Practice Questions for Final Exam
1. Bond MC Questions
What is a Par value of a bond?
a. The amount borrowed by the issuer of the bond and returned to the investors when the bond
matures.
b. The overall return earned by the bond investor when the bond matures.
c. The difference between the amount borrowed by the issuer of bond and the amount returned to
investors at maturity.
d. The size of the coupon investors receive on an annual basis.
e. The effective interest rate payed to the investor for every period that the bond is held.
f. The average value of the bond over its life prior to its maturity.
What is the Coupon of a bond?
a. A predetermined fixed interest amount payed periodically by the issuer of the bond to the
current owner.
b. The number of days between the purchase date of the bond until its maturity.
c. The rate of interest that is currently being payed to the bond holder based on its market value.
d. Another term for the duration of a bond portfolio.
e. A measurement of how creditworthy the issuer of the bond is.
f. The difference between the amount borrowed by the issuer of bond and the amount returned to
investors at maturity.
When the price of a bond is above the face value, the bond is said to be?
a. Trading at par
b. Trading at a discount
c. Trading below par
d. Trading at a premium
e. It is not possible for this to happen.
f. Close to default.
2. Equity MC Questions
Which statement is the most correct when shares are trading in an efficient market?
a. Prices change constantly as new information becomes available and is discounted into company’s
market price.
b. The smartest investors have access to information first and therefore are generally more profitable
than their competitors.
c. It is generally accepted that there is no such thing as an efficient market.
d. Prices will always rise on good news and fall on bad news.
e. All profitable companies will pay dividends otherwise their share prices will never rise.
f. Well managed companies will always provide the highest dividend returns for their investors.
What is the most obvious advantage provided to companies by the existence of secondary markets for
Shares.
a. They enable companies to sell their new debt or equity issues at lower funding costs.
b. It provides easy access to speculators who wish to make profits from share trading.
c. Being listed in a secondary market provides a company with name recognition amongst investors
and this helps business.
d. Lenders of funds will be more likely to make loans to ASX listed companies because they can see
their share prices and so value the company quickly.
e. Shareholders including management and staff will be able to buy and sell their holdings more
easily.
f. When calculating WACC it is far easier if the company’s market risk factors are known so that the
equity portion of the calculation is more accurate.
Calculate the Holding Period Return of the following Share investment. Purchase Price $11.50, Sale Price
$15.50, Interim Dividend $$0.40, Final Dividend $0.60. Assume that both dividends were earned during the
holding period and that there are no franking credits attributable.
Worked Answer: (see Wk4 Seminar Notes Pages 5,6,7)
HPR = ((Sale Price – Purchase Price) + Earnings) / Purchase Price
= ((15.50 – 11.50) + (0.40 + 0.60) / 11.50
= (4 + 1) / 11.50
= $5 which is 43.5% of the Purchase Price.
a. $5 or 43.5%
b. $4 or 34.8%
c. $6 or 52.2%
d. $4.40 or 38.3%
e. $4.60 or 40.0%
f. $5 or 32.3%
3. FV of Cashflows
Deepak has made two investments. Use the compound interest formula to calculate the TOTAL future value
of these investments.
(Seminar 2, Slide 18)
FV = PV (1+i)^n
Investment 1: He invests $20,000 for 5 years compounded annually at 3%.
PV= 20,000  i = 0.03 (3%) n = 5 
FV  = 20,000 (1 + 0.03) ^5 = 23,185.48 
Investment 2: He invests $5,000 for 5 years compounded semiannually at 2.5%  
PV = 5,000  i= .025 / 2 (to make it semiannual) n= 10 (6 month periods in 5 years) 
FV  = 5,000 (1+0.0125) ^10 = 5,661.35 
AssignmentTutorOnline
Add Investment 1 and 2 together for a total FV = $28,846.83. Round up to the answer choice below.
a. $28,847
b. $28,982
c. $28,750
d. $28,285
e. $28,800
f. $28,973
Sanjay has made two investments. Use the compound interest formula to calculate the TOTAL future value
of these investments.
(Seminar 2, Slide 18)
FV = PV (1+i)^n
Investment 1: He invests $10,000 for 5 years compounded annually at 11%.
PV = 10,000 i = 0.11 (11%) n = 5
FV  = 10,000 (1 + 0.11) ^ 5 = $16,850.58 
Investment 2: He invests $3,000 for 5 years compounded semiannually at 10.5%
PV = 3,000  i = 0.105 / 2 (to make it semiannual) n = 10 (6 month periods in 5 years) 
FV  = 3,000 (1+ 0.0525)^10 = $5004.29 
Add Investment 1 and 2 together for a total FV = $21,854.87.
Round up to the answer choice below.
a. $21,855
b. $21,685
c. $21,905
d. $21,965
e. $21,790
f. $21,805
Prakul has made two investments. Use the compound interest formula to calculate the TOTAL future value
of these investments.
(Seminar 2, Slide 18)
FV = PV (1+i)^n
Investment 1: He invests $12,000 for 5 years compounded annually at 6%.
