SM 1.32.41 Quizs

SAV
SDC
Swiss-AIT-Vietnam Management Development Programme
c/o HCMC University of Technology, 268 Ly Thuong Kiet, Dist.10, Ho Chi Minh City, Vietnam Tel: (84-8) 865 08 80 Fax: (84-8) 865 08 81 E-mail: SAV@netnam2.org.vn / swissait@hotmail.com
SAV 6
FINANCIAL MANAGEMENT QUIZ 1

Time: 20 minutes
Closed book exam
(Calculations should be briefly noted under each problem)
Problem 1 (20 points)

You want to buy an ordinary annuity that will pay you $4,000 a year for the next 20
years. You expect annual interest rates will be 8 percent over that time period. What is
the maximum price you would be willing to pay for the annuity?

You are considering investing in a zero-coupon bond that sells for $250. At maturity in 16
years it will be redeemed for $1,000. What approximate annual rate of growth does this
represent (to the nearest percent)?

You are considering borrowing $10,000 for 3 years at an annual interest rate of 6%. The
loan agreement calls for 3 equal payments, to be paid at the end of each of the next 3
years. (Payments include both principal and interest.) What is the annual payment that
will fully payable off this loan?

For $1,000 you can purchase a 5-year ordinary annuity that will pay you a yearly
payment of $263.80 for 5 years. What is the compound annual interest rate implied by
this arrangement (to the nearest percent)?

Vietnam National Treasury Board has outstanding a 9% bond issue with a face value of
VND15,000,000 and 10years to maturity. Interest is payable annually. The bonds are
privately held by South Vietnam Steel Corporation. South Vietnam Steel Corporation
wishes to sell the bonds and is negotiating with another party. It estimates that in current
market conditions, the bonds should provide a rate of return of 13%. What price the
bond should South Vietnam Steel Corporation be able to realize on the sale?
Good Luck!!!
SAV
SDC
SAV 6
FINANCIAL MANAGEMENT QUIZ 2a

Time: 20 minutes
Closed book exam
Problem 1 : Stock A is expected to pay a dividend of $5 next year. Thereafter

dividend growth is expected to be 25% a year for 5 years, i.e. until year 6. Following year
6 there would be no further growth in dividends. What should be the current price of the
stock? Assume opportunity cost of capital at 12%.
(25 marks)
Hint: Find the present value of cash flows up to 6 years and the present value of the
perpetuity to be received thereafter.
Problem 2: Stock B is expected to pay a dividend of $5 next year. Thereafter

dividend growth is expected to be 4% a year forever. What should be the current price
of the stock? Assume opportunity cost of capital at 12%. (25 marks)
Problem 3: Stock A is expected to provide a dividend of $12 per share forever. What
should be the current price of the stock? Assume opportunity cost of capital at 10%. (20
marks)
Problem 4: On Stock D dividends in years 1, 2, and 3 would be $2, $4, and $6.
Thereafter the dividend growth is expected to settle down for the long term at 6%. What
should be the current price of the stock? Assume opportunity cost of capital at 10%. (30
marks)
SAV
SDC
SAV 6
FINANCIAL MANAGEMENT QUIZ 2b

Time: 20 minutes
Closed book exam
Problem 1: Stock A is expected to provide a dividend of $10 per share forever. What
should be the current price of the stock? Assume opportunity cost of capital at 10%. ( 20
marks)
Problem 2: On Stock B is expected to pay a dividend of $5 next year. Thereafter the

dividend growth is expected to be 4% a year forever. What should be the current price
of the stock? Assume opportunity cost of capital at 10%. 25 marks
Problem 3: Stock C is expected to pay a dividend of $5 next year. Thereafter

dividend growth is expected to be 20% a year for 5 years, i.e. until year 6. Following year
6 there would be no further growth in dividends. What should be the current price of the
stock? Assume opportunity cost of capital at 10%. 25 marks
Hint: Find the present value of cash flows up to 6 years and the present value of the
perpetuity to be received thereafter.
Problem 4: On Stock D dividends in years 1, 2, and 3 would be $1, $2, and $3.
Thereafter the dividend growth is expected to settle down for the long term at 6%. What
should be the current price of the stock? Assume opportunity cost of capital at 10%. 30
marks
SAV
SDC
SAV 6

