FIN2002S PRINCIPLES OF FINANCE
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FIN2002S
PRINCIPLES OF FINANCE
Section A (Compulsory question). 40 marks
Question 1
You are asked to evaluate two mutually exclusive projects with the following cash flow streams.
(a) Assume that the required rate of return is 12%. Evaluate the above two projects using the Payback period method, Net Present Value and Internal rate of return. Show your working clearly
(14 marks)
(b) Which project(s) should be chosen? Justify your answer.
(8 marks)
(c) Discuss the advantages and disadvantage of Net Present Value, Payback period and Internal rate of return methods.
(6 marks)
(d) In a survey by John Graham “Using CFO Surveys as a Motivational Tool to Teach Corporate Finance”, the author has discussed how to engage and motivate students with the results from corporate finance professionals. Provide your views on the practical relevance of discounted cash flow techniques (e.g. the Dividend discount model) and cost of equity models (e.g. Capital Asset Pricing Model, CAPM). (Hint: You may include the limitations on the empirical testing of CAPM)
(12 marks)
[Total 40 marks]
Section B (Answer any two questions) 30 marks each.
Question 2
(a) Define corporate governance.
(5 marks)
(b) Discuss the role of board of directors in corporate governance.
(25 marks)
[Total 30 marks]
Question 3
Assume an interest rate of 5 per cent annually, calculate the Present Value of the following cash flows:
(a) $2,800 to be received at the end of each of the first 3 years, and $1,500 at
the end of each of the years 5 to 8. Round your answer to 2 decimal places. (8 marks)
(b) $3,200 to be received every year starting from year 3 to infinity. Round your answer to 2 decimal places.
(8 marks)
(c) Compare stocks and bonds as a financing tool for corporate borrowers . (14 marks)
[Total 30 marks]
Question 4
The following information compares Mutual Fund Forever against the market portfolio using both standard deviation and beta as risk measures.
(a) Discuss the risk of Forever Ltd against the market portfolio in terms of the standard deviation, systematic risk and unsystematic risk.
(6 marks)
(b) Comment on the risk of Forever Ltd against the market portfolio in terms of the beta.
(8 marks)
(c) Comment on the expected return of Forever Ltd shares against the expected return on the market portfolio. Is the expected return on Forever Ltd shares adequate? Justify your answer.
(10 marks)
(d) Based on the expected return of 14% of Forever Ltd and the related standard deviation and beta, will you invest in Forever Ltd? Provide your justification(s).
(6 marks)
[Total 30 marks]
2022-01-04