Exam

Question 1

Asset Beta

Answer 1

Equity Beta * E / (E+D)

Question 2

Equity Beta

Answer 2

Asset Beta * (E+D) / E

Question 3

Asset Cost of Capital

Answer 3

Rfr + Asset B (risk premium)

Question 4

Equity Cost of Capital

Answer 4

Rfr + Equity B (risk premium)

Question 5

beta for company with 3 divisions

Answer 5

(1/3 * beta) + (1/3 * beta) + (1/3 * beta)

Question 6

market efficiency implies

Answer 6

any new info that affects a firm will be incorporated into market price of security

Question 7

market is efficient if

Answer 7

price reflects all relevant and available information

Question 8

weak market efficiency

Answer 8

share prices reflect info in historic share prices - excess returns made

Question 9

semi strong market efficiency

Answer 9

share prices reflect all publicly available info - excess return mades using insider info

Question 10

strong market efficiency

Answer 10

share prices reflect all info - no excess returns made

Question 11

implications for managers

Answer 11

market values the firm and little benefit in attempting to forecast share price movements

Question 12

money market hedge

Answer 12

companies use appropriate money market transactions at current spot rate to lock into exchange rate

Question 13

matching

Answer 13

company selling goods in a foreign currency should try to use raw material importers using the same currency

Question 14

leading and lagging

Answer 14

involves companies settling accounts in foreign currencies at beginning or end according to predictions

Question 15

various derivatives

Answer 15

most common derivatives are options and future contracts

Question 16

forward exchange contract

Answer 16

allows companies to fix future exch rates in advance on foreign currency

Question 17

reduction in receivables

Answer 17

current rec - new rec

Question 18

financing cost

Answer 18

overdraft * reduction

Question 19

discounted net benefit

Answer 19

financing cost + bad debt + admin exp - cost of discount

Question 20

factoring net benefit

Answer 20

financing cost + bad debt + admin exp - (increase finance + annual fee)

Question 21

increase finance

Answer 21

reduction * % * (interest - overdraft)

Question 22

annual fee

Answer 22

% * trade sale

Question 23

bulk

Answer 23

annual cost + order cost + holding cost - bulk purchase discount

Question 24

yearly order

Answer 24

units/order size

Question 25

EOQ

Answer 25

_/`2* units * order cost/holding

Question 26

order cost

Answer 26

yearly orders * £

Question 27

holding cost

Answer 27

% * order size /2

Question 28

NPV 5 working out

Answer 28

inflated sales, inflated costs, capital allowances, working capital, real terms

Question 29

Nominal NPV

Answer 29

inflated revenue/ tax / CA/ Incremental WC/ net cf/ discount

Question 30

inflated sales + cost

Answer 30

sales / cost * discount

Question 31

Capital Allowance

Answer 31

25% of investment, taken away

Question 32

working capital

Answer 32

difference between 10% of inflated sales

Question 33

real terms wc

Answer 33

difference between 10% of sales

Question 34

overdraft benefits

Answer 34

arranged on short notice and flexible

Question 35

overdraft drawbacks

Answer 35

high interest rates, payable on demand

Question 36

factoring benefits

Answer 36

prompt payments, saving on admin costs, financing growth through sales

Question 37

factoring drawbacks

Answer 37

high costs, less control

Question 38

long term finance benefits

Answer 38

not repayable on demand

Question 39

M and M however stock price is affected by

Answer 39

taxes and bankruptcy

Question 40

TERP

Answer 40

MV in use+Proceeds of new/total shares after

Question 41

value of old share right

Answer 41

TERP- New share price / no. of old shares

Question 42

M and M assumes

Answer 42

no transaction costs, no issues and securities are efficiently prices

Question 43

M and M rational investors

Answer 43

are indifferent to receiving capital gains or dividends on their shares

Question 44

m and m maximise

Answer 44

wants a business to maximise its market value by adopting an optimal investment policy

Question 45

optional investment policy requires

Answer 45

company to invest in all projects with positive NPV

Question 46

m and m unrealistic assumptios

Answer 46

info being available (its not) issuing securities do incur losses

Question 47

m and m argue share valuation is

Answer 47

a function of level of corporate earnings rather than earnings paid out as dividends

Question 48

receivables

Answer 48

amount * days/365