SECTION A-(40 MARKS) 1) Investment decisions in financial management include the following except: a. Capital budgeting b. Funding needs c. Investment appraisal d. The need to be profitable e. Use of funds 2) Which types of bonds can be repurchased by the issuing company? a. Unsecured bond b. Redeemable bond c. Non-convertible bond d. Convertible bond e. Bearer bond 3) refers to fixed sums of money paid over equal period forever. a. Perpetuity b. Periodic payment c. Ordinary annuity d. Coupon e. Annuity due 4) Basket Wonders (BW) has a GH10,000 CD at the bank. The interest rate is 6% compounded quarterly for 1 year. What is the Effective Annual Interest Rate (EAR)? a. 6.52% b. 6.33% c. 6.23% d. 6.14% e. 6.00% 5) The Lashgari Company is expected to pay a dividend of GH1 per share at the end of the year, and that dividend is expected to grow at a constant rate of 5% per year in the future. The company's beta is 1.2, the market risk premium is 5%, and the risk-free rate is 3%. What is the company's current stock price? a. GH25.00 b. GH30.00 c. GH10.00 d. GH15.00 e. GH20.00 6) Campbell Co. is trying to estimate its weighted average cost of capital (WACC). Which of the following statements is most correct? a. Since retained earnings are readily available, the cost of retained earnings is generally lower than the cost of debt. b. The after-tax cost of debt is generally cheaper than the after-tax cost of equity. c. The after-tax cost of debt is generally more expensive than the before- tax cost of debt. d. Statement b and c are correct e. Statements a and c are correct. 7) Wyden Brothers has no retained earnings. The company uses the CAPM to calculate the cost of equity capital. The company's capital structure consists of common stock, preferred stock, and debt. Which of the following events will reduce the company's WACC? a. A reduction in the market risk premium. b. An increase in expected inflation. c. An increase in the company's beta. d. An increase in the flotation costs of issuing new common stock. e. None of the above 8) Conglomerate Inc. consists of 2 divisions of equal size, and Conglomerate is 100 percent equity financed. Division A's cost of equity capital is 9.8 percent, while Division B's cost of equity capital is 14 percent. Conglomerate's composite WACC is 11.9 percent. Assume that all Division A projects have the same risk and that all Division B projects have the same risk. However, the projects in Division A are not the same risk as those in Division B. Which of the following projects should Conglomerate accept? a. Division A project with a 10 percent return. b. Division A project with an 11 percent return. c. Division B project with a 12 percent return. d. Division B project with a 13 percent return. e. Division B project with a 14 percent return. 9) Which of the following statements is true about the payback period? a. It is useless as a risk indicator. b. It is difficult to estimate. c. It is complex to calculate. d. It does not account for the time value of money. e. It is not a capital budgeting technique. 10) Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT? a. The project's IRR increases as the WACC declines. b. The project's IRR is unaffected by changes in the WACC. c. The project's NPV decreases as the WACC declines. d. The project's NPV increases as the WACC declines. e. The project's regular payback increases as the WACC declines. 11) The proportion between equity and debt finance for a firm is referred to as a. financing needs. b. finance structure c. equity-to-debt d. debt-to-equity e. capital structure. 1 2