There is one and only one correct answer for each question. Please write down the question number and your answer (either A, B, C or D) in your answers file (workings are not required).

Question 1

Which of the following is not the main factor to be considered when a firm chooses between flexible strategy and restrictive strategy to manage current liabilities?

A  Term structure

B  Pay-out policies

C  Maturity hedging

D  Cash reserves                                                                                                    [3 marks]

Question 2

A bond is quoted at £950 and sold at £975 in the bond market. How much is the accrued interest in the dirty price of this bond?

A  £25

B  £975

C  £950

D  £0.97                                                                                                                  [3 marks]

Question 3

How many years until the final payment are there for a 5-year annuity due just issued?

A  7 years

B  6 years

C  5 years

D  4 years                                                                                                               [3 marks]

Question 4

Which of the following is not a main drawback of internal rate of return (IRR) approach? A  Confusion over investing type cash flows and financing type cash flows

B  Ranking issues

C  Multiple solutions

D  Lack of consideration on time value of money                                                   [3 marks]

Question 5

Which of the following is not a reason for popularity of payback methods?

A  They are easy to understand, especially when communicating with non-specialists. B  They can be used at early stage of investment appraisal.

C  They are precise methods.

D  They are commonly used as secondary methods.                                             [3 marks]

Question 6

Assuming the risk-free rate is 2%, and return of the market portfolio is 7.5%, how much is the market risk premium?

A  9.5%

B  3.75%

C  5.5%

D  None of the above                                                                                              [3 marks]

Question 7

Which of the following statements best describes total asset turnover?

A  It measures how much more investors are willing to pay per unit of current earnings. B  It measures the profit for every unit of sales generates .

C  It measures the sales for every unit of assets generates .

D  None of the above                                                                                              [3 marks]

Question 8

Which of the following is not a common reason for firms to prefer share repurchases over paying dividends?

A  Share repurchases appeal to investors who seek stable cash flows.

B  Share repurchases offer more flexibility.

C  Share repurchases have tax advantage.

D  Share repurchases can offset dilution on shares.                                              [3 marks]

Question 9

Which of the following is not a commonly used type of dividend?

A  Stock dividends

B  Semi-annual coupons

C  Stock split

D  Cash dividends                                                                                                   [3 marks]

Question 10

Which of the following theories concludes that required rate of return to shareholders rises with leverage?

A  The pie theory

B  Portfolio theory

C  Modigliani and Miller proposition I

D  Modigliani and Miller proposition II                                                                     [3 marks]

[Total 30 marks]

Section B

Please write down the question number, necessary workings and answers in your answers file (rounding to two decimal places if necessary).

Question 1

(a) Chelseao plc. pays dividends that are expected to grow at 5% each year. Dividends will stop growing at the end of year 5, at which point the firm will pay out all its earnings as dividends. The next dividend will be paid one year from now at £10 and its earning per share (EPS) at the time will be £15. If the appropriate discount rate on Chelseao plc. is 8%, what is its fair market price of the share today? [15 marks]

(b) Arsenalo plc. has just issued level coupon bonds on the market with 7.5 years to maturity and a yield to maturity (YTM) of 12%, and at a current fair market price of £950. The bonds make quarterly payments. What must be the coupon rate on these bonds? Face value of these bonds is £1,000. [10 marks] [Total 25 marks]

Question 2

(a) Villao plc. is an asset management company. It manages a two-asset portfolio which consists of two risky assets, A and B. The proportions of A and B held in the portfolio are 40% and 60%, respectively. The expected return of A and B are 12% and 8%, respectively. Standard deviations of A and B are 70% and 40%, respectively. The correlation coefficient between A and B is -0.6.

i)        Calculate the expected return and standard deviation of the two-asset portfolio. [6 marks]

ii)        In light of the concept of portfolio diversification, make comments on the results from i). [7 marks]

(b) ManUnito plc. is a UK based pharmaceutical company, and the following information regarding the financial position of the company is provided by their financial director Ms. Jones:

In addition, Ms. Jones is considering two mutually exclusive projects by taking extra finance, and cash flows of each project are shown below:

Points in time (yearly intervals)

0

1

2

3

Project A (£)

- 12,000

5,000

5,000

5,000

Project B (£)

-10,000

4,000

4,000

4,000

i)        Calculate the weighted average cost of capital of ManUnito plc. [8 marks]

ii)       Advise Ms. Jones which project to undertake by applying net present value (NPV) approach. Assuming weighted average cost of capital is the appropriate discount rate. [4 marks] [Total 25 marks]

Question 3

Evertono plc. is a fashion retail company and the following financial information about this company is available:

Assuming Baumol Model is considered to be the appropriate cash management model .

i)        Calculate the number of transactions Evertono plc. will need to make to replenish the cash balance to optimal level next year, and in light of the assumptions of Baumol Model and your calculation, briefly explain how the Baumol Model works on cash management for Evertono plc. [12 marks]

ii)         Using  the  available  information,  calculate  the  current  ratio,  profit  margin, operating cycle and cash cycle of Evertono plc . [8 marks] [Total 20 marks]