Business Finance Practice Questions PDF

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QUESTION 1 What is the more formal name used for describing the corporate finance decision concerning how the firm should raise finance from investors? (a) (b) (c) (d)

The capital structure decision The capital budgeting decision The dividend decision The retained earnings decision

QUESTION 2 The assumed overall financial objective of a company is to: (a) (b) (c) (d)

Raise capital. Reduce debt. Maximise profits. Maximise the market value of its ordinary shares.

QUESTION 3 A process by which, through the operation of interest, a present sum becomes a greater sum in the future is: (a) (b) (c) (d)

The additive principle. The accumulation principle. The compounding principle. The discounting principle.

QUESTION 4 Anannui t yi nwhi cht hefi r s tcashfl owi st ooc c uri mmedi at el yi sknownasa/ an: (a) (b) (c) (d)

Or di nar yannui t y . Or di nar yper pet ui t y . Annui t ydue. Gr owt hannui t y .

QUESTION 5 What quarterly payment is necessary to accumulate $4.05 million over 22 years if the annual interest rate is 4.5% compounded quarterly? Assume payments are made at the end of each quarter. (a) (b) (c) (d)

$111,570 $72,737 $293,904 $27,179

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QUESTION 6 A bond selling at a premium should have: (a) (b) (c) (d)

A coupon rate higher than the YTM A coupon rate lower than the YTM A coupon rate equal to the YTM A coupon rate equal to the current yield

QUESTION 7 Given the following information about Granite Ltd., what is the growth rate of its ordinary shareholders? The required rate of return is 7.0 percent p.a., the current market price of its ordinary shares is $36.50 and the last dividend paid to the firm’s ordinary shareholders was $2.15. (a) (b) (c) (d)

5.67% 1.04% 15.21% 2.70%

QUESTION 8 Given the following information: EPS = $1.30 re = 8% p.a. b = 0.30 g = 5% p.a. what will be the share price? (a) (b) (c) (d)

$30.33 $18.56 $46.11 $2.35

QUESTION 9 What is the market price (to the nearest dollar) of a 5% p.a. quarterly coupon bond with a face value of $1,000, five years to go until maturity when the current market yield is 6% p.a.? (a) (b) (c) (d)

$848 $1,500 $957 $1,201

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QUESTION 10 The director of capital budgeting for ABC Ltd has identified a project with the following expected net cash flows: Year 0 1 2 3

Expected Net Cash Flows ($60) $70 $40 $35

This project has a 8% p.a. cost of capital. What is the project’ NPV? (a) (b) (c) (d)

$17.95 $63.54 $15.46 $66.89

QUESTION 11 Which of the following capital budgeting decision rules does not use the cost of capital, r, in its calculation: (a) (b) (c) (d)

IRR NPV Payback Period Both a) & b)

QUESTION 12 Sunk costs can be defined as: (a) (b) (c) (d)

Incremental costs. Opportunity costs. Cost that has already been incurred but is relevant to future decision making. Cost that has already been incurred and is irrelevant to future decision making.

QUESTION 13 You are given the following information about the possible returns from an investment: Return 12% 9% 6%

Probability 30% 40% 20%

The expected return on this investment is: (a) (b) (c) (d)

1.32% 8.40% 3.20% 6.55%

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QUESTION 14 Thecapi t almar k etl i ne: (a) (b) (c) (d)

Des cr i best heequi l i br i um r i sk r et ur nr el at i onshi pf oreffic i entpor t f ol i os . Des cr i best heequi l i br i um r i sk r et ur nr el at i onshi pf oral lpor t f ol i os . Des cr i best heequi l i br i um r i sk r et ur nr el at i onshi pf orr i skl es spor t f ol i os . Des cr i best heequi l i br i um r i sk r et ur nr el at i onshi pf orr i skypor t f ol i os .

