ASB2202/ASB2203/ASB3200 (Semester1)/ASB2203: CORPORATE FINANCE
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MOCK EXAM
ASB2202/ASB2203/ASB3200 (Semester1)/ASB2203: CORPORATE FINANCE
1) You are given a job to make a decision on project X, which is composed of three sub-projects A, B, and C which have NPVs of + $70, -$40 and + $100, respectively. These sub-projects cannot be undertaken on their own. How should you go about making the decision about whether to accept or reject the project?
a) Accept the firm's joint project as it has a positive combined NPV
b) Reject the joint project entirely
c) Break up the project into its components: accept B and C and reject A
d) Break up the project into its components: accept C and reject A and B
e) None of the above
2) Which of the following amounts is closest to the end value of investing a lump sum of £2,000,000 for 6 years at an effective annual interest rate of 10% compounded annually?
a) £ 1,134,853
b) £ 3,147,192
c) £ 3,524,861
d) £ 3,543,122
e) £ 14,230,378
3) Which of the following amounts is closest to the present value of payments of £4,000 at the end of EACH of the next three years if the appropriate interest rate is 8%?
a) £ 4,546
b) £ 4,883
c) £ 10,308
d) £ 13,636
e) £ 15,000
4) A government bond issued in Germany has a coupon rate of 4 percent, a face value of 100 euros, and matures in five years. The bond pays annual interest payments. Calculate the yield to maturity of the bond (in euros) if the price of the bond is 87.7 euros.
a) 6%
b) 6.5%
c) 7%
d) 7.5%
e) 8%
5) When is the Profitability index most useful:
a) When examining mutually exclusive projects.
b) When a company is examining projects which only have cash outflows
c) When examining projects with cash flows which have more than one change in sign
d) When examining non-normal projects
e) When a company is in a capital rationing situation
6) The internal rate of return (IRR) is defined as:
f) The discount rate that makes the NPV equal to zero.
g) The difference between the cost of capital and the present value of the cash flows
h) The discount rate used in the discounted payback period method
i) The discount rate used in the payback period method
j) None of the above
7) When using the internal rate of return, when might there be more than one IRR?
a) When there are only costs (cash outflows)
b) When examining mutually exclusive projects
c) When the IRR is equal to the company’s cost of capital
d) When examining projects with cash flows which have more than one change in sign
e) None of the above
8) If you only had £45,500 to invest in the following projects, but you could invest in fractions of projects, which projects should you invest in to ensure that your £45,500 is invested in the best way?
PROJECT NPV £ INVESTMENT
A 7,500 10,000
B 8,050 11,500
C 13,200 15,000
D 10,800 18,000
E 14,040 19,500
F 16,400 20,500
a) Project C
b) Project D
c) Projects A, B and F
d) Projects A, C and F
e) All the projects
9) The financial manager of a firm has the following estimates of the net present value of a project using different discount rates:
Discount rate NPV (£mill.)
6% 20.29
8% 8.67
10% -2.25
12% -12.52
Which pair of discount rates will provide the most accurate estimate if interpolation is used to estimate the project’s internal rate of return?
a) 6% and 8%
b) 8% and 10%
c) 10% and 12%
d) 6% and 10%
e) 6% and 12%
10) The following are drawbacks of sensitivity analysis except:
a) it provides ambiguous results
b) underlying variables are likely to be interrelated.
c) it provides additional information about the project that is useful.
d) all of a), b) and c) are drawbacks of sensitivity analysis.
e) None of a), b) and c) are drawbacks of sensitivity analysis
11) Which one of the following ratios gives the best guide to a company’s liquidity?
a) Debt to equity ratio
b) Earnings per share
c) Interest cover
d) Quick ratio
e) Return on capital employed.
For answering Questions 12 to 15, refer to the following financial statements of Treeco ltd.
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Statement of Profit & Loss for Treeco Ltd to 31 December 2019 |
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£000s |
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Turnover |
45,928 |
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cost of sales |
-29,657 |
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Gross profit |
16,271 |
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expenses |
-6,500 |
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PBIT |
9,771 |
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interest |
-75 |
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Profit before taxation |
9,696 |
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Taxation |
-120 |
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Profit after taxation |
9,576 |
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Statement of Financial Position for Treeco Ltd as at 31 December 2019 (£ooos) |
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Non-current assets (at net book value) |
32,156 |
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Current assets: |
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Inventory |
2325 |
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Receivables |
3678 |
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Cash & Bank |
1200 |
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Total current assets |
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7,203 |
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Total assets |
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39,359 |
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Capital & Reserves: |
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Share capital £1 nominal |
20,000 |
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Accumulated profits |
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15,671 |
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35,671 |
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Non-current liabilities: loan |
1,000 |
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36,671 |
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Current liabilities: |
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Payables |
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2,688 |
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Total capital & liabilities |
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39,359 |
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12) What is the value of Treeco Ltd’s current ratio?
13) What is the value of Treeco Ltd’s quick ratio?
14) What is Treeco Ltd’s level of interest cover?
15) What is Treeco Ltd’s debtor collection period in days, assuming a 365-day year?
SECTION B (COMPULSORY QUESTION)
16) Treeco Ltd. has just developed a new product to be called Freddo and is now considering whether to put it into production.
Costs incurred in the development of Freddo were £600,000.
Production of Freddo would require the purchase of new machinery at a cost of £2,500,000 (payable immediately). The machinery would have a useful life of 4 years, at the end of which its salvage value would be zero.
Production costs per unit of Freddo (at year 1 prices) would be as follows:
Variable materials £22
Variable labour £46
Variable overheads £21
In addition, fixed production costs (at year 1 prices), including straight line depreciation on plant and machinery would be £1,200,000.
The selling price of Freddo will be £130 per unit (at year 1 prices) and sales are expected to be 35,000 units in each of the next 4 years.
The retail price index is expected to rise at a rate of 3% per year for the next 4 years and the selling price of Freddo is expected to rise at the same rate. Annual inflation rates for production costs are expected to be as follows:
Variable materials 4%
Variable labour 5%
Variable overheads 3%
Fixed costs 4%
The company’s weighted average cost of capital (in nominal terms) is expected to be 12%.
REQUIRED, ANSWER ALL PARTS (making any necessary assumptions and showing all workings):
Note: You may ignore taxation and also assume that all costs and revenues rise at the end of each year.
a. Based on the above information, perform relevant calculations to determine the net present value of the Freddo project and offer your advice on whether or not Treeco should go ahead with the production of Freddo. (30 marks)
b. Discuss the advantages and disadvantages of the following capital investment techniques:
i. Payback period
ii. Net present value
iii. Internal rate of return
iv. Profitability index (30 marks)
2022-07-22