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THE UNIVERSITY OF THE WEST INDIES

□ Supplemental/Summer School □
Examinations of December ■ /April/May □ /July □ 2010
Originating Campus:
Cave Hill
□
Mona
■
St
...


9:00 am – 11 00am

Paper No:

Materials required:
Answer booklet:

Calculator: Programmable
(where applicable)
Multiple Choice answer sheets:

■

Normal

□

Non Programmable

numerical

□

□

Special

Not required

□

■

□ 1-20 □ 1-100 □

alphabetical

Auxiliary/Other material(s) – Please specify:

Candidates are permitted to bring the following items to their desks: Pencil or pen, Ruler, ID card,
Exam card

Instructions to Candidates: This paper has

7

pages & 5 questions
...


•

You must answer any three (3) questions

•

This exam is worth 60% of your final grade
...


Page 1
The University of the West Indies
10…

SEMESTER 1 - 2010/2011
MGMT2023

2010
...
/

DO NOT WRITE OR TYPE ON THE BACK OF THIS SHEET: USE ONE SIDE ONLY INSTRUCTIONS: Each page must be
signed by the First and Second Examiners, and where applicable the University and External Examiners
...
Where applicable, the EXTERNAL EXAMINER is
required to sign the question paper and return it with comments, if any, (on a separate sheet), to the Senior/Assistant
Registrar (Examinations)
...

First Examiner

……………………………………………
...

Second Examiner

……
...
/……

Date: 20…
...
(20 marks)
(a)

Mr
...
He
wants to set aside an equal amount at the end of each of the next 25 years so that
he can retire at age 60
...

The account is expected to earn 10% per annum for the entire period of time
...

(3 marks)

(ii)

A bank has agreed to loan you $10,000 at 11% for 5 years
...
Determine the amount of these annual payments (to
the nearest dollar)
...
Determine how much additional
interest you will earn over 4 years on a $10,000 CD that is compounded quarterly
compared with one that is compounded annually
...
What is the expected rate of
return on this investment?
(2 marks)

(i)

Differentiate between the nominal and the effective interest rates?

(3 marks)

(ii)

(b)

(i)

Define a perpetuity and give three examples of such investments
...
(20 marks)
(a)

What is an efficient portfolio?

(ii)

List 5 types of events that influence systematic (non-diversifiable) risk
...
70 and the market value of its common
stock is $28
...
If Richtex stock is half as volatile as the market, and the market is in
equilibrium, what rate of growth is expected for Richtex's dividends assuming a
constant growth valuation model is appropriate for Richtex?
(4 marks)

(ii)

The beta of Sanafil is 1
...
Sanafil is evaluating a merger with Matra, a firm that
has a beta of 0
...
Sanafil's stock sells for $40 per share and there are 10 million
shares outstanding
...
If these two firms merge, what will be the merged firm's beta?(3 marks)

(iii)

(b)

(i)

(3 marks)

Lotte Group is planing on diversifying into the transportation industry
...
3 from 1
...
Currently the riskfree rate is 5
...
6%
...
30, should Lotte diversify into the transportation industry?
(4 marks)
Page 2

The University of the West Indies

(3 marks)

SEMESTER 1 - 2010/2011

MGMT2023

2010
...
/ 10…

DO NOT WRITE OR TYPE ON THE BACK OF THIS SHEET: USE ONE SIDE ONLY INSTRUCTIONS: Each page must be signed
by the First and Second Examiners, and where applicable the University and External Examiners
...
Where applicable, the EXTERNAL EXAMINER is required to sign the
question paper and return it with comments, if any, (on a separate sheet), to the Senior/Assistant Registrar (Examinations)
...

First Examiner

……………………………………………
...

Second Examiner

……
...
/……

Date: 20…
...
(20 Marks)
(a)

What are the advantages and disadvantages of long-term debt financing?(4 marks)

(ii)

According to the fundamental principle of intrinsic value, how does a firm value
an asset?
(4 marks)

(iii)

Suppose you buy a 9
...
If interest rates suddenly fall to 8
...
Does your answer change?
(Note: You are not required to perform any mathematical calculations
...
)
(4 marks)

(i)

What is the market value of a zero coupon bond with 5 years to maturity? The
bond was originally sold with a yield to maturity equal to 11 percent, but the
market rate today is 9 percent
...
25% cumulative preferred stock, series D, par
value $75 to an investor who requires a 9
...

