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BWFF2023 FINANCIAL MANAGEMENT II

MID-TERM EXAM ANSWER SCHEME

A111

1.To increase a given present value, the discount rate should be adjusted

A.upward

B.downward

C.to the same level of bond rate

D.to the same level of stock rate

2.In 3 years, you are to receive RM5,000. If the interest rate were to suddenly increase, the present value of that future amount to you would

A.decrease

B.increase

C.remain unchanged

D.cannot be determined without more information

3.Which of the following payments (receipts) would probably NOT be considered annuity due? Based on your knowledge, think about the timing of the payments.

A.Payments for a magazine subscription for a two-year period where the payments are made annually.

B.Annual payments associated with lottery winnings that are repaid out as an annuity.

C.Interest payments associated with a corporate bond that was issue today.

D.Rent payments associated with a five-year lease.

4.All else equal, if you expect to receive a certain amount in the future, say RM500 in 10 years, the present value of that future amount will be lowest if the interest earned on such investments is compounded _____________

A.weekly

B.monthly

C.quarterly

D.annually

5.You want to buy an ordinary annuity that will pay you RM4,000 a year for the next 20 years. You expect annual interest rate will be 8 percent over that time period. The maximum price you would be willing to pay for the annuity is

A.RM32,000.50

B.RM39,272.40

C.RM183,048.22

D.RM187,068.80

6.What is the future value of RM3,500 deposited for 12 years at 5 percent interest compounded annually?

A.RM3,679.07

B.RM6,285.65

C.RM6,369.47

D.RM55,709.47

7.Bonds are

A.a series of shortterm debt instruments

B.a form of equity financing that pays interest.

C.unofficial long-term debt instruments between borrowers and lenders.

D.legally binding long-term agreement between borrowers and lenders.

8.Which of the following statements are TRUE?

I. Yield to maturity (YTM) is the rate investors earn if they insist to buy the bond at their intrinsic value and hold it until maturity.

II. The shorter the amount of time until a bons maturity, the less responsive is its market value to given change in the required return.

III. Whenever the required return is different from the coupon interest rate, the amount of time to maturity will affect bond value.

IV. When the yield to maturity is greater than the coupon interest rate, the

bond value will be greater that its face value.

A.I only

B.I and II only

C.II and III only

D.II, III and IV only.

9.The market price of outstanding bond issues often varies from the face value because

A.the maturity date has changed.

B.the coupon rate has changed.

C.the face value has changed.

D.the market interest rate has changed.

10.The RAC Corporation has two bonds outstanding. These bonds have similar features and risks except for the maturity date. Bond A matures in 4 years, while Bond B matures in 7 years. If the market interest rate changes by 5%,

A.Bond A will have a greater change in price.

B.Bond B will have a greater change in price.

C.The price of these bonds will remain constant.

D.The price change for both bonds will be equal.

11.Ariff is trying to decide which of the two bonds to buy. Bond H is a 10 percent coupon, 10 year to maturity, RM1,000 par, January 2011 issue paying annual interest. Bond F is a 10 percent coupon, 10 year maturity, RM1,000 par, also January 2011 issue but paying semiannual interest. The market required return on these bond is 10 percent. When using the valuation model to determine the prices of these bonds, Ariff finds that

A.the price of Bond F is greater than Bond H.

B.the price of Bond H is greater than Bond F

C.there is no difference in the price of both Bond F and H.

D.the yield to maturity (YTM) of Bond F is greater than Bond H.

12.What is the current price of a bond maturing in 12 years, with RM1,000 par value, coupon interest rate of 14 percent paid semi-annually, that has a YTM of 12 percent?

A.RM 610.80

B.RM 690.30

C.RM1,123.90

D.RM1,125.50

13.How much should you pay for a zero-coupon bond with a 15-year maturity and RM1,000 par value of you want an 11 percent return?

