Final Exam For Corporate Finance Module - Term 16.2.A Part 1: Short-Answer Questions
Final Exam For Corporate Finance Module - Term 16.2.A Part 1: Short-Answer Questions
A
Part 1: Short-answer questions
1) Pecking order and financial stack theories.
2) All three forms: weak, semi-strong and strong form
3) Both do not consider the size effect of the investment
4) Asked price = 1,015.00
Part 2: Practice Problems
Problem 1
INPUT
Project life 4 years
Fixed assets
Original cost 1,000,000
Depreciation period 5 years
Disposal price 150,000
Sales (TR) in year 1 800,000
Sales growth rate (g) 10%
Expenses to Sales ratio 60%
Working capital at year 0 50,000
WC grows at 5% for the next 2 years and then remain constant
T 25%
k 14.00%
OUTPUT
Year 0 1 2 3 4
WC 50,000 52,500 55,125 55,125 0
NFA 1,000,000 800,000 600,000 400,000 0
Investment 1,050,000 852,500 655,125 455,125 0
Sales 800,000 880,000 968,000 1,064,800
Sales of fixed assets 150,000
- Expenses 480,000 528,000 580,800 638,880
- D&A 200,000 200,000 200,000 200,000
- Cost of sales of fixed assets 200,000
EBIT 0 -480,000 352,000 387,200 425,920
EBIT(1-T) 0 -360,000 264,000 290,400 319,440
-∆WC 50,000 2,500 2,625 0 -55,125
-∆NFA 1,000,000 -200,000 -200,000 -200,000 -400,000
FCF -1,050,000 -162,500 461,375 490,400 774,565
k 14.00% 14.00% 14.00% 14.00%
PV 1,002,080 1,304,871 1,026,178 679,443 0
NPV 19,136 -47,920
PI 1.0182
IRR 14.79%
Amount to recover 1,050,000 1,212,500 751,125 260,725 0
PB period (years) 3.19 years
NPV>0 => Accept the project
Problem 2
a)
Scenario Probability RX RY RMarket Dev(X) Dev(Y) Dev(M)
Recession 0.2 -0.08 -0.14 -0.02 -26.40% -38.40% -13.60%
Boom 0.8 0.25 0.34 0.15 6.60% 9.60% 3.40%
E[R] 18.40% 24.40% 11.60%
Variance 1.7424% 3.6864% 0.4624%
Cov(RX,RM) & Cov(RY,RM) 0.8976% 1.3056%
Beta 1.94 2.82
b)
Portfolio P [50%X and 50%Y] 50% 50%
E[R] 21.400%
Cov(RAX,RY) 2.5344%
Variance 2.6244%
SD 16.20%
c)
X Y P
E[R] 10% 24.40% 21.40%
SD 13.2000% 19.2000% 16.2000%
SD per E[R] 132.00% 78.69% 75.70%
Stock X shows the lowest risk per return and, hence, should be the best choice.
The portfolio does not have significantly lower risk since X and Y do not have a negative covariance.