Time: 20 minutes
Closed book exam
Problem 1: Consider the following information:
State of Probability Stock A Stock B

Economy of State of Rate of Rate of
Economy Return Return
Boom .10 .25 .18
Good .20 .10 .20
Poor .50 .15 .04
Very Poor .20 -.12 .00
a. If you have a portfolio which is 60% invested in A and the rest in B, what is the
Expected Return on your portfolio? 25 marks
b. What would be the standard deviation on your portfolio? 25 marks

Problem 2:
A stock has a beta of .9, the expected return on the market is 15 %, and the risk free rate
is 7%. What must the expected return on this stock be? 25 marks
Problem 3:
A Stock has a beta of 1.45 and an expected return of 15%. If the risk free rate is 6% and
the market risk premium is 8%, is the stock: 25 marks
Correctly priced
or
Over priced
or
Underpriced?
SAV
SDC
SAV 6

Time: 20 minutes
Closed book exam
Problem 1.
Consider the following information:
State of Probability Stock A Stock B

Economy of State of Rate of Rate of
Economy Return K& Return
Boom .15 .25 .18
Good .25 .10 .20
Poor .40 .15 .04
Very Poor .20 -.12 .00
a. If you have a portfolio which is 60% invested in A and the rest in B, what is the
Expected Return OD. your portfolio? 25 marks
b. What would be the standard deviation on your portfolio? 25 marks

Problem 2:
A stock has a beta of .9, the expected return on the market is 10 %, and the risk free rate
is 7%. What must the expected return on this stock be? 25 marks
Problem 3:
A Stock has a beta of 1.45 and an expected return of 25%. If the risk free rate is 6% and
the market risk premium is 8%, is the stock:
25 marks
Correctly priced
Over priced
or
Underpriced?
SAV
SDC
SAV 6
Time: 20 minutes
Closed book exam
Problem 1 True/False questions (15 points)

a. The expected return on a risk-free security is zero.
b. Since investors generally tend to avoid risk, additional returns must be offered to
entice investors to take on greater risk.
c. The standard deviation of a portfolio is a weighted average of the expected returns of
the securities in that portfolio.
d. The difference between the expected return on a security and the risk-free rate of
return is referred to as risk premium.
e. The higher a stocks beta, the greater the return investors require.

An investor is considering investing in only one of the following securities:
A B C
Expected Return 0.10 0.10 0.15
Standard Deviation 0.05 0.07 0.09
Which of the above projects are most, medium and least risky?
SAV
SDC
SAV 6
Time: 20 minutes
Closed book exam
Problem 1 True/False questions (15 points)

f. Since investors generally tend to avoid risk, additional returns must be offered to
entice investors to take on greater risk.
g. The expected return on a risk-free security is zero.
h. The difference between the expected return on a security and the risk-free rate of
return is referred to as risk premium.
i. The higher a stocks beta, the greater the return investors require.
j. The standard deviation of a portfolio is a weighted average of the expected returns of
the securities in that portfolio.

An investor is considering investing in only one of the following securities:
A B C
Expected Return 0.11 0.11 0.18
Standard Deviation 0.05 0.06 0.09
Which of the above projects are most, medium and least risky?
You have 20 percent of your portfolio invested in Microtuff Corp., 40 percent in House
Depot, 10 percent in First National Bank, and 30 percent in The Unlimited. You know that
the betas for these companies are, respectively, 1.1, 1.3, 0.9 and 1.2. what is your
portfolio beta?