PV = 12,000  i = 0.06 (6%)  n = 5 
FV  = 12,000 (1+0.06) ^ 5 = $16,058.71 

Investment 2: He invests $4,000 for 5 years compounded semiannually at 5.5%  
PV = 4,000  i = 0.055 / 2 (to make it semiannual) n = 10 (6 month periods in 5 years)  
FV  = 4,000 (1+0.0) ^ 10 = $5,246.60 
Add Investment 1 and 2 together for a total FV = $21,305.31
Round to the answer choice below.
g. $21,305
h. $21,365
i. $21,255
j. $21,395
k. $21,415
l. $21,225
4. NPV Calculation questions.
Indira will receive three payments from the sale of her business over the next three months.
Calculate the Net Present Value (NPV) of these payments. Assume that we are using a 365 day basis (365
days in the year) for calculations. The interest rates applicable at the moment are 1mth 7% per annum,
2mth 8% per annum, and 3mth 8.5% per annum.
(Seminar 2, Slide 23, 24)
PV = FV / (1+i)
Payment 1 in 30 days is $10,000.
FV = 10,000  i = (30/365)*0.07 = 0.00575….. 
PV  = 10,000 / (1+0.00575….) = $9,942.79 
Payment in 60 days is 12,000.
FV = 12,000  i = (60/365)*0.08 = 0.01315…. 
PV  = 12,000 / (1+0.01315…) = $11,844.24 
Payment in 90 days is $20,000.
FV = 20,000  i = (90/365)*0.085 = 0.02095…. 
PV  = 20,000 / (1+0.02095…) = $19,589.42 
Add the PV of the three payments together for a total PV = $41,376.46
Round to the answer choice below.
Choose the correct present valued sum of the three payments.
a. $41,376
b. $41,462
c. $41,416
d. $41,325
e. $41,522
f. $41,422
Amrita will receive three payments from the sale of her business over the next three months.
Calculate the Present Value (PV) of these payments. Assume that we are using a 365 day basis (365 days in
the year) for calculations. The interest rates applicable at the moment are 1mth 7% per annum, 2mth 8%
per annum, and 3mth 8.5% per annum.
(Seminar 2, Slide 23, 24)
PV = FV / (1+i)
Payment 1 in 30 days is $6,000.
FV = 6,000  i = (30/365)*0.07 = 0.00575….. 
PV  = 6,000 / (1+0.00575….) = $5,965.68 
Payment in 60 days is 9,000.  
FV = 9,000  i = (60/365)*0.08 = 0.01315…. 
PV  = 9,000 / (1+0.01315…) = $8,883.18 
Payment in 90 days is $25,000.  
FV = 25,000  i = (90/365)*0.085 = 0.02095…. 
PV  = 25,000 / (1+0.02095…) = $24,486.78 
Add the PV of the three payments together for a total PV = $39,335.64
Round to the answer choice below.
Choose the correct present valued sum of the three payments.
a. $39,336
b. $39,462
c. $39,416
d. $39,305
e. $39,522
f. $39,422
Latika will receive three payments from the sale of her business over the next three months.
Calculate the Present Value (PV) of these payments. Assume that we are using a 365 day basis (365 days in
the year) for calculations. The interest rates applicable at the moment are 1mth 7% per annum, 2mth 8%
per annum, and 3mth 8.5% per annum.
(Seminar 2, Slide 23, 24)
PV = FV / (1+i)
Payment 1 in 30 days is $10,000.
FV = 10,000  i = (30/365)*0.07 = 0.00575….. 
PV  = 10,000 / (1+0.00575….) = $9,942.79 
Payment in 60 days is 12,000.  
FV = 12,000  i = (60/365)*0.08 = 0.01315…. 
PV  = 12,000 / (1+0.01315…) = $11,844.24 
Payment in 90 days is $18,000.  
FV = 18,000  i = (90/365)*0.085 = 0.02095…. 
PV  = 18,000 / (1+0.02095…) = $17,630.48 
Add the PV of the three payments together for a total PV = $39,417.51
Round to the answer choice below.
Choose the correct present valued sum of the three payments.
a. $39,418
b. $39,498
c. $39,511
d. $39,367
e. $39,542
f. $39,399
5. Annuity Question.
Raj is to receive an ordinary Annuity in the form of a pension for the next 18 years. It is for a fixed amount
of $3000 per year and the first payment will be made to him one year from now. If the current 18 year
interest rate is 11% per annum, calculate the Present Value (PV) of this annuity and choose the correct
answer from the choices given.
(Seminar 3, Slide 10, 11, 12, 13)
PV = (CF/i) * [1 1/(1+i)^n]
CF = 3000 i = 0.11 (11%) n = 18
PV  = (3000/0.11) * [1 – 1/(1+0.11)^18] = $23,104.85 
Round to the answer choice below.
a. $23,105
b. $23,020
c. $25,175
d. $25,555
e. $31,475
f. $31,110
Raul is to receive an ordinary Annuity in the form of a pension for the next 20 years. It is for a fixed amount
of $5000 per year and the first payment will be made to him one year from now. If the current 20 year
interest rate is 5% per annum, calculate the Present Value (PV) of this annuity and choose the correct
answer from the choices given.
