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Bachelor of Business
(Incorporating Graduate Diploma in Business & Graduate Certificate in Business)
INTRODUCTION TO FINANCE
395000
SOLUTIONS
FINAL EXAMINATION
SEMESTER 1 2013
Date:
Friday, 14 June 2013
Time Allowed: 3 hours plus 10 minutes reading for the paper
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Summary:
1
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3
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5
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7
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9
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C
A
B
C
B
D
C
C
C
B
11
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13
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15
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17
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19
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-1-
B
D
D
A
A
C
B
B
B
A
Version A
SECTION 2:
PROBLEM SOLVING
(TOTAL: 20 MARKS)
Full marks are only given if all working has been shown
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The YTM is
determined by market forces
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Question 2: Stocks and Stock Valuation
a)
To get the price in 10 years, we use the formula Price10 = Div10 ×
P10 = $5 ×
b)
(3 marks)
=
= $65
...
63
To get today's price, we use the PVIF of
P0 =
to get:
with r = 0
...
33
Question 3: Capital Budgeting Decision Models
(5 marks)
Project A:
NPVA = CF0 + (PMT ×
) = $180,000 + ($38,000 ×
)
= $180,000 + ($38,000 × 5
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20 = $12,114
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18
[
(
)
]
[
(
)
]
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Version A
Project B:
NPVB = CF0 + (PMT ×
) = $160,000 + ($36,000 ×
)
= $160,000 + ($36,000 × 4
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59 = $9,869
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60
EAAB
[
(
)
]
[
(
)
]
George will take Project A not only because its EAA is positive and superior to Project
B's, but because the NPV for Project B is negative
...
Question 4: Risk and Return
(4 marks)
To find the expected return for an equally-weighted portfolio, first find the expected return
in each state via the formula E(rs) = (Σri)/n:
Boom: Expected return = (10% + 20% 9%)/3 = 7
...
00%
Bust: Expected return = (4% + 0% + 14%)/3 = 6
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2) + (7% × 0
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5)
= 6
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5%) × 0
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5%) × 0
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5%) × 0
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50%
Question 5: Cost of Equity Capital
a)
For the dividend growth model,
Re =
b)
(4 marks)
+g=
+ 0
...
00%
For the CAPM,
E(ri) = rf + βi × [E(rm) rf] = 0
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9 × (0
...
04) = 12
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The capital market consists of longer-term financial assets such as stocks and bonds
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Since these costs will be
incurred anyway, they are not part of the decision to accept or reject the project
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OPPORTUNITY COSTS: An opportunity cost is is a benefit forgone due to the selection
of a new project
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EROSION COSTS: Erosion costs occur whenever a new product competes against a
company's already existing products and reduces the sales of these existing products
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SYNERGY GAINS: Synergy gains are gains that result when a new product is
introduced that complements another current product of the firm, thereby increasing the
sales of the current product
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In many cases, the costs
of any increase in working capital will be at least partially offset with termination of the
project when the working capital is "released
...
It is
adjustments to the required rate of return
average
...
WACC is the appropriate required rate of
also the starting point for making subjective
for projects of greater or lesser risk than
appropriate hurdle rate for determining if a
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Version A