A.RM209

B.RM215

C.RM232

D.RM352

14.Vertigo bonds have a par value of RM1,000. . The bonds carry a coupon interest rate of 14 percent. Interest is paid semi-annually. The bond will mature in seven years. If the current market price is RM1,092.65, will you purchase the bonds if your required interest rate is 10 percent? What is your intrinsic value for the bonds?

A.Yes; RM1,294.70

B.Yes; RM1,197.98

C.Yes; RM1,115.72

D.No ; RM914.25

15.Chong Wei has just purchased a RM1,000 par value, zero coupon bond, with 20 years remaining until maturity for RM311.80. If he decides to hold this bond until maturity, what is the expected rate of return of his investment in this bond?

A.4 percent

B.5 percent

C.6 percent

D.7 percent

16.A bond indenture

A.contains the bonds current rating.

B.contains the yield to maturity of the bond.

C.contains the provisions of the bond agreement.

D.contains the duration of the bond compared to other bonds outstanding.

17.BB bonds have 5 years maturity, with a par value of RM1,000 and an annual coupon of 9 percent. On the other hands, CC bonds have 6 years to maturity, a par value of RM1,000 and 10 percent annual coupon. Both BB is selling at RM828.35, while Bond CC is selling at RM844.45 in the market currently. If your required rate of return is 14 percent, which bonds price is more sensitive to fluctuations in the interest rates and why?

A.Both bonds are equally sensitive to changes in interest rate.

B.Bond BB since its duration is higher than Bond CCs duration.

C.Bond CC since its duration is higher than Bond BBs duration.

D.Cannot be determined since both bonds have different coupon rate.

18.OKG Incs bonds have a par value of RM1,000 and 8 years to maturity. The bonds pay semiannual coupon of 7 percent. If the market required interest rate is 8 percent and the bondholders required return is 7 percent, what is the bonds current yield?

A.3.50 percent

B.3.72 percent

C.7.00 percent

D.7.43 percent

19.Preferred stock valuation usually treats the preferred stock as a

A.perpetuity.

B.long-term security.

C.constant growth asset.

D.non-hybrid stocks.

20.MHB recently paid a RM3 dividend on its preferred stock. Investors require a 6 percent return on the stock. The stock is currently selling for RM45. Is the stock a good buy?

A.Yes, as it is undervalued RM5.

B.Yes, as it is undervalued RM10.

C.No, as it is overvalued RM5.

D.No, as it is overvalued RM10.

21.The expected rate of return on a share of common stock whose dividends are growing at a constant rate (g) is which of the following?

A.(D1 + g)/Vc

B.D1/Vc

C.D1/g

D.None of the above

22._____________ gives minority shareholders more power to elect board of directors.

A.Preemptive right

B.Majority voting

C.Proxy fights

D.Cumulative voting

23.A decrease in the _______________will cause an increase in common stock value.

A.growth rate

B.required rate of return

C.last paid dividend

D.both b and c

24.The common stockholders are most concerned with

A.the spread between the return generated on new investments and the investors required rate of return.

B.the size of the firms beginning earnings per share.

C.the percentage of profits retained.

D.the risk of the investment.

25.An issue of common stock currently sells for RM30.00 per share, has an expected dividend to be paid at the end of the year of RM2.50 per share, and has an expected growth rate to infinity of 3 percent per year. If investors required rate of return for this particular security is 12 percent per year, then this security is:

A.overvalued and offering an expected return higher than the required return.

B.undervalued and offering an expected return higher than the required return.

C.overvalued and offering an expected return lower than the required return.

D.undervalued and offering an expected return lower than the required return.

26.GCs preferred stock is selling for RM6. If the company pays RM0.50 annual dividends, what is the expected rate of return on its stock?

A.8.3%

B.9.5%

C.12.0%

D.14.0%

27.SBP currently pays a RM0.80 dividend per share on its common stock. Its dividends are expected to grow at a rate of 8 percent a year for the next four years and to continue to grow thereafter at a rate of 3 percent. What is the value of a share of SBP's common stock if investors require a 12 percent rate of return?