At present, the risk-free rate is 6 percent and the expected return on the market portfolio
is 10 percent. The expected returns for four stocks are given below. On the basis of
these expectations, which stock is overvalued and which undervalued? Why?
Stock Expected return Expected Beta

1. Microtuff Corp. 0.10 1.1
2. House Depot 0.123 1.3
3. First National Bank 0.09 0.9
4. The Unlimited 0.108 1.2
You have 40 percent of your portfolio invested in Microtuff Corp., 30 percent in House
Depot, 20 percent in First National Bank, and 10 percent in The Unlimited. You know that
the betas for these companies are, respectively, 1.2, 1.4, 0.8 and 1.1. what is your
portfolio beta?

At present, the risk-free rate is 5 percent and the expected return on the market portfolio
is 11 percent. The expected returns for four stocks are given below. On the basis of
these expectations, which stock is overvalued and which undervalued? Why?
Stock Expected return Expected Beta

1. Microtuff Corp. 0.20 1.2
2. House Depot 0.125 1.4
3. First National Bank 0.10 0.8
4. The Unlimited 0.116 1.1
SAV
SDC
SAV 6
Time: 20 minutes
Closed book exam

Painz, Inc. rents cars and disposes of them at the end of a year. It currently has a car
which is valued at $7,000 on its books, and has three disposal alternatives. (1) It can
trade in the car and purchase a new one; the new car dealer is offering $11,000 trade-in
value. (2) It can advertise the car for sale to the public at $7,000. (3) It can sell the car to
Rent-a-Bomb for $5,000. If Painz has a 35 percent tax rate, what is the net cash flow
from disposing of the car each way?

The Financial Analysts Journal has offered three following subscription options: 1 year,
$150; or 2 years, $260; or 3 years, $345. What is your optimal strategy when you intend
to be a permanent subscriber, using EAC method? Assum three situations in which real
cost of capital are 0%, 3%, 5%.

A firm is considering two mutually exclusive investment alternatives, both of which cost
$5,000. The firms hurdle rate is 12 percent. The after-tax cash flows associated with
each investment are:
Year Investment A Investment B
1 $2,000 $1,000
2 1,500 1,500
3 1,500 2,000
4 1,000 3,000
For each alternative, calculate the payback period, the net present value, and the
internal rate of return. Which alternative (if any) should be selected?
SAV
SDC
SAV 6
Time: 20 minutes
Closed book exam

Painz, Inc. rents cars and disposes of them at the end of a year. It currently has a car
which is valued at $8,000 on its books, and has three disposal alternatives. (1) It can
trade in the car and purchase a new one; the new car dealer is offering $10,000 trade-in
value. (2) It can advertise the car for sale to the public at $8,000. (3) It can sell the car to
Rent-a-Bomb for $6,000. If Painz has a 35 percent tax rate, what is the net cash flow
from disposing of the car each way?

The Financial Analysts Journal has offered three following subscription options: 1 year,
$150; or 2 years, $260; or 3 years, $345. What is your optimal strategy when you intend
to be a permanent subscriber, using EAC method? Assum three situations in which real
cost of capital are 0%, 2%, 4%.

A firm is considering two mutually exclusive investment alternatives, both of which cost
$6,000. The firms hurdle rate is 11 percent. The after-tax cash flows associated with
each investment are:
Year Investment A Investment B
1 $2,000 $1,000
2 1,500 2,000
3 1,500 3,000
4 1,000 3,000
For each alternative, calculate the payback period, the net present value, and the
internal rate of return. Which alternative (if any) should be selected?
SAV
SDC
SAV 6
Time: 20 minutes
Closed book exam
Problem 1: True/False questions: (15 points)
1. The after tax cost of debt is generally cheaper than other sources of financing.
2. Generally, a firm should try to maximize its overall cost of capital.
3. Managers prefer to finance projects by debt, the reason for this is that for the
company debt is less risky.
4. When computing the overall cost of capital, component costs should be based on the
marginal costs of various sources of financing.
5. Discounting rate of a new project a company intends to invest in could be the same
with the companys cost of capital if the project is assessed to have the same risk as
the company.

