FINM7409 Sample Final Exam Semester 2, 2021 Exam information Course code and title FINM7409 Financial Management for Decision Makers Semester Semester 2, 2021 Exam type Online, non-invigilated, end-of-semester examination Exam technology File upload to Blackboard Assignment Exam date and time Refer to your personal exam timetable for the scheduled date and time of this exam. Your examination will begin at the time specified in your personal examination timetable. If commence your examination after this time, the end for your examination does not change. For example, if your examination is schedule for 10am with an end time of 11:40am, even if you commence at 10:30am your end time is still 11:40am. The total time for your examination from the scheduled starting time will be: 2 hours 10 minutes including 10 minutes planning time. . A 15-minute submission period is available for submitting your examination. If your examination is submitted after this period late penalties will be applied unless you can demonstrate that there were problems with the system and/or process that were beyond your control. Exam window You must commence your exam at the time listed in your personalised timetable. You have from the start date/time to the end date/time listed in which you must complete your exam. Permitted materials This is an open book exam – all course materials are permitted. Recommended materials Ensure the following materials are available during the exam: Calculator; bilingual dictionary; phone/camera/scanner Instructions You will need to download the question paper included within the Blackboard Test. Once you have completed the exam, upload the completed exam answers file to the Blackboard assignment submission link. You may choose to either type your response OR hand write and scan-to-pdf your response Who to contact Given the nature of this examination, responding to student queries and/or relaying corrections to exam content during the exam may not be feasible. At the end of the exam there will be a free text box field. Please use this to specify any assumptions you have made in completing the exam and which questions those assumptions relate to. You may also include queries you may have made with FINM7409 Sample Final Exam Semester 2, 2021 respect to a particular question, should you have been able to ‘raise your hand’ in an examination room. If you experience any interruptions to your examination, please collect evidence of the interruption (e.g. photographs, screenshots or emails). If you experience any issues during the examination, contact the Library AskUs service for advice as soon as practicable: Chat: support.my.uq.edu.au/app/chat/chat_launch_lib Phone: +61 7 3506 2615 Email: [email protected] You should also ask for an email documenting the advice provided so you can provide this to the course coordinator immediately at: [email protected] Important exam condition information Academic integrity is a core value of the UQ community and as such the highest standards of academic integrity apply to all examinations, whether undertaken in- person or online. This means: You are permitted to refer only to the allowed resources for this exam, and you must not use any instances of work that has been submitted previously elsewhere. You are not permitted to consult any other person – whether directly, online, or through any other means – about any aspect of this examination during the period that it is available. If it is found that you have given or sought outside assistance with this examination, then that will be deemed to be cheating. If you submit your online exam after the end of your specified planning time, duration, and 15 minutes submission time, the following penalties will be applied to the total mark available for the assessment: Less than 5 minutes – 5% penalty From 5 minutes to less than 15 minutes – 20% penalty More than 15 minutes – 100% penalty These penalties will be applied to all online exams unless there is sufficient evidence of problems with the system and/or process that were beyond your control. Undertaking this online exam deems your commitment to UQ’s academic integrity pledge as summarised in the following declaration: “I certify that I have completed this examination in an honest, fair and trustworthy manner, that my submitted answers are entirely my own work, and that I have neither given nor received any unauthorised assistance on this examination”. FINM7409 Sample Final Exam Semester 2, 2021 Question 1 Your brother (tech-head) insists that depreciation is a source of cash. He cites the fact that depreciation is an ‘add back’ item on the reconciliation of profit to cash flow from operations. Set him straight. Be gentle. Solution: He’s correct that depreciation is an ‘add back’ item on the reconciliation. Depreciation, however, is certainly not a cash flow. It’s added back because the starting point of the reconciliation is profit for the period which has been lowered by a deduction for depreciation expense. Adding back depreciation just gets us back to where we should have been in the first place. Question 2 Lorraine Jackson won a lottery. She will have a choice of receiving $25,000 at the end of each year for the next 30 years, or a lump sum today. If she can earn a return of 10 per cent on any investment she makes, what is the minimum amount she should be willing to accept today as a lump-sum payment Show your workings and round your final answer to nearest hundred dollars Solution: $235,700 Question 3 Jeremy Kohn is planning to invest in a 10-year bond that pays a 12 percent coupon. The current market rate for similar bonds is 9 percent. Assume semi-annual coupon payments. What is the maximum price that should be paid for this bond Show your workings and round to the nearest dollar. Solution: $1,195 Question 4 Aquaman Stock has exhibited a standard deviation in share returns of 0.7, whereas Green Lantern Stock has exhibited a standar