QUESTION 15 The return on treasury notes is expected to be 7.5%. The market risk premium is 8%. What is the expected return on a stock with a beta of 1.3? (a) (b) (c) (d)

17.90% 8.15% 12.95% 12.35%

QUESTION 16 What is the more formal name used for describing the corporate finance decision concerning how the firm should raise finance from investors? (a) (b) (c) (d)

The capital structure decision The capital budgeting decision The dividend decision The retained earnings decision

QUESTION 17 The assumed overall financial objective of a company is to: (a) (b) (c) (d)

Raise capital. Reduce debt. Maximise profits. Maximise the market value of its ordinary shares.

QUESTION 18 A method of calculating interest in which, during the entire term of the loan, interest is computed on the original sum borrowed is the: (a) (b) (c) (d)

Present value method. Simple interest method. Compound interest method. Interest rate method.

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QUESTION 19 Which of these answers best describes an ordinary annuity? (a) A series of equally sized regularly occurring cash flows extending indefinitely into the future, with the cash flows occurring at the end of each period (b) A series of equally sized regularly occurring cash flows extending n periods into the future, with the cash flows occurring at the start of each period (c) A series of equally sized regularly occurring cash flows extending n periods into the future, with the cash flows occurring at the end of each period (d) A series of equally sized regularly occurring cash flows extending indefinitely into the future, with the cash flows occurring at the start of each period

QUESTION 20 Debt Ltd borrowed $100 000 from its local bank to finance the purchase of new equipment. Annual payments are required over five years at a fixed interest rate of 10% p.a. How much is each annual payment? (a) (b) (c) (d)

$27 398.18 $20 000.00 $26 379.75 $24 444.12

QUESTION 21 A bond selling at a discount should have: (a) (b) (c) (d)

A coupon rate higher than the YTM A coupon rate lower than the YTM A coupon rate equal to the YTM A coupon rate equal to the current yield

QUESTION 22 Given the following information about Stone Ltd., what is the growth rate of its ordinary shareholders? The required rate of return is 8.0 percent p.a., the current market price of its ordinary shares is $36.00 and the last dividend paid to the firm’s ordinary shareholders was $2.10. (a) (b) (c) (d)

5.67% 2.04% 15.21% 8.20%

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QUESTION 23 The expectations theory of the term structure of interest implies that: (a) Interest received on securities is in accordance with term to maturity. (b) Bond investors can expect to achieve the same return over any future period, regardless of the security in which they invest. (c) There is a premium due to uncertainty about the future level of interest rates. (d) There is a risk that borrowers may default on the payment of the principal.

QUESTION 24 According to the expectations theory of the term structure of interest, if the 1-year bond rate today is 6% p.a. and the 2-year bond rate today is 7% p.a., what is the 1-year bond rate next year? (a) (b) (c) (d)

6% 6.75 % 7.5 % 8%

QUESTION 25 The corporate finance manager of Baidi4us Ltd has identified a project with the following expected net cash flows: Year 0 1 2 3

Expected Net Cash Flows ($80) $50 $30 $27

This project has a 6% p.a. cost of capital. What is the project’s NPV? (a) (b) (c) (d)

$19.31 $16.54 $21.56 $84.21

QUESTION 26 Which of the following capital budgeting decision rules does not use the cost of capital, r, in its calculation: (a) (b) (c) (d)

IRR NPV Payback Period Both a) & b)

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QUESTION 27 What are sunk costs? (a) Costs associated with research and development. (b) Costs associated with exploration. (c) Costs that are past outlays that should not influence the decision to continue or terminate a project. (d) Costs associated with negative net present value projects. QUESTION 28 An investment has the following possible returns: Return 13% 8% 5%

Probability 40% 50% 10%

The expected return on this investment is: (a) (b) (c) (d)

2.80% 9.70% 4.30% 7.60%

QUESTION 29 A security market line: (a) (b) (c) (d)

Explains the covariance between the returns on the risky asset and the market portfolio. Explains the covariance between the returns on the risky asset and a riskless asset. Is a graphical representation of the CAPM. Is a graphical representation of the CML.