Company As stock is currently selling for $45 a share. Last years dividend was $2, the
firms marginal tax rate is 34 percent, and dividends are expected to grow 5 percent
annually. What is the cost of equity?

Virgil Products has a capital structure which contains 40 percent debt and 60 percent
equity based on market values. If the after-tax cost of debt is 8 percent and the cost of
equity is 16 percent, what is the firms after-tax cost of capital?

The required rate of return on the bonds of the EAP Corporation is 12 percent. The firms
beta coefficient is 1.2, the risk-free rate is 8 percent, and the required rate of return on
stocks in general is 14 percent. If the firms marginal tax rate is 40 percent, and it will be
financing projects with a 30-70 debt to equity mix, find its weighted average cost of
capital.
SAV
SDC
SAV 6
Time: 20 minutes
Closed book exam
Problem 1: True/False questions: (15 points)
6. Discounting rate of a new project a company intends to invest in could be the same
with the companys cost of capital if the project is assessed to have the same risk as
the company.
7. The after tax cost of debt is generally cheaper than other sources of financing.
8. Managers prefer to finance projects by debt, the reason for this is that for the
company debt is less risky.
9. When computing the overall cost of capital, component costs should be based on the
marginal costs of various sources of financing.
10. Generally, a firm should try to maximize its overall cost of capital.

Company American Standards has a capital structure which contains 30 percent debt and
70 percent equity based on market values. If the after-tax cost of debt is 7 percent and
the cost of equity is 14 percent, what is the firms after-tax cost of capital?

Company B stock is currently selling for $65 a share. Last years dividend was $3, the
firms marginal tax rate is 36 percent, and dividends are expected to grow 4 percent
annually. What is the cost of equity?

The required rate of return on the bonds of the Celeron Corporation is 13 percent. The
firms beta coefficient is 1.4, the risk-free rate is 9 percent, and the required rate of return
on stocks in general is 15 percent. If the firms marginal tax rate is 35 percent, and it will
be financing projects with a 40-60 debt to equity mix, find its weighted average cost of
capital.

SM 1.32.41 Quizs

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SAV

FINANCIAL MANAGEMENT QUIZ 1

Problem 1 (20 points)

Problem 2 (20 points)

Problem 3 (20 points)

Problem 4 (20 points)

Problem 5 (20 points)

FINANCIAL MANAGEMENT QUIZ 2a

Problem 1 : Stock A is expected to pay a dividend of $5 next year. Thereafter

Problem 2: Stock B is expected to pay a dividend of $5 next year. Thereafter

FINANCIAL MANAGEMENT QUIZ 2b

Problem 2: On Stock B is expected to pay a dividend of $5 next year. Thereafter the

Problem 3: Stock C is expected to pay a dividend of $5 next year. Thereafter

FINANCIAL MANAGEMENT QUIZ 3a

Problem 1: Consider the following information:

State of Probability Stock A Stock B

b. What would be the standard deviation on your portfolio? 25 marks

FINANCIAL MANAGEMENT QUIZ 3b

Consider the following information:

State of Probability Stock A Stock B

b. What would be the standard deviation on your portfolio? 25 marks

Problem 1 True/False questions (15 points)

Problem 2 (30 points)

Problem 1 True/False questions (15 points)

Problem 2 (30 points)

Problem 4 (40 points)

Stock Expected return Expected Beta

Problem 4 (40 points)

Stock Expected return Expected Beta

Problem 1 (15 points)

Problem 2 (35 points)

Problem 3 (50 points)

Problem 1 (15 points)

Problem 2 (35 points)

Problem 3 (50 points)

Problem 1: True/False questions: (15 points)

2. Generally, a firm should try to maximize its overall cost of capital.

Problem 2 (25 points)

Problem 3 (25 points)

Problem 4 (35 points)

Problem 1: True/False questions: (15 points)

Problem 2 (25 points)

Problem 3 (25 points)

Problem 4 (35 points)

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