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SAMPLE SEMESTER TEST
BAFI1100 FINANCIAL DECISION MAKING
DATE:
TIME ALLOWED: 90 minutes (no reading time)
INSTRUCTIONS:
 This is an CLOSED BOOK TEST
 This test represents 30% of the assessment in this subject.
 All answers are to be made on the answer sheet.
 The use of a calculator is permitted.
Today the financial manager’s major concern is:
 managing and controlling the firm’s financial operations.
 assessing the condition and performance of other firms.
 constantly monitoring the firm’s value.
 raising capital.
 Consider the following equally likely project outcomes:
Profit  
X  Y  
Pessimistic prediction  $ 0  $500 
Expected outcome  $ 500  $500 
Optimistic prediction  $1 000  $500 
 Project Y has less uncertainty than Project X.
 Project X has more variability than Project Y.
 a and b.
 Since Projects X and Y have the same expected outcomes of $500, investors will view them as identical in value.
 Maximising shareholder wealth means maximizing:
 total market values of the firm’s ordinary shares
 value of the firm’s assets
 amount of the firm’s cash
 value of firm’s investments
 Under the concept of efficient capital markets:
 the price adjustment of new information is slow, allowing some investors to earn abnormal profits
 the price adjustment needs to be correct
 individuals in the market are assumed to act dependently
 the current share price is the best estimate of the firm’s true value
 Which of the following is a benefit provided by the existence of financial markets?
 standardisation of asset pricing models
 providing households with real assets
 helping businesses raise new capital
 keeping short term bond returns below 8%
 Savings are transferred to the business firms in need of cash by:
 a direct transfer of funds whereby the business sells its securities directly to savers
 an indirect transfer using banks
 an indirect transfer through a financial intermediary such as a superannuation fund
 all of the above
 Financial claims are also known as:
 financial assets.
 financial instruments.
 financial securities.
 all of the above.
 Which of the following are not financial intermediaries?
 Banks.
 Stockbrokers.
 Superannuation funds.
 Trust funds.
 If you put $200 in a savings account at the end of each year for 10 years and then allow the account to compound for an additional 10 years, how much will be in the account at the end of the 20th year? Assume that the account earns 10% per annum and round to the nearest $100.
 $8 300
 $9 100
 $8 900
 $9 700
 How much money must you pay into an account at the beginning of each of 20 years in order to have $10 000 at the end of the 20th year? Assume that the account pays 12% per annum and round to the nearest $1.
 $1 195
 $111
 $124
 $139
 You want to buy a one way ticket to Birdsville. The bus ticket costs $119 but you only have $80. If you put the money in an account that pays 12% per annum interest compounded monthly, how many months must you wait until you have $119 (round to nearest month)?
 36 months
 38 months
 40 months
 48 months
 If you have $20 000 in an account earning 8% annually, what constant amount could you withdraw each year and have nothing remaining at the end of 5 years?
 $3 525.62
 $5 008.77
 $3 408.88
 $2 465.78
 You want to travel to Europe to visit relatives when you graduate three years from now. The trip is expected to cost a total of $10 000 at that time. Your parents have deposited $5 000 for you in an account paying 6% interest annually, maturing three years from now. Aunt Hilda has agreed to finance the balance. If you are going to put Aunt Hilda’s gift in an investment earning 10% over the next three years, how much must she deposit now, so you can visit your relatives at the end of three years?
 $3 345
 $5 801
 $3 757
 $3 039
 What is the value on 1/1/07 of the following cash flows? Use a 10% discount rate and round to the nearest $10.
Date  Amount 
01.01.09  $100 
01.01.10  $200 
01.01.11  $100 
01.01.12  $100 
01.01.13  $100 
 $490
 $460
 $420
 $450
 Slick Company bonds have a coupon rate of 12%, paid semiannually, a face value of $1 000, and mature at the end of 20 years. What is the current price on this bond if its yield to maturity is 10%?