(3 marks)

(iii)

(b)

(i)

WPI has a bond issue outstanding that has a coupon rate of 10%, and a current
yield of 11%
...
What is the market price,
to the nearest dollar, of the WPI bond if it pays interest semi-annually and has 10
years to mature?
(3 marks)

Question 4
...
What are some potential problems with relying on the IRR
method?
(3 marks)

(2 marks)

Com-Cat is considering expanding their current production facility
...
Capital expenditures (purchase and installation of
equipment) of $320,000 will be required to support the expansion
...
These cash flow
changes are expected to continue for the next 7 years
...
What is the net present value and modified
internal rate of return attributable to this project, if the tax rate is 40% and the firm’s cost
of capital is 12% (Assume a net salvage value of zero ($0) on the investment)? Should the
firm go ahead with the expansion?
(12 marks)

Page 3
The University of the West Indies

SEMESTER 1 - 2010/2011

MGMT2023

2010
...
/ 10…

DO NOT WRITE OR TYPE ON THE BACK OF THIS SHEET: USE ONE SIDE ONLY INSTRUCTIONS: Each page must be signed
by the First and Second Examiners, and where applicable the University and External Examiners
...
Where applicable, the EXTERNAL EXAMINER is required to sign the
question paper and return it with comments, if any, (on a separate sheet), to the Senior/Assistant Registrar (Examinations)
...

First Examiner

……………………………………………
...

Second Examiner

……
...
/……

Date: 20…
...
(20 Marks)
(a)

Determine Bodacious Bodywear’s weighted average cost of capital under the following
conditions:
* The firm has 30% debt, 10% preferred stock, and 60% equity
* The market return is 13%, the risk-free rate is 9% and the firm’s beta is 1
...
78 and sells for $42 presently
* The firm’s bonds are priced at $871
...
List and discuss those values
...
Why is it that internal funding does
not have a zero cost?
(3 marks)

END OF QUESTION PAPER

Page 4
The University of the West Indies

SEMESTER 1 - 2010/2011

MGMT2023

2010
...
/ 10…

DO NOT WRITE OR TYPE ON THE BACK OF THIS SHEET: USE ONE SIDE ONLY INSTRUCTIONS: Each page must be signed
by the First and Second Examiners, and where applicable the University and External Examiners
...
Where applicable, the EXTERNAL EXAMINER is required to sign the
question paper and return it with comments, if any, (on a separate sheet), to the Senior/Assistant Registrar (Examinations)
...

First Examiner

……………………………………………
...

Second Examiner

……
...
/……

Date: 20…
...


Page 5
The University of the West Indies

SEMESTER 1 - 2010/2011
MGMT2023

2010
...
/ 10…

DO NOT WRITE OR TYPE ON THE BACK OF THIS SHEET: USE ONE SIDE ONLY INSTRUCTIONS: Each page must be
signed by the First and Second Examiners, and where applicable the University and External Examiners
...
Where applicable, the EXTERNAL EXAMINER is required
to sign the question paper and return it with comments, if any, (on a separate sheet), to the Senior/Assistant Registrar
(Examinations)
...

First Examiner

……………………………………………
...

