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SAMPLE EXAMINATION
StudentID:
SeatNumber:
SubjectCode:FIN1FOF PaperNo:1
SECTIONSAANDB
SubjectName:
FUNDAMENTALSOFFINANCE
PaperName:
FUNDAMENTALSOFFINANCE
ReadingTime(fortheentireexam):
15minutes
WritingTime(fortheentireexam):
150minutes
No.ofPagesinthisexamination(includingcoversheets):
26(SectionsA&B–14,SectionC–12)
OFFICEUSEONLY(COLLEGE/SCHOOLSTAFF):
CAMPUS
AW
BE
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MI
SH
ALLOWABLEMATERIALS
Number
1
Description
ProgrammableornonͲprogrammablecalculatorpermitted.
INSTRUCTIONSTOCANDIDATES
1. Electronicdictionariesarenotpermitted.Noothernotes,materialsordictionariesarepermitted.Blankpaper
maynotbebroughtintotheexamination.
2. Thisexaminationwillbemarkedoutof100andwillcontribute50%ofyourfinalmarkforthesubject.
3. ThisexaminationisdividedintoTHREEsections.ThispapercontainsSectionsAandBonly.
SectionA: MultipleChoiceQuestions.Therearethirty(30)questionsinthissection.Allquestionsaretobe
answered.Eachquestionisworth1mark.TotalforSectionA=30marks.
SectionB: ShortAnswerQuestions.Thereareten(10)questionsprovidedinthissection.Allquestionsareto
beanswered.Thenumberofmarksavailableforeachquestionisshownateachquestion.Totalfor
SectionB=20marks.
4.
AnswerstoSectionAmustbemarkedontheMultipleChoiceAnswerSheetprovided.AnswerstoSectionBare
tobewritteninthespacesprovidedinthispaper.
ThispaperMUSTNOTBEREMOVEDfromtheexaminationvenue
Question
Possible mark
Examiner’s Use Only
A
30
B
20
C
50
Total
100
SECTIONA
MultipleChoiceQuestions
Instructions
Therearethirty(30)questionsinthissection.Allquestionsaretobeanswered.
Eachquestionisworth1mark.Thissectionisworthatotalof30marks.
SectionAistobeansweredontheMultipleChoiceAnswerSheetprovided.
QuestionA1
Whichofthefollowingisanexampleofapersonalfinancialdecision?
(a)
(b)
(c)
(d)
Whethertoexpandintoanewmarket.
Whethertoputextracashintoabankaccountortoinvestinshares.
Whethertoissuesharesorborrowmoneyfromabanktoraisemoney.
Whethertobuyanewmachineinordertoexpandproduction.
QuestionA2
Whichofthefollowingisadisadvantageofapartnershipasaformofbusinessorganisation?
(a)
(b)
(c)
(d)
Thepartnershipendswiththedeathorwithdrawalofoneoftheowners.
Ownershavelimitedliabilityforthedebtsofthefirm.
Thereputationofthebusinessislinkedtothereputationoftheownersofthe
business.
Thefirmexistsindefinitely.
QuestionA3
Which of the following statements about the differences between private and public
companiesistrue?
(a)
(b)
(c)
(d)
Privatecompaniesarenotrequiredtoappointanauditor.
Public companies are denoted by the abbreviation “Ltd”, which stands for
“Listed”.
Privatecompaniesareownedby privateindividuals,whereaspubliccompanies
areownedbythegovernment.
PubliccompaniesarelistedontheAustralianSecuritiesExchange.
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QuestionA4
Ifinterestcompoundsonceayear,whichofthefollowingwillhavethesmallestvalue?
(a)
(b)
(c)
(d)
Theinterestratepercompoundingperiod.
TheAnnualPercentageRate.
TheEffectiveAnnualRate.
Alloftheabovewillhavethesamevalue.
QuestionA5
WhichofthefollowingisNOTanassumptionbehindthePureExpectationsTheory?
(a)
(b)
(c)
(d)
Investorsareindifferentbetweeninvestmentswithdifferentmaturities.
InvestorswillswitchbetweenshortͲtermandlongͲterminvestmentsinorderto
achievethehighestreturn.
InvestorshaveapreferenceforshortͲtermsecurities.
