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Ques.1 Attempt ALL multiple choice question (1 x 5 = 5)1. Consider a corporate bond with a $1000 face value, 10% coupon with semiannual couponpayments, 5 years until maturity, and currently is selling for (has a cash price of)$1,113.80. The next coupon payment will be made in 63 days and there are 182 days inthe current coupon period. The clean price for this bond is closest to:a. $1146.50b. $1065.70c. $1113.80d. $1081.102. Which of the following costs would you consider when making a capital budgetingdecision?a. Sunk costb. Opportunity costc. Interest expensed. Fixed overhead cost3. Which of the following statements is FALSE?a. In general, the difference between the cost of capital and the IRR is the maximumamount of estimation error in the cost of capital estimate that can exist withoutaltering the original decision.b. The IRR can provide information on how sensitive your analysis is to errors in theestimate of your cost of capital.c. If you are unsure of your cost of capital estimate, it is important to determine howsensitive your analysis is to errors in this estimate.d. If the cost of capital estimate is more than the IRR, the NPV will be positive.4. Which of the following statements is FALSE?a. If investors have homogeneous expectations, then each investor will identify the sameportfolio as having the highest Sharpe ratio in the economy.b. Homogeneous expectations are when all investors have the same estimatesconcerning future investments and returns.c. There are many investors in the world, and each must have identical estimates of thevolatilities, correlations, and expected returns of the available securities.d. The combined portfolio of risky securities of all investors must equal the efficientportfolio.Page 2 of 35. Which of the following statements is false regarding profitable and unprofitable growth?a. If a firm wants to increase its share price, it must cut its dividend and invest more.b. If the firm retains more earnings, it will be able to pay out less of those earnings,which means that the firm will have to reduce its dividend.c. A firm can increase its growth rate by retaining more of its earnings.d. Cutting the firms dividend to increase investment will raise the stock price if, andonly if, the new investments have a positive NPV.______________________________________________________________________________Section B (7 marks)Ques. 2 Describe the different mechanisms available to a firm to use to repurchase shares (2 marks)Ques. 3 KMS Corporation has assets with a market value of $500 million, $50 million of whichare cash. It has debt of $200 million, and 10 million shares outstanding. Assume perfectcapital markets.a. What is its current stock price?b. If KMS distributes $50 million as a dividend, what will its share price be after thedividend is paid?c. If instead, KMS distributes $50 million as a share repurchase, what will its share pricebe once the shares are repurchased?d. What will its new market debt-equity ratio be after either transaction?(2 marks)Ques. 4 Acort Industries owns assets that will have an 80% probability of having a market valueof $50 million in one year. There is a 20% chance that the assets will be worth only $20million. The current risk-free rate is 5%, and Acorts assets have a cost of capital of 10%.a. If Acort is unlevered, what is the current market value of its equity?b. Suppose instead that Acort has debt with a face value of $20 million due in one year.According to MM, what is the value of Acorts equity in this case?c. What is the expected return of Acorts equity without leverage? What is the expectedreturn of Acorts equity with leverage?d. What is the lowest possible realized return of Acorts equity with and without leverage?(2 marks)Ques. 5 Sensitivity analysis: Describe the circumstances under which sensitivity analysis mightbe a reasonable basis for determining changes to a firms EBIT or FCF.(1 marks)Page 3 of 3Section C (8 marks)Attempt both the questions (2 x 4 = 8 marks)Ques. 6 From the following you are instructed to prepare a statement of Cash Flow by indirectmethod showing all three different activities of cash flow statement.(4 marks)Ques. 7 Procter & Gamble will pay an annual dividend of $0.65 one year from now. Analystsexpect this dividend to grow at 12% per year thereafter until the fifth year. After then,growth will level off at 2% per year. According to the dividend-discount model, what isthe value of a share of Procter & Gamble stock if the firms equity cost of capital is 8%?(4 marks)

Quiz - FINA 321 Business Finance Last Date of Submission - 24th April 2016 Section A (5 marks) Ques.1 Attempt ALL multiple choice question (1 x 5 = 5) 1. Consider a corporate bond with a $1000 face value, 10% coupon with semiannual coupon payments, 5 years until maturity, and currently is selling for (has a cash price of) $1,113.80. The next coupon payment will be made in 63 days and there are 182 days in the current coupon period. The clean price for this bond is closest to: a. $1146.50 b. $1065.70 c. $1113.80 d. $1081.10 2. Which of the following costs would you consider when making a capital budgeting decision? a. Sunk cost b. Opportunity cost c. Interest expense d. Fixed overhead cost 3. Which of the following statements is FALSE? a. In general, the difference between the cost of capital and the IRR is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision. b. The IRR can provide information on how sensitive your analysis is to errors in the estimate of your cost of capital. c. If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate. d. If the cost of capital estimate is more than the IRR, the NPV will be positive. 4. Which of the following statements is FALSE? a. If investors have homogeneous expectations, then each investor will identify the same portfolio as having the highest Sharpe ratio in the economy. b. Homogeneous expectations are when all investors have the same estimates concerning future investments and returns. c. There are many investors in the world, and each must have identical estimates of the volatilities, correlations, and expected returns of the available securities. d. The combined portfolio of risky securities of all investors must equal the efficient portfolio. Page 1 of 3 5. Which of the following statements is false regarding profitable and unprofitable growth? a. If a firm wants to increase its share price, it must cut its dividend and invest more. b. If the firm retains more earnings, it will be able to pay out less of those earnings, which means that the firm will have to reduce its dividend. c. A firm can increase its growth rate by retaining more of its earnings. d. Cutting the firm's dividend to increase investment will raise the stock price if, and only if, the new investments have a positive NPV. ______________________________________________________________________________ Section B (7 marks) Ques. 2 Describe the different mechanisms available to a firm to use to repurchase shares (2 marks) Ques. 3 KMS Corporation has assets with a market value of $500 million, $50 million of which are cash. It has debt of $200 million, and 10 million shares outstanding. Assume perfect capital markets. a. What is its current stock price? b. If KMS distributes $50 million as a dividend, what will its share price be after the dividend is paid? c. If instead, KMS distributes $50 million as a share repurchase, what will its share price be once the shares are repurchased? d. What will its new market debt-equity ratio be after either transaction? (2 marks) Ques. 4 Acort Industries owns assets that will have an 80% probability of having a market value of $50 million in one year. There is a 20% chance that the assets will be worth only $20 million. The current risk-free rate is 5%, and Acort's assets have a cost of capital of 10%. a. If Acort is unlevered, what is the current market value of its equity? b. Suppose instead that Acort has debt with a face value of $20 million due in one year. According to MM, what is the value of Acort's equity in this case? c. What is the expected return of Acort's equity without leverage? What is the expected return of Acort's equity with leverage? d. What is the lowest possible realized return of Acort's equity with and without leverage? (2 marks) Ques. 5 Sensitivity analysis: Describe the circumstances under which sensitivity analysis might be a reasonable basis for determining changes to a firm's EBIT or FCF. (1 marks) Page 2 of 3 Section C (8 marks) Attempt both the questions (2 x 4 = 8 marks) Ques. 6 From the following you are instructed to prepare a statement of Cash Flow by indirect method showing all three different activities of cash flow statement. (4 marks) Ques. 7 Procter & Gamble will pay an annual dividend of $0.65 one year from now. Analysts expect this dividend to grow at 12% per year thereafter until the fifth year. After then, growth will level off at 2% per year. According to the dividend-discount model, what is the value of a share of Procter & Gamble stock if the firm's equity cost of capital is 8%? (4 marks) Page 3 of 3