2 hours (plus 10 minutes reading time) 10 multiple choice and 5 short answer questions

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1 SEAT NUMBER:. ROOM:... This question paper must be returned. Candidates are not permitted to remove any part of it from the examination room. FAMILY NAME:.... OTHER NAMES: STUDENT NUMBER: FORMAL EXAMINATION PERIOD: SESSION 2, NOVEMBER 2016 Unit Code: Unit Name: Duration of Exam (including reading time if applicable): Total No. of Questions: Total No. of Pages (including this cover sheet): ACST101 Finance 1A 2 hours (plus 10 minutes reading time) 10 multiple choice and 5 short answer questions 9 GENERAL INSTRUCTIONS TO STUDENTS: Students are required to follow directions given by the Final Examination Supervisor and must refrain from communicating in any way with another student once they have entered the final examination venue. Students may not write or mark the exam materials in any way during reading time. Students may only access authorised materials during this examination. A list of authorised material is available on this cover sheet. All watches must be removed and placed at the top of the exam desk and must remain there for the duration of the exam. All alarms, notifications and alerts must be switched off. Students are not permitted to leave a final examination venue during the last 15 minutes of the examination. If it is alleged you have breached these rules at any time during the examination, the matter may be reported to a University Discipline Committee for determination. EXAMINATION INSTRUCTIONS: 1. All questions must be answered. 2. There are a total of 70 marks available: Part A (20 marks): Ten multiple choice questions (2 marks each). Answers to these questions must be recorded on a red-coloured General Purpose Answer Sheet which will be read by optical scanner. Use 2B lead pencils. Please enter your student number and name on this sheet. Part B (50 marks): 5 short answer questions. Marks for each question, or part of a question, are given in parentheses. Write your answers in the spaces provided. Show all workings. 3. Illegible handwriting risks loss of marks. AIDS AND MATERIALS PERMITTED/NOT PERMITTED: Dictionaries: Calculators: Other: No dictionaries permitted. A non-programmable calculator (no text retrieval capacity) is permitted. Financial calculators may be used. Closed book with specified materials permitted: One A4 reference sheet of material printed (handwritten and/or typed) on both sides is permitted. To be collected with exam paper. Part A Part B TOTAL Problem Multiple TOTAL A+B Choice Value Mark

2 PART A MULTIPLE CHOICE (20 marks 2 marks each question) (Write answers on the Red General Purpose Answer Sheet) Use the following information to answer Questions 1 to 3 CSL Limited wants to raise $100million by issuing 7-year bonds with a coupon rate of 7% p.a. paid semi-annually. The face value of each bond is $1,000 and the required yield-to-maturity is 5.6% p.a. 1. The value of each bond at the time of issue is closest to: A. $1, B. $1, C. $1, D. $1, The number of bonds that CSL will be required to issue is closest to: A. 100,000 B. 92,579 C. 92,653 D. 92, The effective annual yield (EAY) on the bonds is closest to: A. 7.00% B. 5.60% C. 5.68% D. 7.12% Use the following information to answer questions 4 and 5 Consider the following probability distribution of possible returns to a project over the next year: Probability Return 25% -20% 10% -10% 65% 10% 4. The expected return over the next year is closest to: A. 0.50% B % C % D. 0.00% 5. The standard deviation of returns is closest to: A. 20.0% B. 24.9% C. 13.2% D. 10.0% 2

3 Use the following information to answer questions 6 to 9 Community Bank Ltd issues $414 million of shares in an initial public offering (IPO) at an offer price of $5.00 underwritten at $4.50 per share. Legal fees and registration costs associated with the IPO are $560,000. The company s share price increases 12% on the first day of trading on the stock exchange. Assume the issue was fully subscribed. 6. The amount the underwriter receives as its underwriting spread is closest to: A. $41.4 million B. $46 million C. $20.7 million D. $560, The total cost of the IPO to the company is closest to: A. $560,000 B. $46 million C. $41.4 million D. $91.64 million 8. The number of shares issued was closest to: A million B. 92 million C million D million 9. The IPO under-pricing represents: A. A cost to the pre-ipo shareholders of the issuing company B. A benefit to the original pre-ipo shareholders of Community Bank Ltd C. A cost to the investors who purchased shares in the IPO D. Both B and C above 10. Which of the following decisions involves a mutually-exclusive project? A. The decision to either build a public car park or a sporting complex on a vacant block of land in Ryde. B. The decision to build a public car park to service a proposed sporting complex development that the Ryde council is considering. C. The decision to build a sporting complex in Ryde and to build a public car park four kilometres away at Concord. D. Both A and C above 3

4 PART B SHORT ANSWER QUESTIONS (50 marks) (Write your answers in the space provided. Show all workings.) Question 1 (10 marks) a) Refer to the below excel spreadsheet image which shows the amortisation schedule for a 5-year $100,000 loan. Provide one detailed formula that could be entered in cell D4 to determine the amount of the repayment. You must reference the relevant spreadsheet cells within the formula (rather than just using the numerical values). (3 marks) b) Refer to the excel diagram in a) above. Cell C4 contains the following formula for the annual interest: =B4*C2 If the formula was to be copied from C4 to the cells C5 to C13, show how the equation must be restated (prior to copying it). (3 mark) c) In excel, the formula =-PV(rate,nper,pmt,[fv],[type]) could be used to determine the price of a 5-year bond with a face value of $1,000 which has a coupon rate of 7%p.a. paid semiannually, selling at a 6.5%p.a yield-to-maturity. Indicate below, the values that you could use to fill the formula. (2 mark) = -PV(,, 35,, ) 4

5 d) Describe what is meant by a loan amortisation schedule. (2 marks) Question 2 (10 marks) SHARES a) Explain two problems associated with the dividend growth rate used in the constant growth Dividend Discount Model. (5 marks) b) LJ Ltd has just paid a dividend of 47 cents per share. Analysts expect the dividend will grow by 5% p.a. for the next 3 years, then stabilise to a 2% p.a. growth rate thereafter, forever. Shareholders require a 12% p.a. return. Calculate the current value of a share in LJ Ltd. (5 marks) 5

6 Question 3 (10 marks) A project involves an initial cash outlay of $101,000 and is expected to generate annual cash flows of $41,000 for 6 years commencing in exactly two years time. The appropriate discount rate is 12%p.a (EAR). a) Calculate the payback period (in years to 2 decimal points). (3 marks) b) Calculate the net present value of the project. (4 marks) c) Is the Internal Rate of Return (IRR) of the project greater or less than 12%p.a.? Explain why. (3 marks) Greater or Less than 12% p.a.(circle one) GREATER / LESS Reason 6

7 Question 4 (11 marks) Mary and Jim borrowed $4,200 at 5.9%p.a. compounding monthly with instalments each month-end over 5 years. a) Calculate the level monthly instalment. (3 marks) b) Calculate the amount of loan outstanding after two years (immediately after the 24 th payment). (4 marks) c) Assume that Mary and Jim repay the loan in full after two years with a lump sum payment based on c). Describe the steps used to calculate the total interest paid on the loan. (calculations are not required) (4 marks) 7

8 Question 5 (9 marks) a) Sub-prime mortgages contributed to the Global Financial Crisis. What are sub-prime mortgages? (3 marks) b) Explain three reasons why a company may choose to borrow through from a commercial bank rather than sell debt securities direct in public markets. (6 marks) [End of Paper] 8

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