MCQ - There are 10 questions to this quiz, each having 2 points and there is one definite answer to every question (Except Q10). Please identify the answer.

Q1. Four companies are identical in all respects, except for their capital structures, which are as follows:

	A plc, %	B plc, %	C plc, %	D plc, %
Equity as a proportion of total market capitalisation	70	20	65	40
Debt as a proportion of total market capitalisation	30	80	35	80
The Equity beta of A plc is 0.89 and the equity beta of D plc is 1.22

Within which ranges will equity betas of B plc and C plc lie? (Choose one answer)

a. The beta of B plc and the beta of C plc are both higher than 1.22

b. The beta of B plc is below 0.89 and the beta of C plc is in the range 0.89 to 1.22

c. The beta of B plc is above 1.22 and the beta of C plc is in the range 0.89 to 1.22

d. The beta of B plc is in the range 0.89 to 1.22 and the beta of C plc is higher than 1.22

e. The beta of B plc is 2 and the beta of C plc is 0.1

Q2. A company issued its 12% irredeemable loan notes at 95. The current market price is 92. The company is paying corporation tax at a rate of 30%.

What is the current net cost of capital per annum of these loan notes (to one decimal place)? (Choose one answer)

a. 19.2%

b. 15.5%

c. 10.0%

d. 9.1%

e. 6.0%

f. 5.5%

g. 5.1%

h. 3.0%

Q3. Delta Corp's capital structure is as follows

	Million EUR
0.50 Eur ordinary shares	12	0.5
8% 1 EUR preference shares	6	8%
12.5% loan notes 20X0	8	12.50%
Total	26

The loan notes are redeemable in nominal value in 20X0. The current market prices of the companys securities are as follows:

	in EUR
0.50 Eur ordinary shares	2.50
8% 1 EUR preference shares	0.92
12.5% loan notes 20X0	100.00

Delta is paying corporation tax at the rate of 30%

The cost of Deltas ordinary equity capital has been estimated at 18% p.a.

What is Deltas weighted average cost of capital for capital investment appraisal purposes? (Choose one answer)

a. 6.25%

b. 9.25%

c. 10.25%

d. 12.25%

e. 15.50%

f. 16.29%

g. 17.25%

h. 18.00%

Q4. A company has just declared an ordinary dividend of 0.256 per share; the cum-div market price of an ordinary share is 2.80 . Assuming a dividend growth rate of 16% p.a., what is the companys cost of equity (to one decimal place)? (Choose one answer)

a. 17.7%

b. 27.0%

c. 17.0%

d. 15.6%

e. 13.4%

f. 12.5%

g. 11.5%

h. 30.0%

Q5. The following are exact statements of the financial position of a company

	EUR
Equity
Ordinary Shares	8 000 000
Reserves	20 000 000
Total Equity	28 000 000
Non-current liabilities
Bonds	4 000 000
Bank loans	6 200 000
Preference Shares	2 000 000
Total Non-current Liabilities	12 200 000
Current Liabilities
Overdraft	1 000 000
Trade Payables	1 500 000
Total Current Liabilities	2 500 000
Total Equity and Liabilities	42 700 000

Ordinary share nominal value	0.50
Ordinary share current market value	5
Preference share nominal value	1
Preference share current market value	0.80
Bond nominal value	100
Bonds are trading at	105/ Per bond

What is the market value based gearing of the company, defined as a prior charge for capital/equity? (Choose one answer)

a. 19%

b. 18%

c. 17%

d. 16%

e. 15%

f. 14%

g. 13%

h. 10%

Q6. The equity shares of Nikke Plc have a beta value of 0.80. The risk-free rate of return is 6% and the market equity risk premium is 4%. Corporation tax is 30%.

What is the required return on the shares of Nikke Plc (to one decimal place)? (Choose one answer)

a. 12.5%

b. 2.5%

c. 10.5%

d. 5.5%

e. 9.2%

f. 12.9%

g. 8.5%

h. 6.8%

Q7. The lower risk of a project can be recognised by increasing which of the following? (Choose one answer)

a. The cost of the initial investment of the project

b. The estimates of future cash inflows from the project

c. The internal rate of return of the project

d. The required rate of return of the project

Q8. The payback period is the number of years that it takes a business to recover its original investment from net returns. Which of the following statements is true? (Choose one answer)

a. It is calculated before both depreciation and taxation

b. It is calculated before depreciation but after taxation

c. It is calculated after depreciation but before taxation

d. It is calculated after both depreciation and taxation

Q9. Four projects P, Q, R and S, are available to a company which is facing shortages of capital over the next years but expects capital to be freely available thereafter.

	P 000	Q 000	R 000	S 000
Total capital required over life of project	20	30	40	50
Capital required in next year	20	10	30	40
Net present value (NPV) of project at companys cost of capital	60	40	80	80

In what sequence should the projects be selected if the company wishes to maximise net present values? (Choose one answer)

a. P, R, S, Q

b. Q, P, R, S

c. Q, R, P, S

d. R, S, P, Q

Q10. Which THREE of the following are advantages of the IRR? (Choose 3 options)

a. Considers the whole life of the project

b. Uses cash flows not profits

c. It is a measure of absolute return

d. It considers the time value of money