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    Practice Exam Spring 2018 Questions and Answers

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    Fami Famz
    This document contains a 7 question practice exam for a corporate financial management course. It includes questions on portfolio returns and risk, the capital asset pricing model, bond valuation, project valuation techniques like payback period, net present value and internal rate of return, option pricing, dividend growth models, and Australia's imputation tax system. Students are instructed to solve the questions in class within 45 minutes using provided formulas and calculations. The lecturer will then discuss answers.

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    Practice Exam Spring 2018 Questions and Answers

    Uploaded by

    Fami Famz
    79 views3 pages
    This document contains a 7 question practice exam for a corporate financial management course. It includes questions on portfolio returns and risk, the capital asset pricing model, bond valuation, project valuation techniques like payback period, net present value and internal rate of return, option pricing, dividend growth models, and Australia's imputation tax system. Students are instructed to solve the questions in class within 45 minutes using provided formulas and calculations. The lecturer will then discuss answers.

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    This document contains a 7 question practice exam for a corporate financial management course. It includes questions on portfolio returns and risk, the capital asset pricing model, bond valuation, project valuation techniques like payback period, net present value and internal rate of return, option pricing, dividend growth models, and Australia's imputation tax system. Students are instructed to solve the questions in class within 45 minutes using provided formulas and calculations. The lecturer will then discuss answers.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    79 views3 pages

    Practice Exam Spring 2018 Questions and Answers

    Uploaded by

    Fami Famz
    This document contains a 7 question practice exam for a corporate financial management course. It includes questions on portfolio returns and risk, the capital asset pricing model, bond valuation, project valuation techniques like payback period, net present value and internal rate of return, option pricing, dividend growth models, and Australia's imputation tax system. Students are instructed to solve the questions in class within 45 minutes using provided formulas and calculations. The lecturer will then discuss answers.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    lOMoARcPSD|4041866

    Practice Exam Spring 2018, questions and answers

    Corporate Financial Management (Western Sydney University)

    StuDocu is not sponsored or endorsed by any college or university


    Downloaded by Fatima Mazhar (fatima.mazhar@gscwu.edu.pk)
    lOMoARcPSD|4041866

    Practice Exam (Week 13_Spring 2018):


    Students are requested to solve and practice these questions given
    below at home. The tutor will give you the same questions in Week
    13 class. Please solve these questions in the class.
    Time allocated: 45 min.
    Note: Please bring your Formula list (print copy), pen, 5 pages of
    blank papers (stapled together with your name and student
    number) and calculator.
    The lecturer will discuss the answers in the class after the exam.
    (Please come to the class on time)
    1. An investor invested 60% of his money in Stock A and 40% in stock B and
    constructed a portfolio. The return data for both stock A and B are given below:
    Year Return A (%) Return B (%)
    Weight=0.60 Weight=0.40
    2009 0.52 1.65
    2010 5.21 2.15
    2011 7.23 0.25
    2012 1.22 5.32
    2013 3.22 3.12
    2014 5.96 4.26

    (i) Calculate the sample expected return and standard deviation for both Stock A
    and Stock B separately. (0.5*4=2 marks)
    (ii) Calculate the correlation coefficient between the two stocks. (1 mark)
    (iii) Calculate the portfolio expected return and standard deviation using the
    answers from part (i) and (ii) (2 marks)
    (iv) Will this selection of the above portfolio reduce the risk efficiently? Please
    explain with proper reason. (0.5_1.5=2 marks)

    2. According to the capital asset pricing model the expected return on shares in the
    Gamma Corporation is 10.6%. The beta value associated with these shares is 1.1
    and the risk free rate of interest is 4%. Given this information, calculate the
    market risk premium and the expected return on the market portfolio?

    3. Complex System has an outstanding issue of $1000 per-value bonds with a 15%
    coupon interest rate. The issue pays interest annually and has 16 years remaining to
    its maturity date.
    (i) If bonds of similar risk are currently earning a 10% rate of return, how much
    should the Complex System bond sell today? (3 marks)
    (ii) If the required return at 15% instead of 10%, what would be the current value
    of Complex Systems’ bond? Contrast this finding with your findings in part i)
    and discuss.
    (1 mark)

    Downloaded by Fatima Mazhar (fatima.mazhar@gscwu.edu.pk)


    lOMoARcPSD|4041866

    4. XYZ Corporation is considering a project with an initial investment of $100. The cash
    inflows associated with the project are as follows: Suppose the cost of capital is 15%
    (r =0.15)

    Year Expected cash inflows


    1 40
    2 20
    3 80
    (i) Calculate the payback period for the project. (1 mark)

    (ii) Calculate the NPV of the project. (1 mark)

    (iii) Calculate the IRR for the project (4 marks)

    5. A six-month call option on 100 shares of SRS is selling for $30. The exercise price for
    the option is $5. The share is currently selling at $4.80 per share.
    (i) Ignoring brokerage fees, what price must the share achieve just to cover the
    expense of the option? (1 mark)
    (ii) If the share price rises to $5.50 at the time of expiration, what will the net
    profit on the option contract be? (1 mark)
    (iii) Please draw the diagram. (1 mark)

    6. (i) The current price of RIO stock is $25 per share. If RIO’s current dividend is $1
    per share and investors’ required rate of return is 15 percent, what is the expected
    growth rate of dividends for RIO, based on the constant growth dividend valuation
    model? (2 marks)
    (ii) Draw diagram and explain non-diversifiable and diversifiable risk.
    (3 marks)
    7. (i) Explain imputation dividend tax system.
    (ii) Suppose a company pays out fully franked dividends of $70 each to investors with
    marginal tax rates of 19%. The statutory company tax rate is 30%. How much tax
    will each investor pay on his/her franked dividend? (2 marks)
    End of exam paper

    Downloaded by Fatima Mazhar (fatima.mazhar@gscwu.edu.pk)

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