Question 1

(a)

What is the price of a $1000 face value bond that pays 10% annual coupon interest if the this bond has another 5 years to maturity if the current market interest is 12%.

(4 marks)

(b)

What is the yield to maturity of the bond (assuming annual interest payments) that will mature in 10 years if the current price of the bond is $1,150.00? The bond has an 8% coupon rate and a face value of $1,000.

(6 marks)

(c)

Mr Anderson wishes to accumulate $1,000,000 at the end of 30 years.To do this, he needs to deposit an equal amount into the bank at the end of each year.If he can earn 3% compounded annually, how much does he need to deposit each year?

(4 marks)

(d)

Year

Amount ($)

1

R2000

2

2,200 RM3000

3

3,000 RM6000

If you can save the above funds at the end of each year in the bank that pays 2% annual interest, how much will you have at the end of the third year?

(5 marks)

(e)

Calculate is the expected return of a stock valued at $12.00 if the stock had just recently paid a dividend of $0.60 and has constant growth rate of 6%.

(4 marks)

(f)

DL Corporation's common stock is expected to have extraordinary growth in earnings and dividends of 12% per year for 3 years, after which the growth rate will settle into a constant 5%. If the discount rate is 10% and the most recent dividend was $0.80 what should be the approximate current stock price?

(6 marks)

(g)

Calculate the payback period, NPV and IRR for a project with a $100,000 initial cost, cash inflows of $35,000 per year for 4 years, and a discount rate of 12%?

(11 marks)

Question 2

(a)

Probability

Rate of Return

Rate of Return

portfolio P

portfolio Q

0.3

-8

30

0.4

14

22

0.3

22

-10

(i)Calculate the risk and return for Portfolio P and Q.

(6 marks)

(ii)Calculate the covariance and correlation for Portfolio P and Q.

(6 marks)

(b)

Project X has a beta of 1.5, the risk-free rate is 4.5%, and the market rate of return is 12.5%. What is the project's expected rate of return?

(3 marks)

(c)

KL Inc's capital is made up of 50% debt and its debt has a pretax interest rate of 8%. TL's common stock trades at $6.00 per share and its most recent dividend was $0.50. Future dividends are expected grow by 5%. If the tax rate is 30%, what is KL's WACC?

(7 marks)

(d)

AA firm had $15,500 cash at the beginning of the period. During the period, the firm collected $6,500 in receivables, paid $13,800 to supplier, had credit sales of $20,000, and incurred cash expenses of $5,000. What was the cash balance at the end of the period?

(4 marks)

(e)

ST firm starts the week with payables of $20,000. It pays $15,000 of outstanding bills, and purchases $8,000 of raw materials on one month's credit. What is the level of payables at the end of the week?

(4 marks)

SECTION B:Answer any TWO (2) question. (30 marks)

Question 1

Discuss with examples, the FIVE (5) criteria in credit analysis.

(15 marks)

Question 2

Evaluate with examples the advantages and disadvantages of debt financing over equity financing.

(15 marks)

Question 3

(a)

Discuss the TWO (2) types of risk in portfolio investment with examples.

(9 marks)

(b)

What does it mean if the correlation coefficient is positive, negative, or zero?

(6 marks)

Question 4

(a)

Do managers maximize shareholders' wealth or their own wealth? Discuss.

(9 marks)

(b)

Discuss any TWO (2) advantages of forming a corporation.

(6 marks)