 $850
 $1 172
 $608
 $1 133
 Consider the following two questions: What is the present value of $100 to be received in 10 years if the required rate of return is 17%? How much would I have to invest now in order to receive $100 in 10 years, given an interest rate of 17%? Is the answer to these two questions:
a. The same 
b. The answer to the second question is higher 
c. The answer to the first question is higher 
d. The answer is dependent on other factors 
 According to the Fisher effect, if the nominal interest rate is 8 percent and the inflation rate is 3 percent, what is the real rate of interest?
 5%
 4.85%
 5.15%
 8%
 The risk premium would be greater for an investment in oil and gas exploration in unproven fields than an investment in preference shares because:
 oil and gas exploration investments have a greater variability in possible returns.
 the preference shares are more liquid.
 the inflation rate would vary more with oil and gas exploration investments.
 both a and b.
 You are considering investing in a project with the following possible outcomes:
State  Probability ofOccurrence  InvestmentReturns 
State 1: Economic Boom  15%  16% 
State 2: Economic Growth  45%  12% 
State 3: Economic Decline  25%  5% 
State 4: Depression  15%   5% 
Calculate the expected rate of return and standard deviation of returns for this investment.
 9.8%, 7.0%
 7%, 43.6%
 8.3%, 6.6%
 8.3%, 16.1%
 You are planning to retire in 40 years. Currently, the typical house that you plan to purchase costs $300,000, but you expect inflation to increase the price of the house at a rate of 5 percent over the next 40 years. In order to buy the house upon retirement, how much must you save each year in equal annual endofyear deposits if you can earn 10 percent annually?
 $4,500.
 $5,772
 $14,750
 $4,772
 You hold a portfolio with the following securities:
Security  % ofPortfolio  Beta  Return 
X  20%  1.35  14% 
Y  35%  0.95  10% 
Z  45%  0.75  8% 
Compute the expected return and beta for the portfolio.
 10.67%, 1.02
 9.9%, 1.02
 34.4%, 0.94
 9.9%, 0.94
 Beginning with an investment in one company’s securities, as we add securities of other companies to our portfolio, which type of risk declines?
 Systematic risk
 Market risk
 Nondiversifiable risk
 Firmspecific risk
 You are considering investing in Hardie Products Ltd shares. Which of the following are examples of diversifiable risk?
 Risk resulting from possibility of a stock market crash.
 Risk resulting from uncertainty regarding a possible strike against Hardie.
III. Risk resulting from an expensive recall of a Hardie product.
 Risk resulting from interest rates decreasing.
 I only
 I and IV
 I, II, III, IV
 II, III
 The prices for the Guns and Hoses Company for the first quarter of 2003 are given below. Find the holding period return for February.
Month End  Price 
January  $135.28 
February  $119.40 
March  $141.57 
 18.56%
 13.30%
 11.73%
 8.83%
 The capital asset pricing model:
 provides a riskreturn tradeoff in which risk is measured in terms of the market volatility.
 provides a riskreturn tradeoff in which risk is measured in terms of beta.
 measures risk as the coefficient of variation between security and market rates of return.
 depicts the total risk of a security.
 You are thinking of adding one of two investments to an already well diversified portfolio.
Security A 
Security B 

Expected Return  12%  12% 
Standard Deviation  20.9%  10.1% 
Beta  0.8  2.0 
If you are a risk averse investor, which one is the better choice?
 Security A
 Security B
 Either security would be acceptable.
 Cannot be determined with information given.
 All of the following are criticisms of the Capital Asset Pricing Model (CAPM) except:
 different methods of computing beta can give different results.
 the accuracy of the model cannot be determined empirically because we cannot determine the “true” market portfolio.
 it is rather complex and difficult to apply in practice.
 it is based on the notion that the riskiness of any asset can be represented entirely by its relationship to the market (i.e. all relevant risk can be measured by this one variable).
 A $1 000 par value 10year bond with a 10 percent coupon rate recently sold for $900. The yield to maturity:
 is 10 percent.
 is greater than 10 percent.
 is less than 10 percent.
 cannot be determined.
 What is the value of a bond that has a par value of $1 000, a coupon of $80 (annually), and matures in 11 years? Assume a required rate of return of 11 percent, and round your answer to the nearest $10.