Therearenotransactioncosts.
QuestionA6
The Liquidity Premium Theory assumes that investors have a preference for shortͲterm
investmentsratherthanlongͲterminvestments.Whichofthefollowingisthemostlikelyreason
forthispreference?
(a)
(b)
(c)
(d)
ShortͲtermsecuritiesaretradedinmoreliquidmarketsthanlongͲtermsecurities.
ShortͲtermsecuritiesareusuallycheaperthanlongͲtermsecurities.
ShortͲtermyieldsareusuallyhigherthanlongͲtermyields.
ShortͲterm securities are considered a less risky investment than longͲterm
securities.
QuestionA7
Whichofthefollowingstatementsaboutthedifferencesbetweendebtandequityistrue?
(a)
(b)
(c)
(d)
Holdersofequitysecuritieshaveacontractualclaimovertheincomeandassets
ofthefirm.
Equitysecuritiesnormallyhaveanunlimitedlife.
Debtsecuritiesaregenerallyariskierformofinvestmentthanequitysecurities.
Equitysecuritiesalwayspayavariablerateofreturn.
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QuestionA8
Whichofthefollowingstatementsabout“discountsecurities”istrue?
(a)
(b)
(c)
(d)
Adiscountsecuritymeansanysecuritythathasayieldthatisgreaterthanitscoupon
rate.
AdiscountsecuritymeansashortͲtermdebtsecuritythatonlyhasonefuturecashflow.
Adiscountsecuritymeansanysecuritythatistradingatadiscounttoitsparvalue.
Adiscountsecuritymeansanydebtsecuritythatonlyhasonefuturecashflow.
QuestionA9
Abondhasafacevalueof$700andacouponrateof6%p.a.,withcouponpayments
madetwiceayear.Howmuchcashwillbepaidtotheholderofoneofthesebondson
thebond’smaturitydate?
(a)
(b)
(c)
(d)
$742
$721
$21
$700
QuestionA10
WhichofthefollowingisNOToneoftheassumptionsthatwemakewhenusingtheWACC
asthediscountratewhenevaluatinganewproject?
(a)
(b)
(c)
(d)
Financialdistresscostsaresignificantatthecurrentlevelofdebt.
Themaineffectofleverageatthecurrentlevelofdebtisthetaxdeductibilityof
interest.
Financialdistresscostsareinsignificantatthecurrentlevelofdebt.
Theriskofthenewprojectmustbeequivalenttotheaverageriskofthefirm's
existingprojects.
QuestionA11
FirmABCisplanningtotakeoverXYZ.Thecostofthistakeoverrepresentstheoutlayon
a project, and XYZ's ongoing cash flows representing the cash flows from the project.
WhatdiscountrateshouldbeusedinevaluatingtheNPVofthisProject?
(a)
(b)
(c)
(d)
FirmABC'sWACC.
NeitherFirmABC'sWACCorFirmXYZ'sWACCwouldbesuitable.
FirmABC'sWACCorFirmXYZ'sWACC,whicheverishigher.
FirmXYZ'sWACC.
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QuestionA12
MelbourneHoldingsLtdisadiversifiedindustrialfirmwhoseoverallWACCis14.43%.It
isconsideringthreeindependentprojectsinitsclothing,autopartsandminingdivisions.
The expected returns from these three projects are 17.98%, 16.38% and 16.63%,
respectively.Thecostsofcapital,basedonthebetaoffirmsineachindustry,are15.57%,
18.87%and14.84%respectively.WhichprojectsshouldMelbourneaccept?
(a)
(b)
(c)
(d)
Theclothingandautopartsprojectsonly
Theclothingandminingprojectsonly
Theminingprojectonly
Theautopartsandminingprojectsonly
QuestionA13
WhichofthefollowingisadisadvantageofthePaybackPeriodmethodcomparedtothe
NPVmethodofprojectevaluation?
(a)
(b)
(c)
(d)
PaybackPeriodcanhavemorethanonesolution.
PaybackPeriodisnotaspopularamethodofprojectevaluationasNPV.
PaybackPeriodtakesintoaccountnonͲcashflowitems.
Payback Period has an arbitrary decision criterion that is not grounded in
economictheory.