Second Examiner

……
...
/……

Date: 20…
...
9901
1
...
9410
3
...
8534

0
...
9135
2
...
7171
4
...
9434
1
...
6730
3
...
2124

0
...
8080
2
...
3872
4
...
9259
1
...
5771
3
...
9927

0
...
7591
2
...
2397
3
...
9091
1
...
4869
3
...
7908

0
...
7125
2
...
1024
3
...
8929
1
...
4018
3
...
6048

0
...
6467
2
...
9137
3
...
7955
6
...
6517
8
...
4713

5
...
2303
7
...
7861
8
...
9173
5
...
2098
6
...
3601

4
...
3893
5
...
5152
7
...
6229
5
...
7466
6
...
7101

4
...
0330
5
...
9952
6
...
3553
4
...
3349
5
...
1446

4
...
7122
5
...
5370
5
...
1114
4
...
9676
5
...
6502

3
...
2883
4
...
9464
5
...
2551
13
...
7179
18
...
0232

9
...
2961
12
...
8775
17
...
3838
9
...
1059
11
...
7834

7
...
7455
9
...
5940
11
...
5361
8
...
8514
9
...
6748

7
...
7862
8
...
1285
9
...
8137
7
...
8237
8
...
0770

6
...
9819
7
...
9633
8
...
1944
6
...
9740
7
...
8431

5
...
0021
6
...
6231
6
...
9901
0
...
9706
0
...
9515

3%
0
...
9426
0
...
8885
0
...
9434
0
...
8396
0
...
7473

7%
0
...
8734
0
...
7629
0
...
9259
0
...
7938
0
...
6806

9%
0
...
8417
0
...
7084
0
...
9091
0
...
7513
0
...
6209

11%
0
...
8116
0
...
6587
0
...
8929
0
...
7118
0
...
5674

14%
0
...
7695
0
...
5921
0
...
9420
0
...
9235
0
...
9053

0
...
8131
0
...
7664
0
...
7050
0
...
6274
0
...
5584

0
...
6227
0
...
5439
0
...
6302
0
...
5403
0
...
4632

0
...
5470
0
...
4604
0
...
5645
0
...
4665
0
...
3855

0
...
4817
0
...
3909
0
...
5066
0
...
4039
0
...
3220

0
...
3996
0
...
3075
0
...
8874
0
...
8528
0
...
7798

0
...
6611
0
...
5537
0
...
4970
0
...
3936
0
...
2330

0
...
3878
0
...
2584
0
...
3971
0
...
2919
0
...
1460

0
...
2992
0
...
1784
0
...
3186
0
...
2176
0
...
0923

0
...
2320
0
...
1240
0
...
2567
0
...
1631
0
...
0588

0
...
1597
0
...
0728
0
...
/ 12
...
Completed forms should be handed to the Senior/Assistant Registrar
(Examinations)
...

…………………………
...

University Examiner (where applicable)

………………………………
...

External Examiner (where applicable)

Date: 20…
...
/……

7
Table 3: Future Value of an Annuity of $1 per Period for n Periods:

Equation:
Number
of
Periods

FVIFA r ,n =

n

∑ (1 + r )

n −t

=

(1 + r )n

t =1

−1

r

1%

3%

6%

7%

8%

9%

10%

11%

12%

14%

1
2
3
4
5

1
...
0100
3
...
0604
5
...
0000
2
...
0909
4
...
3091

1
...
0600
3
...
3746
5
...
0000
2
...
2149
4
...
7507

1
...
0800
3
...
5061
5
...
0000
2
...
2781
4
...
9847

1
...
1000
3
...
6410
6
...
0000
2
...
3421
4
...
2278

1
...
1200
3
...
7793
6
...
0000
2
...
4396
4
...
6101

6
7
8
9
10

6
...
2135
8
...
3685
10
...
4684
7
...
8923
10
...
464

6
...
3938
9
...
491
13
...
1533
8
...
260
11
...
816

7
...
9228
10
...
488
14
...
5233
9
...
028
13
...
193

7
...
487
11
...
579
15
...
9129
9
...
859
14
...
722

8
...
089
12
...
776
17
...
5355
10
...
233
16
...
337

12
14
16
20
25

12
...
947
17
...
019
28
...
192
17
...
157
26
...
459

16
...
015
25
...
786
54
...
888
22
...
888
40
...
25

18
...
215
30
...
762
73
...
141
26
...
003
51
...
70

21
...
975
35
...
275
98
...
713
30
...
190
64
...
4

24
...
393
42
...
05
133
...
271
37
...
980
91
...
9

Table 4: Future Value of $1 Due at the End of n Periods:

Equation:
Number
of
Periods
1
2
3
4
5

1%
1
...
0201
1
...
0406
1
...
0300
1
...
0927
1
...
1593

1
...
1236
1
...
2625
1
...
0700
1
...
2250
1
...
4026

1
...
1664
1
...
3605
1
...
0900
1
...
2950
1
...
5386

10%
1
...
2100
1
...
4641
1
...
1100
1
...
3676
1
...
6851

12%
1
...
2544
1
...
5735
1
...
1400
1
...
4815
1
...
9254

6
7
8
9
10

1
...
0721
1
...
0937
1
...
1941
1
...
2668
1
...
3439

1
...
5036
1
...
6895
1
...
5007
1
...
7182
1
...
9672

1
...
7138
1
...
9990
2
...
6771
1
...
9926
2
...
3674

1
...
9487
2
...
3579
2
...
8704
2
...
3045
2
...
8394

1
...
2107
2
...
7731
3
...
1950
2
...
8526
3
...
7072

12
14
16
20
25

1
...
1495
1
...
2202
1
...
4258
1
...
6047
1
...
0938

2
...
2609
2
...
2071
4
...
2522
2
...
9522
3
...
427

2
...
9372
3
...
6610
6
...
8127
3
...
9703
5
...
623

3
...
7975
4
...
7275
10
...
4985
4
...
3109
8
...
59

3
...
8871
6
...
646
17
...
8179
6
...
137
13
...
46

FVIFr,n = 7% r)n
(1+ 8%
3%
6%

Page 7
The University of the West Indies

MGMT2023

SEMESTER 1 - 2010/2011
2010
...
/ 10…

DO NOT WRITE OR TYPE ON THE BACK OF THIS SHEET: USE ONE SIDE ONLY INSTRUCTIONS: Each page must be signed by the First and
Second Examiners, and where applicable the University and External Examiners
...
Where applicable, the EXTERNAL EXAMINER is required to sign the question paper and return it with comments, if any, (on a separate
sheet), to the Senior/Assistant Registrar (Examinations)
...

First Examiner

……………………………………………
...

Second Examiner

……
...
/……

Date: 20…

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