QUESTION 30 The return on treasury notes is expected to be 6.5%. The market risk premium is 7%. What is the expected return on a stock with a beta of 1.5? (a) (b) (c) (d)

12.26% 7.25% 18.25% 13.33%

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QUESTION 31

The concept of investors being risk averse means that: A. investors will always prefer an investment that carries less risk. B. investors require higher returns to compensate for carrying more risk. C. the investment's risk is the predominant feature considered by the investor. D. investors will make all possible attempts to avoid systematic risk. QUESTION 32

The ultimate objective of investment and financing decisions is to maximise: A. the number of projects the company is invested in. B. the amount added to the value of the owner's wealth. C. the salaries of all employees of the firm. D. the repayments that are made of debt. QUESTION 33

The principle that a dollar is worth more the sooner it is to be received is the: A. value principle. B. value of money principle. C. time value of money principle. D. Fisher effect. QUESTION 34

A company has $25 million in cash and the interest rate is 12%. The company has decided to invest $20 million in assets, and the investment has a net present value of $5 million. What is the wealth of the company's shareholders immediately after the investment plan is announced? A. $30 million B. $10 million C. $28 million D. $25 million QUESTION 35

If a term deposit paid an interest rate of 24% p.a. over the past six months, and the current balance is $1008, what was the amount initially invested? A. $812.90 B. $681.08 C. $900.00 D. $975.00 QUESTION 36

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What is the present value of the following cash flow stream, discounted at 7% p.a.: Year 1, $100; Year 2, $400; Years 3 through 20, $300? A. $2859.20 B. $3563.40 C. $3078.63 D. $2782.40 QUESTION 37

A Ltd is currently paying a dividend of 90 cents per share. Assume that the investors expect this dividend to be maintained indefinitely and that they require a return of 15% on the investment. What is the value of A's shares? A. $0.14 B. $16.66 C. $6.00 D. $1.05 QUESTION 38

According to the expectations theory of the term structure of interest, if the 1-year bond rate today is 6% p.a. and the 2-year bond rate today is 7% p.a., what is the 1-year bond rate next year? A. 6% B. 6.75% C. 7.5% D. 8% QUESTION 39

Sunk costs can be defined as: A. incremental costs. B. opportunity costs. C. cost that has already been incurred but is relevant to future decision making. D. cost that has already been incurred and is irrelevant to future decision making. QUESTION 40

If a company has on issue debentures paying a coupon rate of 12% p.a. and the market yield on similar securities is 18 per cent, what is the correct cost of debt the company should use when estimating the WACC? A. None of the given options. B. 15% C. 12% D. 18%

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QUESTION 41

Given that shares have an expected dividend stream of 10 cents in perpetuity and that the current market price of the shares is $2.40, calculate the cost of equity capital of these shares. A. 8% B. 12% C. 10% D. 4.2% QUESTION 41

A weak-form efficient market can best be described as a market in which: A. trading strategies based upon past share prices cannot earn abnormal profits. B. all publicly available information is fully reflected in share prices. C. share prices follow predictable trends. D. trading strategies based on past information can earn abnormal profits. QUESTION 43 Cor por at edec i si onsi ncl ude:

A. investment decisions. B. financing decisions. C. dividend decisions. D. all of the given options QUESTION 44 Theconc eptofmar k eteffic i enc yembodi est hei deat hat :

A.i nvest or swantt obecompensat edwi t hhi gherr et ur nsf oral l t heuns yst emat i cr i skt heybear ,andexpect pr i cest oadj usti nani nst ant aneousandunbi asedway . B.al li nvest or sar ef ul l yi nf or medaboutt hepot ent i alr et ur nsf oragi v enfir m,andt her ef or et heshar epr i c ei sa f ai rr epr esent at i on. C.shar epr i cesr espondt onewi nf or mat i oni nawayt hati sbot hunbi as edandi ns t ant aneous. D.becaus ehol der sofdebtdonotshar ei nt hehi ghr et ur nsi ngoodeconomi cper i ods ,t heyr equi r eahi gher r at eofr et ur nr el at i v et ot her i s kt heybear .