d deviation of 0.8. The correlation coefficient between the share returns is 0.1. What is the standard deviation of a portfolio composed of 70 per cent Aquaman and 30 per cent Green Lantern Show your working and round your final answer to four decimal places. Solution: 0.56676 Question 5 Harvey’s Toymakers is introducing a new line of digital toys, which it expects to grow their earnings at a much faster rate than normal over the next three years. After paying a dividend of $2.00 last year, it does not expect to pay a dividend for the next three years. After that Harvey’s plans to pay a dividend of $4.00 in year 4 and then increase the dividend at a rate of 10 percent in years 5 and 6. What is the present value of the dividends to be paid out over the next six years if the required rate of rate of return is 15 percent Show your workings and round your final answer to two decimal places. Solution: $6.57 FINM7409 Sample Final Exam Semester 2, 2021 Question 6 Sunshine Ltd. is a privately owned business in Brisbane that operates 100 fruit juice bars in Queensland. It achieved strong results last year, with record total sales of AUD 200 million. Its cost of goods sold (COGS) then was 70% and its owners have indicated that going forward, it will be able to maintain this level of COGS for any new shop that it plans to open. The strong results were down in large part to the company’s aggressive marketing efforts. This marketing compaign cost the company a total of AUD 200,000 per year, which is shared equally among all of its juice bars. Currently, with the summer coming soon, Sunshine Ltd. is considering opening a new juice bar on UQ Refectory to cater specifically to UQ students and staff. This investment will cost a total of AUD 1.5 million to establish. Sunshine has estimated that it will be able to achieve the same sales revenue for the new bar and operate this bar for 5 years. Sunshine Ltd. is subject to a 30% corporate tax rate. Sunshine Ltd. has asked you, a finance expert, to analyse this potential project. a) Estimate the after-tax cash flows for the first 5 years of operations for this new juirce bar project. b) If the discount rate is 8.0%, what is the NPV of this project Should Sunshine accept this project Show your workings and round your final answers to nearest dollars. Solutions: a) Year 0 1 – 5 Sales 2,000,000 COGS -1,400,000 Other expenses -2,000 EBIT (Taxable income) 598,000 Tax expenses -179,400 NOPAT 418,600 Year 0 1 – 5 Initial investment -1,500,000 NOPAT 418,600.00 After-tax cash flows -1,500,000 418,600.00 Workings: After-tax cash flows for 5 years of operations: Annual sales revenue = 200,000,000/100 = AUD 2,000,000 Annual COGs = 70%(2,000,000) = AUD 1,400,000 Expenses (marketing campaign that contributes to such sales figures) = 200,000/100 = 2,000 Tax expenses = 598,000(0.3) = 179,400 b) = 1,500,000 + 418,600 1 1.0850.08 = 171,348 > 0 => FINM7409 Sample Final Exam Semester 2, 2021 Question 7 The last four years of returns for a stock are as follows: Year 1 2 3 4 Return -4.4% +27.8% +11.6% +3.9% a. What is the average annual return b. What is the variance of the stock’s returns c. What is the standard deviation of the stock’s returns Show your workings and round your final answers to two decimal places. Solutions: a. Average annual return: = 4.4% + 27.8% + 11.6% + 3.9%4 = 9.73% b. Variance of returns: 2
= ( 0.044 0.0973)2 + (0.278 0.0973)2 + (0.116 0.0973)2 + (0.039
0.0973)2 == 0.01996569 + 0.03265249 + 0.00034969 + 0.00339889 = 0.05637
c. Standard deviation of returns: = 0.05636676(4 1) = 0.1371 = 13.71% Question 8 You are considering how to invest part of your retirement savings. You have decided to put $200,000 into three stocks: 55% of the money in GoldFinger (currently $21/share), 30% of the money in Moosehead (currently $71/share), and the remainder in Venture Associates (currently $4/share). If GoldFinger stock goes up to $44/share, Moosehead stock drops to $69/share, and Venture Associates stock rises to $7 per share. a. What is the new value of the portfolio b. What return did the portfolio earn c. If you don’t buy or sell shares after the price change, what are your new portfolio weights Show your workings and round your final answers to nearest dollars. Solutions: a. = $200,000×0.55$21 = 5,238 = $200,000 × 0.3$71 = 845 = $200,000×0.15$4 = 7,500 The new value of the portfolio is = 5,238 × $44 + 845 × $69 + 7,500 × $7 = $341,277 b. The old value of the portfolio is = 5,238 × $21 + 845 × $71 + 7,500 × $4 = $199,993 FINM7409 Sample Final Exam Semester 2, 2021 The return is = $341,277 $199,993 1 = 0.7064 = 70.64% c. The portfolio weights are the fraction of value invested in each stock. = 5,238 × $44$341,277 = 0.6753 = 67.53% = 845 × $69$341,277 = 0.1708 = 17.08% = 7,500 × $7$341,277 = 0.1538 = 15.38% Question 9 Aluminum maker Alcoa has a beta of about 1.73, whereas Hormel Foods has a beta of 1.68. If the expected excess return of the marker portfolio is 3%, which of these firms has a higher equity cost of capital, and how much higher is it Show your workings and round your final answers to two decimal places. Solutions: = × [] = 1.73 × (3%) = 5.19% = 1.68 × (3%) = 5.04% Alcoa’s cost of capital is higher by 0.15%. Question 10 Under CAPM assumption, security with only diversifiable risk has an expected return that exceeds the risk-free interest rate. Is this statement true or false Explain. You will not be rewarded by only answering “True” or “False” without the correct explanation. Solutions: This statement is false. Under CAPM, risk premium is associated with taking the systematic risk. We can see this from the formula, where beta is the measurement of the level of systematic risk. Diversifiable risk can be diversified away if taking an efficient portfolio. It can also be reduced by investing in a portfolio with more assets that come with low pairwise correlation.