Sample/practice exam April 2015, questions and answers PDF

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FNCE 90018 Practice Problems for Corporate Financial Policy Semester One 2013 PLEASE NOTE THAT WHEN I AM ASKING FOR THE CORRECT ANSWER IT IS THE ANSWER WHICH IS THE MOST CORRECT. THIS WILL BE THE SAME FOR THE MST. 1. Ordinary shares can be best described as a. securities with an ownership interest in a company with no voting rights. b. securities with an ownership interest with voting rights. c. having a residual interest in the net assets of the issuing company. e. None of a., b, and c. is correct. 2. The private placement of a company’s share offering...

b. must always be approved by the shareholders before the issue takes place. c. involves a critical element of timing with overall conditions in the market. d. results in the same price that could have been obtained with a public issue. e. All of a, b, c and d are correct. 3. Underpricing refers to the phenomenon where the offer price in an Initial Public Offering (IPO) is below the subsequent market price. Which of the following statements is correct? a. Underpricing is clear evidence of market failure. b. One explanation for underpricing is the winner’s curse hypothesis which states that IPOs must be underpriced to attract the better informed investors into the market. d. (b) and (c). e. None of (a), (b) and (c) is correct. 4. Fleet Ltd has 40 million shares on issue with a current market share price of $5 per share. Fleet raises $20 million by placing 5 million shares at $4 each to a group of financial institutions. As a result of this private placement... a. b. c. d.

Old shareholders have their voting power diluted. There is a transfer of wealth from old shareholders to new shareholders. Old shareholders wealth drops to $196 million (to the nearest dollar). (a) and (b).

5. If all shareholders exercise each of the rights (to purchase additional shares at the specified subscription price), shareholder wealth...

b. will increase due to an exactly offsetting decrease in the wealth of other shareholders (transfer of wealth). c. will decrease due to the loss of voting power. d. will decrease due to the inability to exploit creditors. e. will be unaffected because share value will decline to the subscription price of the rights offering. 6. Dill owns 5 per cent of the outstanding shares in Pickle Ltd, which has just announced a 1 for 5 rights issue with a subscription price of $1.90. The current ‘cum rights’ price for Pickle shares is $2.20. If the number of outstanding shares in Pickle Ltd is 5000, what is the theoretical value of the right to one new share? a. $0.05.

d. $0.45. e. $0.50. 7. If an investor purchases shares cum-rights, it means that: a. The investor will not participate in the rights issue. c. The investor will participate in the rights issue without having to pay the subscription price. d. the investor cannot sell the right separately. e. The investor can not sell the shares cum-rights. 8. Bookbuilding is:

c. a process where the company offers a fixed price for shares via a prospectus. d. (b) and (c). e. (a) and (c).

9. The XYZ corporation intends to issue 100,000 new shares to raise funds for expansion of current plant facilities. The current share price is $20 and there are 300,000 shares outstanding. The number of shares needed to entitle the bearer to one right should be: a.

0.333.

c. d. e.

4.000. 6.333. indeterminate without the subscription price.

10. The equity participants in a leveraged lease generate a return mainly through: a. b. d. e.

Accounting differences between lessor and lessee. Tax differences across countries. . Saving the maintenance costs of the leased asset. None of the above.

11. Which lease is essentially a rental agreement? a. b. c. d. e.

Finance lease. Cross border lease. Leveraged lease. None of the above.

12. Lorenzo Airlines needs a new plane. It can be purchased for $150million; or it can be leased for 10 years at $20million per year payable in advance. Lorenzo’s tax rate is 30 percent and it can borrow on a secured basis at 12% before tax. The required (after tax) rate of return on projects of comparable risk is 16%. Aircraft are depreciated on a straight line basis to a zero residual value over 10 years. Since regulations require that planes be grounded after 10 years, the actual residual value is negligible. The appropriate discount rate to calculate the NPV of the lease versus buy decision is: a. b. c.

15%. 12%. 11.2%.

e.

None of the above.

13. What is the rationale for analysing a finance lease by comparing it with debt? a.

A finance lease is off-balance sheet and so can be compared to debt.

c. d. e.

A finance lease will use some of the lessor’s debt capacity. The lessor is able to extend its debt capacity. None of the above.

14. Which theory proposes that companies have an optimal capital structure based on a trade-off between the benefits and costs of using debt? a. b. c. d.

Reverse pecking order theory. Information asymmetry theory. Pecking order theory. Market timing theory. .

15. The market value of Teldar Paper Corporation's equity is $15 million, and the market value of its risk-free debt is $5 million. If the required rate of return on the equity is 20% and that on the debt is 8%, calculate the company's cost of capital. (Assume no taxes.) a. b.

11%. 14%.

d. e.

20%. None of the above.

16. The MM theory with taxes implies that firms should issue maximum debt. In practice, this is not true because: a. debt is more risky than equity. c. firms will incur large agency costs of short term debt by issuing long term debt. d. (a) and (b). e. (b) and (c).

17. Share price changes around the time of announcements of dividend changes are on average positively related to the change in dividends. This evidence may not invalidate the dividend irrelevance theorem because: a. b.

investors are indifferent between capital gains and dividend income. debt is not necessarily affected by such announcements.

d.

share prices revert back to pre-dividend levels following the announcement. The dividend change was expected.

e.

18. In an off-market share buyback, assume the deemed consideration is $4.50, the franked dividend $2.50, the cost base $3.00 and the buyback price $4.20. What is the capital gain according to TD 2004/22? a. -$2.00. b. -$1.30. d. $1.00. e. $2.00. 19. Off-market share buybacks in Australia cannot be used by companies as a mechanism to distribute imputation tax credits. True or false and why? a. b. c. d.

True, because the 10/12 rule prohibits the distribution of franking credits with off-market buybacks. True, because the proceeds of off-market buybacks are only taxed as capital gains. False, because share buybacks are prohibited in Australia. True, because imputation tax credits can only be distributed with dividend payments.

e.

20. The following project inputs are given to you. NPVf=$50; NPVLCM=$30.72; Cost of debt=8%; cost of capital=10%. Calculate the EAV. a. $4. c. $8. d. $10. e. None of the above.

21. Two mutually exclusive projects with unequal lives are being evaluated. Under the equivalent annual value method, the criterion for project acceptance is: a. b. c.

the project with the higher equivalent annual value is preferred. the project with the lower equivalent annual value is preferred. the project with the shorter life is preferred.

e.

The project with the longer life is preferred.

22. Which of the following statements is false? a) The CCR model assumes that the incumbent machines and their replacements are absolutely identical.

c) Retirement decisions involve evaluating when to abandon a project. d) The constant chain of replacement assumption may be used to evaluate projects of unequal lives. e) None of the above.

Question 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Answer D A C E A B B A B C C D B E C B C C E B D B...