QuestionA14
Aprojecthasthefollowingcashflows.Ifthecostofcapitalis6%,whatistheproject’s
PaybackPeriod?
Year
0
1
2
3
4
(a)
(b)
(c)
(d)
CashFlow
Ͳ$1,160
$440
$230
$340
$390
3.92years
3.72years
3.38years
3.12years
FIN1FOF–FundamentalsofFinance
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QuestionA15
You are choosing from the following independent projects, and your capital budget is
limitedto$1000.Whichprojectdoyouselectfirst?
Project
A
B
C
D
NPV
$231
$411
$249
$383
Investment
$350
$570
$400
$670
(a)
ProjectA
(b)
ProjectB
(c)
ProjectC
(d)
ProjectD
QuestionA16
IfyouhadafreechoicebetweenusingstraightͲlineordiminishingͲvaluedepreciationfor
equipmenttobeusedinaproject,whichshouldyouchoose,andwhy?
(a)
DiminishingͲvalue,becauseitiseasiertocalculate.
(b)
StraightͲline,becauseitiseasiertocalculate.
(c)
DiminishingͲvalue,becauseitwillmaximisetheNPVoftheproject.
(d)
StraightͲline,becauseitwillmaximisetheNPVoftheproject.
QuestionA17
Equipmentusedinaprojectissoldearlierthanexpected,andthereforestillhasabook
valueof$23,000.Theequipmentissoldfor$15,000.Ifthetaxrateis35%,whatisthe
taxeffectthatresultsfromthesaleoftheequipment?
(a)
Ͳ$2,800
(b)
$2,800
(c)
Ͳ$5,200
(d)
$5,250
FIN1FOF–FundamentalsofFinance
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QuestionA18
Inthecontextofprojectevaluation,whichofthefollowingisthecorrectdefinitionofan
opportunitycost?
(a)
Thevalueofabenefitforegonebyusinganexistingresourceforaprojectwhich
couldotherwisehaveyieldedamonetarybenefitiftheprojectdidnotproceed.
(b)
Anexpenseincurredinrelationtoaprojectwhichwillbepaidwhetherornotthe
projectproceeds.
(c)
Anexpenseincurredinrelationtoaprojectwhichrelatestothecostoffinancing
theproject.
(d)
Anincrementalfreecashflowthatresultsfromundertakingaproject,butwhich
affectssomepartofthebusinessnotdirectlyrelatedtotheproject.
QuestionA19
Youbuyashareon1Januaryfor$32andselliton31Decemberfor$35.Duringtheyear
thesharepaysadividendof$3.80.Whatisthedividendyieldandthecapitalgainyield
fromholdingthisshare?
(a)
10.9%and9.4%
(b)
11.9%and9.4%
(c)
10.9%and8.6%
(d)
11.9%and8.6%
QuestionA20
Asharetakesonthefollowingvalueson31Decemberintheyearsshown.Whatisthe
geometricaveragerealisedreturnfrom31December2012to31December2016?
Year
2012
2013
2014
2015
2016
(a)
(b)
(c)
(d)
Price
$4.35
$4.80
$4.95
$4.72
$4.85
2.20%
2.76%
2.89%
5.21%
FIN1FOF–FundamentalsofFinance
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QuestionA21
Considerthefollowingprobabilitydistributions.
Thesegraphsdepictthe
distributionofpossible
returnsforShares
A,B,andC.
B
C
A
WhichsharewouldariskͲaverseinvestorbeLEASTlikelytoinvestin?
(a)
ShareA
(b)
ShareB
(c)
ShareC
(d)
Thiscannotbedeterminedbecauseitdependsontheinvestor’sattitudetowards
risk(i.e.levelofriskaversion).
QuestionA22
WhatdoestheCapitalMarketLineindicate?
(a)
Therelationshipbetweenreturnandsystematicriskforefficientportfolios.
(b)
Therelationshipbetweenreturnandunsystematicriskforallassetsandportfolios.
(c)
Therelationshipbetweenreturnandtotalriskforefficientportfolios.
(d)
Therelationshipbetweenreturnandsystematicriskforallassetsandportfolios.
QuestionA23
In which of the following markets would you expect share prices to follow a “random
walk”?
(a)
AweakͲformefficientmarket.