A.RM9.99

B.RM10.83

C.RM15.37

D.RM16.55

28.RE has paid RM1.60 in annual dividends on its common stock for the past two years and expects to maintain this amount for the foreseeable future. If an investor requires a 12 percent return on this stock, how much would she be willing to pay for a share?

A.RM7.50

B.RM9.36

C.RM13.33

D.RM14.63

29.MCs ROE is 15 percent. Their dividend payout ratio is 15 percent. The last dividend, just paid, was RM1.30. If dividends are expected to grow by the companys sustainable growth rate indefinitely, what is the current value of MC common stock if its required return is 20%?

A.RM7.49

B.RM10.50

C.RM18.25

D.RM20.22

30.Farmosa stock is currently selling for RM5.00. It is expected to pay a dividend of RM0.60 at the end of the year. Dividends are expected to grow at a constant rate of 3 percent indefinitely. Compute the required rate of return on Farmosa stock.

A.10%

B.12%

C.13%

D.15%

31As a source of financing, once retained earnings have been exhausted, the weighted average cost of capital will

A.increase.

B.decrease.

C.remain the same.

D.change in an undetermined direction.

32When determining the after-tax cost of a bond, the face value of the issue must be adjusted to the net proceeds amounts by considering

A.the risk.

B.the taxes.

C.the flotation costs.

D.the approximate returns.

33.In accepting a project, the rate of return should be _______ than/to the weighted marginal cost of financing.

A.greater or equal

B.less or equal

C.equal

D.Less

34.The ________ is the level of total financing at which the cost of one of the financing components rises.

A.weighted marginal cost of capital

B.weighted average cost of capital

C.target capital structure

D.breaking point

35.Choose ONE of the following statements which best represent the weighted average cost of capital (WACC)?

A.The maximum rate which the firm should require on any projects it undertakes.

B.The discount rate which the firm should apply to all of the projects it undertakes.

C.The rate of return that the firms preferred stockholders should expect to earn over the long term.

D.The overall rate which the firm must earn on its existing assets to maintain the value of its stock.

36.Pusing Manufacturing can sell a new bond for RM1,069. The bonds have a RM1,000 par value, pay interest annually at a 12 percent coupon rate, and mature in 10 years. The firm has a marginal tax rate of 34 percent. The after-tax cost of the debt issue is:

A.6.58%

B.7.21%

C.9.92%

D.10.93%

37.LV Care products just paid a dividend of RM1.80. This dividend is expected to grow at a constant rate of 5 percent per year. The stock price is currently RM12.50. New stock can be sold at this price subject to flotation costs of 15 percent of the market price. The company's marginal tax rate is 40 percent. Compute the cost of internal common equity.

A.15.53%

B.18.21%

C.20.12%

D.22.35%

38Given the following information, determine the risk-free rate.

Cost of equity = 12.5 percent

Beta = 1.20

Market risk premium= 5 percent

A.8.0%

B.7.5%

C.7.0%

D.6.5%

39.Metals Corp. has RM32,250 of debt, RM64,500 of preferred stock, and RM118,250 of common equity. Metals Corp.'s after-tax cost of debt is 5.25 percent, preferred stock has a cost of 6.35 percent, and newly issued common stock has a cost of 14.05 percent. Calculate the companys weighted average cost of capital?

A.12.78%

B.10.42%

C.8.32%

D.6.56%

40.A firm's current investment opportunity schedule and the weighted marginal cost of capital schedule are shown below.

Investment opportunity

IRR (%)

Initial Investment

A

15

300,000

B

12

200,000

C

10

300,000

D

16

400,000

Weighted marginal cost of capital

Range of total financing

WMCC

0 500,000

8.5%

501,000 1,000,000

11.0%

Above 1,000,000

12.5%

The investment opportunities which should be selected are

A.A and D

B.A, B and C

C.A, B and D

D.A, B, C and D

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