 $320
 $500
 $810
 $790
 Cassel Co. debentures pay an annual coupon rate of 10 percent. If the investor’s required rate of return is now 8 percent on these debentures, they will be priced at:
 par value.
 a premium to par value.
 a discount to par value.
 a price that cannot be determined from the information given.
 How are preference shares affected by a decrease in the required rate of return?
 The dividend increases
 The dividend decreases
 The value of a share decreases
 The value of a share increases
 Little Feet Shoe Co. just paid a dividend of $1.65 on its ordinary shares. This company’s dividends are expected to grow at a constant rate of 3 percent per annum indefinitely. If the required rate of return is 11 percent, compute the current value per share.
 $20.63
 $21.24
 $15.00
 $55.00
 XLNT Ltd. just paid a dividend of $2.15 per ordinary share. The dividends of XLNT are expected to grow at about 4 percent per year indefinitely. If the riskfree rate is 5 percent and investors’ risk premium is 7.5 percent, estimate the value of XLNT shares 3 years from now.
 $71.71
 $28.47
 $37.23
 $29.59
 The XYZ Company, whose ordinary shares are currently selling for $40 per share, is expected to pay a $2.00 dividend in the coming year. If investors believe that the expected rate of return on XYZ is 14 percent, what growth rate in dividends must be expected?
 5 percent
 14 percent
 9 percent
 6 percent
 What is the expected rate of return on a bond that pays a coupon rate of 9 percent, has a par value of $1 000, matures in 5 years, and is currently selling for $719? Round your answer to the nearest whole percent, and assume annual coupon payments.
 18%
 13%
 16%
 17%
 The ordinary shareholders are most concerned with:
 the percentage of profits retained.
 the size of the firm’s beginning earnings per share.
 the riskiness of the investment.
 the spread between the return generated on new investments and the investor’s required rate of return.
 LMN Company invests in an asset costing $2 million. This asset is depreciated equally over its fiveyear life, and it will have no residual value at the end of five years. The asset is expected to generate additional revenues of $950 000 each year, however, additional costs are expected to be 45 percent of additional revenues. Given this information, what is the expected accounting profit for LMN Company for years 1 to 5?
 $122 500
 $283 333
 $522 500
 $827 500
 ABC Service can purchase a new assembler for $15 052 that will provide an annual net cash flow of $6 000 per year for five years, after which time the assembler will be sold as junk for $750. Calculate the net present value of the assembler if the required rate of return is 12 percent. Round your answer to the nearest $10.
 $1 050
 $4 560
 $6 600
 $7 000
 Diehard Battery Recyclers is considering a project with the following cash flows:
Initial Outlay = $13 000
Cash Flows: Year 1 = $5 000
Year 2 = $3 000
Year 3 = $9 000
If the appropriate discount rate is 15 percent, compute the NPV of this project.
 $4 000
  $460
 $27 534
 $8 891
 Which of the following capital budgeting decision criteria is the most theoretically correct criterion?
 Net present value
 Internal rate of return
 Accounting rate of return
 Payback period
 Consider a project with the following characteristics:
Year  AccountingProfits  Cash FlowsFrom Operations 
1  $799  $750 
2  $150  $1 000 
3  $200  $1 200 
Initial Outlay  $1 500  
Terminal Cash Flow  $0 
Compute the profitability index if the company’s discount rate is 10 percent.
 15.8
 1.61
 1.81
 0.62
 If the internal rate of return is greater than the required rate of return:
 the present value of all the cash inflows will be greater than the initial outlay.
 the payback will be less than the life of the investment.
 the project will be rejected.
 both a and b.
 If the net present value (NPV) of a project is positive, the project’s internal rate of return (IRR) ____________ the required rate of return.
 must be less than
 must be greater than
 could be greater or less than
 cannot be determined without actual cash flows.
 Given the following annual net cash flows, determine the internal rate of return to the nearest whole percent of a project with an initial outlay of $1 520.
Year  Net Cash Flow 
1  $1 000 
2  $1 500 
3  $500 
 48%
 40%
 32%
 28%
 All of the following are criticisms of the payback period criterion except:
 time value of money is not accounted for.
 returns occurring after the payback period are ignored.
 it deals with accounting profits as opposed to cash flows.
 none of the above; they are all criticisms of the payback period criterion.