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Finance Quiz 1. What statement best describes the overall objectives of the finance function? A: Measuring financial outcomes B: Evaluating strategies and financing these strategies C: Getting financing D: Satisfying government and business reporting requirements 2. What is the approximate Present Value of a $100 gift you will receive in 2 years' time, assuming that you can earn 10% per annum on your money. A: $83 B: $95 C: $100 D: $110 E: $120 3. Your firm is considering purchasing Mountain Top Cycles for a final cost of $25m at the beginning of 2019. Assume that Mountain Top pays a dividend at the beginning of each of 2019-2023: $1m in 1999 and growing by 2% for each year following. Finally, at the beginning of 2024 Real Cool sells all its shares, receiving $32m. What is the Net Present Value of this investment using a cost of capital of 11%? A: -$1.91m B: +$0.33m C: -$0.67m D: +$0.18m E: -$1.76m 4. Consider the following data for a product. Current product sales are projected to be 2,000 units for 2011 and 2012 at $1000 (wholesale price). Unit cost for these same years is expected to be $500. Initial investment is $1.5m in 2010, and ongoing cost of $100k per year. If the required rate of return is 10%, calculate the approximate Net Present Value of this product. A: $150,000 B: -$20,000 C: $500,000 D: $1,000,000 E: $70,000 5. Assume that (nominal) household mortgage rates are 6%, the (nominal) interest rate on government stock is 2%, the (nominal) interest rate on personal investment accounts is 1% and the inflation rate is 1%. What is the approximate real risk free rate? A: 0% B: 1% C: 2% D: 4% E: 6% 6. Your firm has long-term debt of $2m and a debt to equity ratio of 1.0. A member of the management team proposes raising long-term debt by $1m to finance the payment of a dividend. What effect is this likely to have on the rate of return required by investors in the future? A: Increase the required rate of return B: Decrease the required rate of return C: No effect D: It depends on the size of the dividend E: It depends on the number of issued shares 7. What might be the main reasons why a firm's management may be slow to increase dividends even though profits have increased significantly? A: Managers may believe that they have better uses for the money in projects inside the firm B: Managers want to ensure that the increased profits are sustainable C: Managers have a target payout ratio that they are reluctant to change D: All of the above 8. The Weighted Average Cost of Capital (WACC) is a measure of the total cost of capital of an organization and depends on how much of its value is in debt and equity. Your firm has total assets of $9.2m with $2m of issued capital and $5.5m of retained earnings. Given a cost of debt of 5.5% and a cost of equity of 9.0% what is the Weighted Average Cost of Capital (WACC) of your firm? A: 6.13% B: 6.77% C: 7.92% D: 8.21% E: 8.35% 9. The Weighted Average Cost of Capital (WACC) is a measure of the total cost of capital of an organization and depends on how much of its value is in debt and equity. Assume that Asset Value (V) = $3m (debt) + $7m (equity). The bank charges 10% for debt for this company and the market requires 15% return on equity (shares). For a typical project in this company what is the WACC and what does it mean? A: Not enough information B: 14%, and this is a measure of the profitability only C: 12%, and this is the how much the company should be willing to pay for money to invest in the project D: 13.5% and this is the minimum that the project should be able to return E: None of the above 10. Assume that the long-term earnings per share of your firm are expected to be $1.20 and that these are all returned as dividends. Assume that your required return on equity is 12%. Roughly what would you expect your share price to be? A: $5 B: $10 C: $12 D: $20 11.A firm's beta measures the riskiness of the firm relative to the stock market in which it is trading, by looking at how volatile its price is relative to the market average. A beta of 0.5 means that the firm: A: Is more risky than the average in the market B: Is the same risk as the average in the market C: Is less risky than the average in the market 12.Assume that a publicly-listed company has a beta of 1.2 based on historical performance. If the share market as a whole increases by 10%, then how much would you expect this company's share price to increase? A: 1.2% B: 8.8% C: 10% D: 11.2% E: 12% 13.Assume that a firm has a beta of 2, that the risk free rate is 6% and the market rate of return is 15%. What is the required rate of return for this firm according to the Capital Asset Pricing Model and is this more risky or less risky than the market average? A: 6%, less risky B: 12%, less risky C: 15%, about the same D: 18%, more risky E: 24%, more risky 14.Your company has a Net Surplus (Profit) of $2m and the Total Net Equity is $5m. There is an Interest Charge of $50k for debt and the Required Rate of Return on Equity is 20%. What is the Economic Value Added (EVA) for the year? A: $950k B: $$2m C: $1.950m D: None of the above 15.Profits have been rising at a constant rate for the last five years but the rate of increase in your EVA has been declining each year for the last three years. What financial actions could you take to try to increase EVA? A: Increase cash reserves by increasing long-term debt B: Increase dividends, initiate a share buy-back C: Increase cash reserves by reducing dividends D: Issue shares E: Increase cash reserves by increasing short-term debt 16. Assume that a company has $3m debt and $7m equity. The bank charges 10% for debt for this company and the market requires a 15% return on equity (shares). The company makes a profit of $1m (excluding interest charges) for the year. Roughly what is its Economic Value Add and is this company performing well for its owners in a oneyear analysis? A: Not enough information B: EVA = -$0.35m and it is not performing well since the money used costs the company more than it returns C: EVA = $1.35m and is performing well since it is making a profit D: EVA = -$0.35m and is performing well since it is making a profit E: None of the above