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Practice Mid-Module Examination (Finance)

Question Book

Instructions to students:

1. Your FC714 Business and Management (Finance) module assessment is an online, timed open book examination.  This means  that you can access module learning resources specified by your teacher (and only those materials) whilst you are answering the examination questions. The questions will not ask you to copy any specific information from your learning materials, rather you will be asked to use the information and apply it in a thoughtful way. This does not mean you will be summarising the information from a textbook; it means you will be asked to interpret or use the information in relation to the specific examination questions and/or problems/case studies/scenarios.

2. You are expected to work on this assessment on your own.  Please note that you may be required to attend an online meeting with your teacher to confirm that it is your own work.

3. There are three sections in this paper.  You should attempt to answer all questions in Sections A and B, and two questions from the four choices in section C

4. In order to complete this assessment successfully you must:

• read the question paper carefully before you begin to answer

• follow the instructions on how to answer each question fully

• type your answers into a document and save it as MS Word file.  For answers that require equations, formulae, graphs or diagrams you should write your answers clearly on paper and take a photograph of each page.  Make sure you indicate the number of question you are answering.

• please save each file following this format:

eg:

5. All workings must be shown for all calculations to attain full marks

Now proceed to answer the examination questions below.

SECTION A – Multiple Choice Questions

Answer questions 1 to 10.

Select only one answer a, b, c or d for each question. Please put your answer in the box provided. All workings must be shown for all calculations to attain full marks. Each question is worth 2 marks.

1. You have just inherited £10,000 from your late grandfather’s will.  You decide to put this in an interest- bearing account today in order to cover the cost of buying a car when you start to work full-time in 4 years’ time.  The bank is offering 6% on this account on a compound interest basis.  To the nearest pound, how much will you have in this account in 4 years’ time?

a. £12,653

b. £7,921

c. £12,625

d. £12,400

2. The UK government has decided to pay a leading war veteran charity £500,000 a year in perpetuity.  The discount rate is 9%.  What is the Present Value of this annual donation, to the nearest £0.1 million?

a. £3.4 million

b. £5.4 million

c. £5.6 million

d. £6.2 million

Questions 3, 4, 5 and 6 relate to the information below regarding Sports Clubs Limited.

Sports Clubs Limited is considering investing in new premises and equipment to help with its planned business expansion.  This would involve an initial cash outflow of £8,000,000.  This outflow, and cash inflows associated with this investment are as follows:

Time 0 – this month – Cash Outflow	End of Year 1 Cash Inflow	End of Year 2 Cash Inflow	End of Year 3 Cash Inflow
(£8,000,000)	£4,000,000	£6,000,000	£1,000,000

The discount rate is 11%

Additionally, the following forecasted accounting information for the investment is available.

	Year 1	Year 2	Year 3
Accounting Profit ( Net Income)	£1,000,000	£1,000,000	£1,000,000
Accounting Value (Book Value)	£7,000,000	£6,200,000	£5,100,000

3.What is the Net Present Value of the £8 million project?

a. £1,204,529.58

b. (£131,468.26)

c. £1,085,161.79

d. (£243,112.56)

4.What is the Payback Period for the investment?

e. 1 year and 8 months

f. 2 years and 2 months

g. 2 years and 6 months

h. 3 years

5.What is the Internal Rate of Return for the investment, to the nearest percentage?

a. 18%

b. 19%

c. 22%

d. 21%

6.What is the accounting rate of return for this investment?

a. 12%

b. 13%

c. 18%

d. 16.4%

7.You pay £111 for a bond with the 4% coupon paid semi-annually.  On the day you buy the bond, the next coupon of £2 is due in 5 months.  What is the bond’s clean or quoted price on the day you buy it?

a. £111.33

b. £107.67

c. £110.67

d. £109.12

8.If a corporate bond has a face value of £100 but is trading in the marketplace for £109.24, which of the following applies?

a. The bond is trading at a discount

b. The bond is trading at a premium

c. The bond is overpriced

d. The bond is mispriced

9.What is the price of a share with the following details?

Detail	Amount applying to this share
Dividend paid today	7 pence per share
Expected steady dividend growth per annum	4 per cent
Relevant Cost of Equity	10%

a. £121.33

b. £134.00

c. £72.80

d. £1.21

10.Which of the following statements is correct with regards to shareholders?

a. Shareholders must help others to collect their debt

b. Shareholders do not exist in the modern financial environment

c. Shareholders must be employees of the company

d. Shareholders can be ‘Ordinary’ or ‘Preference’

Total marks for Section A :20 marks

Section B

Section B contains three questions.  You must answer all parts of this section. All workings must be shown for all calculations to attain full marks

Question1-Net Present Value

The directors of A 2 Z Limited are considering a new investment proposal. The project will require an initial investment of £350,000 and a further investment in year 3 of £200,000. Net cash inflows in years 1 to 5 are expected to be £80,000, £200,000, £275,000, £350,000 and £385,000. At the end of 5 years, the project will be discontinued, and the project assets will be sold for an expected £150,000. A 2 Z Limited has a required rate of return of 10%. What is the net present value of this proposal?

Question 2-Bonds

ABC Limited is the world leader in manufacturing product A and this product is very popular amongst many people. Two weeks ago, it issued bonds to the general public, at a face value of £100 each.  Each bond is a 7-year coupon bond and pays a semi-annual coupon of £4.  The current yield expected from this type of instrument is 11% (as at today).

Required:

a) Based on the scenario above on ABC Limited calculate:

i. The Present Value of Coupon Payments

ii. The Present Value of Principle

iii. The Price of the Bond

b) Also explain whether this bond is selling at a premium or a discount.

Question 3- Time Value of Money

a) Hailey is looking forward to retiring in 9 years’ time so that she can spend more time with her dogs.  Meantime, she has just decided to pay her favourite charity, the SSPCA, £600 a year, with the first payment being in 1 years’ time.  She wants to figure out what the total value of these payments is, in today’s money.  The discount rate is 6%.

Can you help Hailey to calculate the Present Value of her charity payments?

Total for Section B: 30 marks

SECTION C– Investment Appraisal

Section C - Writing (2x 25 points)

Choose two from four questions and write 200-300 words for each

1) For Investment Appraisal techniques, analyse the key steps involved in undertaking each technique and provide an example of when an investment appraisal technique could be used

2) Explain if and how discounting affects Investment Appraisal Techniques

3) Analyse the significance of any results for 2 Investment Appraisal decision techniques

4) Analyse two advantages and disadvantages of 2 investment appraisal techniques