(Seminar 3, Slide 10, 11, 12, 13)
PV = (CF/i) * [1 1/(1+i)^n]
CF = 5000 i = 0.05 (5%) n = 20
PV  = (5000/0.05) * [1 – 1/(1+0.05)^20] = $62,311.05 
Round to the answer choice below.
a. $62,311
b. $62,562
c. $66,177
d. $66,594
e. $60,488
f. $60,690
Preeti is to receive an ordinary Annuity in the form of a pension for the next 7 years. It is for a fixed amount
of $12,000 per year and the first payment will be made to her one year from now. If the current 7 year
interest rate is 6% per annum, calculate the Present Value (PV) of this annuity and choose the correct
answer from the choices given.
(Seminar 3, Slide 10, 11, 12, 13)
PV = (CF/i) * [1 1/(1+i)^n]
CF = 12,000 i = 0.06 (6%) n = 7
PV  = (12000/0.06) * [1 – 1/(1+0.06)^7] = $66,988.58 
Round to the answer choice below.
b. $66,989
c. $66,562
d. $68,177
e. $68,594
f. $63,488
g. $63,690
Section 2: Written Response Questions
8. Ethics are an important consideration for every business.
Discuss this statement outlining some of the challenges businesses face when operating. Consider
the potential conflicts that owners/managers face when considering ethics whilst also trying to
maximise profits and the value of the business. (3 marks)
(Seminar 1, slides 33, 34)
Ethics are a society’s ideas about what actions are right and wrong.
Are business ethics different? Traditions of morality are relevant to business and financial
markets. Corruption in business creates inefficiencies in an economy. The law is not enough:
Ethicists argue that laws and market forces are not enough. Businesses need to take account of
the ethics and morals of the communities that they operate in. There are serious consequences
when business is seen to have not acted ethically. The legal cost of ethical mistakes can be
extremely high as has been demonstrated by the banking royal commission findings of recent
years. Rectification and compensation expenses can also be large. The conflict that owners and
managers face stem from the sometimes difficult decisions required when forsaking profitable
activities / investments that may appear (or be) unethical to some.
9. In Virat’s investment portfolio he holds two stocks. They are the Commonwealth Bank (CBA) which is
the largest banking business in Australia, and Woolworths (WOW) which is the largest retail grocer
in Australia.
(Seminar 4)
a. Discuss the idea of correlation with regard to portfolio theory and whether you feel that the
price movements of the two assets in the portfolio would have a positive, neutral (0) or negative
correlation and why. (1 mark)
Portfolio theory suggests that by investing in two or more assets, it is possible to reduce the
risk held in the portfolio (assuming that the two assets have a correlation less than 1).
In this case, given the two stocks are both very large businesses in the Australian economy it
is likely that they are highly correlated. They are both highly exposed to the Australian
economy and particularly to Australian households. Regardless, it is likely that their
correlation would be less that 1 and therefore by adding the second stock to the portfolio,
volatility of returns would be reduced slightly.
b. If Virat wanted to achieve a portfolio with reduced volatility of returns, what should he do? (1
mark)
He should diversify by adding uncorrelated assets to the portfolio.
c. When discussing the CAPM model, explain what it means when the Beta of a stock is equal to 1.
(1 mark)
When the Beta of a stock is equal to 1, it means that the stock moves in unison with the
general market. If the market rallies or sells off 1%, then the individual stock will also rally or
fall by 1%.
10. When considering a purchase of a new machine for her business , Mekhla wants to calculate the
Weighted Average Cost of Capital (WACC) for her current operations.
Her long terms borrowings make up 40% of the business’s capital. The applicable interest rate paid
for this is 8% per annum. The current tax rate that the business pays is 30%.
Although her business is not listed she has researched similar business and has calculated that the
Beta for these (and her own) is 0.7. Through research she has also found that the Market Risk
Premium is 4% and the Government Bond Rate (risk free rate) is 3%.
(Seminar 6)
a. Calculate the cost of Debt Capital for the business (allow for the tax deductibility of the debt). (1
mark)
The cost of debt = Interest expense*(1tax rate)
Kd  = 8% * (1 – 0.30) = 5.6% 
b. Assuming that her business has only ordinary shares, calculate the cost of Equity Capital for the
business. (1 mark)
Expected Return = Risk free rate + Beta* Market Premium
= 3% + 0.70 * 4%
= 5.8%
c. With your answers in a. and b. calculate the current WACC for Mekhla’s business that should be
used when considering new purchases of equipment. (1 mark)
WACC = Cost of equity x % of equity + Cost of Debt x % of debt
= 5.8% x 0.60 + 5.6% x 0.40
= 5.72%
d. If the returns generated by purchasing the new piece of equipment equate to an 8% payback,
should Mekhla go ahead with the purchase? Why? (1 mark)
Mekhla should go ahead and make the investment because the returns generated from it
(8%), are greater than the weighted average cost of capital of her firm (5.72%)
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