QUESTION 45 Thei nv es t ment sc omponentoffi nancet ak est hevi ewpoi ntoft he_______r at hert hanac ompany .

i nvest or

QUESTION 46 Thev al uet hatt hefi nanci al mar k et spl aceonacompany ’ sdebtandequi t ys ec ur i t i eswi l l dependont he_____andexpec t edr et ur n oni nv es t ment si nt hoses ec ur i t i es .

r i sk

QUESTION 47

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I fas har ehol derwi shest osel l hi sorhers har esi nor dert ofi nancegr eat ercons umpt i on,t hegr eat ert he______,t hegr eat erar ehi s orhercons umpt i onoppor t uni t i es .

shar epr i ce

QUESTION 48 Ani nv es t orwhoi s______________wi l l c hoosear i s kyi nv es t mentonl yi ft heex pect edr et ur nont hei nv es t menti shi ghenought o c ompensat et hei nv est orf orbear i ngt her i sk .

r i skaver se

QUESTION 49 Thepur chas i ngpowerofmoneyi nc r eas esov ert i measar es ul tof____________.

i nflat i on

QUESTION 50 Acompanyhasani ndefini t el i f e. TRUE

QUESTION 51 Themar k etv al ueofac ompanyi sc al cul at edast hes um oft henetas set sandowner sequi t yont hecompany ' sbal ances heet . FALSE

QUESTION 52 Pur s ui ngagoal ofmax i mi s i ngt hemar k etv al ueofacompany ' ss har esi seas ywhen:

A.di vi dendsar egr owi ngatacons t antr at e. B.t her ei sl i mi t edunc er t ai nt y . C.t her ear el i mi t edmar k eti mper f ect i ons . D.t her ear enomar k eti mper f ec t i onsandnounc er t ai nt y .

QUESTION 53 Gi v enaper f ectc api t al mar k etandper f ectcer t ai nt y ,t hefi r m wi l l al way sunder t ak eapr oj ectwher e:

A.t hef ut ur er at eofr et ur nont hepr oj ec ti sgr eat ert hant hei nt er estr at eav ai l abl ei nt hecapi t al mar k et . B.t hef ut ur er at eofr et ur nont hepr oj ec ti sl es st hant hei nt er estr at eav ai l abl ei nt hec api t almar k et . C.t hecur r entr at eofr et ur nont hepr oj ecti sl esst hant her et ur nav ai l abl eonpr oj ec t sunder t ak enby c ompet i t or s . D.t hecur r entr at eofr et ur nont hepr oj ecti sgr eat ert hant heoppor t uni t ycos toff or gonec ons umpt i on.

QUESTION 54

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Shar epr i ceschangeasar esul tofi nv est or s ' r eac t i ont o_________pr ovi dedt hr oughi nv es t ment ,financ i nganddi v i denddeci s i ons madebyt hemanager sofacompany .

i nf or mat i on

QUESTION 55 Thei nt er es tr at ewher ei nt er esti sc har gedatt hes amef r equenc yast hequot edi nt er es tr at ei st he:

A.nomi nali nt er estr at e. B.r eali nt er es tr at e. C.c ompoundi nt er es tr at e. D.effec t i v ei nt er estr at e.

QUESTION 56 Anannui t yi nwhi c ht hefi r s tcas hfl owi st oocc uri mmedi at el yi sk nownasa/ an:

A.or di nar yannui t y . B.or di nar yper pet ui t y . C.annui t ydue. D.gr owt hannui t y .

QUESTION 57 Anannui t yi nwhi c ht hefi r s tcas hfl owi st oocc uraf t erat i meper i odt hatex ceedst het i meper i odbet weeneachsubs equentcas h fl owi sknownasa/ an:

A.def er r edannui t y . B.gr owt hannui t y . C.or di nar yannui t y . D.annui t ydue.

QUESTION 58 Youhav ebor r owed$1000f r om af r i endt opayf orunf or eseenc arr epai r s ,wi t hanagr eementt opayi nt er estatanannual r at eof 18%,compoundi ngdai l y .I fy our epai dy ourf r i endaf t er90day s ,howmuchwoul dy ouneedt or epay ?

A.$1044. 38 B.$1045. 00 C.$1045. 37 D.$1043. 56

QUESTION 59 Cal c ul at et heeffect i v eannual i nt er estr at ecor r es pondi ngt o12% p. a. ,c ompoundedquar t er l y .

