from your rough work. Clearly state any assumptions you must make.): What is the WACC of James Bond Ltd? (10 marks) Page 14 of 19 Semester One Final Examinations, 2012 FINM2401 Financial Management Page 15 of 19 Semester One Final Examinations, 2012 FINM2401 Financial Management Problem 4 (10 Marks) You are a share analyst and have been asked to make a recommendation on QQQ Enterprises. After discussing the company's prospects with management, and reading up on QQQ's industry, you forecast next year's dividend at 15 cents per share. Based on QQQ's strategic plan, you believe that dividends will be constant for 8 years and will grow at a 3% rate after that. Based on the returns available on similar firms, you estimate the opportunity cost of equity for QQQ at 16% p.a. QQQ shares are currently selling at $0.80. What recommendation do you make and why? Page 16 of 19 Semester One Final Examinations, 2012 FINM2401 Financial Management Problem 5 (5 marks) How is beta estimated in practice? limitations of this method? What are the assumptions required and the Page 17 of 19 Semester One Final Examinations, 2012 FINM2401 Financial Management (This page left blank for rough work) END OF EXAMINATION The formula sheet on the next page can be removed, but must be returned with your exam paper. Page 18 of 19 Semester One Final Examinations, 2012 FINM2401 Financial Management Useful Formulas div franking credit 1 c net shareholder tax c div 1 c 1 1 PV C 1 r 1 r n FV C N 1 1g PV C 1 (r g) 1 r PV PV 1 N 1 r 1 r APR 1 EAR 1 k FV 1 r days 365 PV k rr 1 T Rt R T 1 t 1 Var R 2 SD Individual Risk Number of observations 1 Ri R i T 1 R j N Fn s p2 i j xi x j i , j E R r Page 19 of 19 i ,j i j 2p i xi i ,p Rj E Rs rf n1 rI rf I E Rmkt rf p2 x12 12 x22 22 2x1 x2 1,2 1 1 Average Variance 1 Average Covariance n n i i i ,mkt i ,2mkt mkt mkt 1r r i 1 r i 1i 1i Corr Ri , Rj i , j Cov Ri , Rj i , j E Ri E Ri Rj E Rj p2 C r g 2 2 Var Ri i2 E Ri E Ri R pR Ri ,R E Ri SD Ri i Var Ri Cov Ri , R j i , j C r g 1 DPR Return on New Investment E R R pR R SD Avg of IID risks p c Fn f rwacc E D rE rD 1 C E D E D