kewangan - jawapan ulangkaji test

8/9/2019 Kewangan - Jawapan Ulangkaji Test

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Q1. What are the two major decisions made by financial managers?

(1) the investment, or capital budgeting, decision (how much to invest and which real assets to invest

in)

(2) the financing decision (how to raise the necessary cash.)

Q2. How does the expected return and risk from investment differ between a bondholder and a

shareholder?

A bondholder has a contract for specific cash flows at specific dates with a contractual mechanism for

dealing with late or missed payments. Payments to bondholders must be made before shareholders.

Consequently, the risk and expected return to a bondholder of a particular company is less than that

of the companys shareholders. Stockholders are residual claimants meaning they get what is left

over after the company has met its other financial obligations. Their cash flows are less certain, may

be non-existent, and they have no specific contractual arrangement to recover their investment.

Therefore, the added risk borne by shareholders is directly related to their expected return.

Q3. How do corporations ensure that managers and stockholders interests coincide?

Conflicts of interest between managers and stockholders can lead to agency problems. These

problems are kept in check by compensation plans that link the well being of employees to that of the

firm; by monitoring of management by the board of directors, security holders, and creditors; and by

the threat of takeover.

Q4. What are the differences between the bonds coupon rate, current yield, and yield to maturity?A bond is a long term debt of a government or corporation. When you own a bond, you receive a

fixed interest payment each year until the bond matures. This payment is known as the coupon. The

coupon rate is the annual coupon payment expressed as a fraction of the bonds face value. At

maturity the bonds face value is repaid. In the United States most bonds have a face value of

$1,000. The current yield is the annual coupon payment expressed as a fraction of the bonds price.

The yield to maturity measures the average rate of return to an investor who purchases the bond

and holds it until maturity, accounting for coupon income as well as the difference between purchase

price and face value.

Q5. Why do investors pay attention to bond ratings and demand a higher interest rate for bonds with

low ratings?Investors demand higher promised yields if there is a high probability that the borrower will run into

trouble and default. Credit risk implies that the promised yield to maturity on the bond is higher than

the expected yield. The additional yield investors require for bearing credit risk is called the default

premium. Bond ratings measure the bonds credit risk.

Q6.How do changes in working capital affect project cash flows?


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Increases in net working capital such as accounts receivable or inventory are investments, and

therefore use cash- that is, they reduce the net cash flow provided by the project in that period. When

working capital is run down, cash is freed up, so cash flow increases.

SECTION B [50 MARKS]

Q1.

(a) NPVA = -100 + 30 (PVIF2%,1) + 50(PVIF2%,2) + 70(PVIF2%,3)

= -100 + 30(0,9804) + 50(0.9612) + 70(0.9423)

= -100 + 29.41 + 48.06 + 65.96

= 43.43 (2m)

NPVB = -100 + 49(PVIFA2%,3)

= -100 + 49(2.8839)= -100 + 141.31

= 41.31 (2m)

if r=2%, choose A. (2m)

(b) NPVA = -100 + 30(PVIF12%,1) + 50(PVIF12%,2) + 70(PVIF12%,3)

= -100 + 30(0.8929) + 50(0.7972) + 70(0.7118)

= -100 + 26.79 + 39.86 + 49.83

= -100 + 116.48

= 16.48 (2m)

NPVB = -100 + 49(PVIFA12%,3)

= -100 + 49(2.4018)

= -100 + 117.69

= 17.69 (2m)

if r = 12%, choose B (2m)

(c) Change in cost of capital (2m)

[14M]

Q2. (a)

Project Payback A 3 (2m)

B 2(2m)

C 3 (2m)

(b) Only B (2m)

(c) All three projects (2m)


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(d) False (2m)

[14M]

kewangan - jawapan ulangkaji test

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