A.11. 9% B.12. 55% C.12. 45% D.12. 71%

QUESTION 60

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J ohnhasj us tbeenempl oy edbyapr est i gi ousfir m,dr awi nganannual s al ar yof$300000,pai datt heendofeac hy ear .Hepl anst o wor kf orfi v ey ear sbef or er et i r i ng.Hebuy sanewl uxur yhomewi t hmor t gager epay ment sof$5000permont hf ort henex t20y ear s ( pay abl eatt heendofeac hmont h) ,anddonat es$10000perannum f or ev ert ohi sf av our i t ec har i t y .Whatannual amount ,i npr esent v al uet er ms ,canJ ohnwi t hdr awf ort hefir s tfi v ey ear sofhi sr et i r ementf r om t her emai nderofhi ssav i ngs ?As s umeanannuali nt er es r at eof6% p. a.

A.$93926 B.$246819 C.$94754 D.$112754

Whati st hepr esentv al ueof$500pay abl ei n10y ear s ' t i mei ft hei nt er es tr at ei s6% p. a. ?

A.$290. 50 B.$335. 60 C.$895. 40 D.$279. 20

QUESTION 61 Kr i s t yhast omak er ent al payment sof$1000att hes t ar tofev er ymont h,t hr oughoutt hef our y eardur at i onofheruni v er s i t ycour se. Heruni v er si t yf eesar e$4000t obepai datt hes t ar tofeac hy ear .Sheear ns$1500permont h( pai datt heendofeac hmont h)f r om apar t t i mej ob.Ass umeani nt er es tr at eof8% p. a.andt hats hek eepst hepar t t i mej obf ort henex tf oury ear s .Howmuchmoney ,i n pr es entv al uet er ms ,cans hewi t hdr aweac hmont hf ort henex tf oury ear s ?

A.$144 B.$126 C.$55 D.$177

QUESTION 62 The______i nt er es tr at ei sani nt er es tr at ec al cul at edaf t ert ak i ngoutt heeffect sofi nfl at i on.

r eal

QUESTION 63 Apr i nc i pl eandi nt er estl oani sac ommonex ampl eofan__________annui t y .

or di nar y

QUESTION 64 Theannui t ywher et hecas hflowsc ont i nuef or ev eri scal l eda________.

per pet ui t y

QUESTION 65 Thedi st i ngui s hi ngf eat ur eofanannui t yduei st hatt het i meper i odbet weent hepay mentofeac hsuc ces s i v ecas hfl owdi ffer st ot he f r equenc ywi t hwhi c ht hei nt er es tc ompounds . FALSE

QUESTION 66 Page 13 of 24

Ani ndi v i dual bor r owed$100000atafi x edi nt er es tr at eof12% p. a.f ort heent i r el oant er m of20y ear s .I ft hel oani st ober epai d t hr oughequal mont hl yi ns t al ment s ,t hent her egul arr epay mentt ot henear es tdol l ari s$1101. TRUE

QUESTION 67 Theper i odi cc as hfl owsf r om ani nv est menti nshar esar ec al l ed:

A.c oupons . B.i nt er es t . C.c api t algai ns . D.di vi dends .

QUESTION 68 Gi v ent hatdi vi dendsonas har ear eexpec t edt or emai ni ndefi ni t el yat$1p. a.andt hatt her equi r edr at eofr et ur nf ort hel ev el ofr i sk ons uc has har ei s15%,t hec or r ectpr i cef ort hi sshar e:

A.c annotbeas cer t ai nedf r om t hi si nf or mat i on. B.cannotbeas cer t ai nedwi t houtr egar dt ot hemanagements t r uct ur eoft hefir m. C.i s$1. D.i s$6. 67.

QUESTION 69 Ass umet hel at es tdi vi dendpers har e,pai dr ecent l y ,f orACDLt di s90c ent sandt hatt her equi r edr at eofr et ur nont hes eshar esi s 15% p. a.I ft hec ur r ents har epr i cei s$19. 80,t heex pect edgr owt hr at eont hes es har esi s :

A.0%. B.10%. C.5%. D.7. 5%.