(b)
AsemiͲstrongͲformefficientmarket.
(c)
AstrongͲformefficientmarket.
(d)
Alloftheabove.
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QuestionA24
WhichofthefollowinggraphsdepictsthesetofefficientportfoliosifthereISariskͲfree
assetavailableforinvestment?
GraphA
GraphB
GraphC
GraphD
(a)
GraphA
(b)
GraphB
(c)
GraphC
(d)
GraphD
Question25
WhatisthemostlikelyexplanationfortheJanuaryeffect?
(a)
GoodnewsisgenerallyreleasedinJanuary,causingpricestorise.
(b)
U.S.shareholdersaremorelikelytosellinDecemberthanJanuaryfortaxreasons.
(c)
InvestorsaregenerallymoreoptimisticafterChristmasandatthestartofanew
year.
(d)
Alloftheaboveareequallylikely.
FIN1FOF–FundamentalsofFinance
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2017FinalExamination
QuestionA26
ThefollowingdiagramshowsfourpossibleinvestmentsontheCapitalMarketLine.
E(R)
Y
M
E(RM)
X
F
StdDev
SD(RM)
WhichoftheseinvestmentsimpliesborrowingattheriskͲfreerateofinterest?
(a)
InvestmentF
(b)
InvestmentX
(c)
InvestmentM
(d)
InvestmentY
QuestionA27
Whattendstohappenasaresultofthe“size”effect?
(a)
Smallstockstendtooutperformlargestocks.
(b)
Largestockstendtooutperformsmallstocks.
(c)
MidͲsizestockstendtooutperformbothsmallandlargestocks.
(d)
BothlargeandsmallstockstendtooutperformmidͲsizestocks.
FIN1FOF–FundamentalsofFinance
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2017FinalExamination
RefertothefollowinginformationinansweringQuestionsA28,A29andA30.
A call option was originally purchased for $3 and is currently selling for $4. It has an
exercisepriceof$64.Theunderlyingshareiscurrentlypricedat$66.
QuestionA28
Howwouldyoudescribethisoption?
(a)
InͲtheͲmoney
(b)
OnͲtheͲmoney
(c)
AtͲtheͲmoney
(d)
OutͲofͲtheͲmoney
QuestionA29
Whatistheintrinsicvalueofthisoption?
(a)
$0
(b)
$1
(c)
$2
(d)
$3
QuestionA30
Whatisthetimevalueofthisoption?
(a)
$0
(b)
$2
(c)
$3
(d)
$4
FIN1FOF–FundamentalsofFinance
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SECTIONB
ShortAnswerQuestions
Instructions
Thereareten(10)questionsprovidedinthissection.Allquestionsaretobeanswered.
Themarksavailableforeachquestionareshownwiththequestion.TotalforSection
B=20marks.
Answerstothissectionaretobewritteninthespacesprovidedbelow.
QuestionB1
Listthreedifferentwaysofstatingthegoaloffinancialmanagement.
[3marks]
QuestionB2
Whatisnameofthepriceatwhichyoucanbuyshares,andthepriceatwhichyoucansell
shares,ifyouplaceamarketorderonastockexchange?
[2marks]
Priceatwhichyoucanbuyshares:
Priceatwhichyoucansellshares:
QuestionB3
Inthecontextofissuingshares,whatisaprivateplacement,
andwhatisthedisadvantageofaprivateplacement?
[2marks]
FIN1FOF–FundamentalsofFinance
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QuestionB4
Listtwostockexchanges(outsideofAustralia)andthenameof
anindexusedtomeasuretheperformanceofsharesonthatexchange.
[2marks]
Exchange
StockIndex
QuestionB5
Onthefollowingsetofaxes,showtheresultsofaneventstudywhich
wouldindicatethatamarketissemiͲstrongͲformefficient?
[3marks]
Shareprice
Time
Event
QuestionB6
HowcanyoutesttoseewhetheramarketisweakͲformefficient?
[1mark]
QuestionB7
Whatkindofanalysiswouldbeawasteoftime
inaweakͲformefficientmarket?
[1mark]
FIN1FOF–FundamentalsofFinance
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2017FinalExamination
QuestionB8
Namethetwokindsofmarketsinwhichoptionscanbetraded.
[2marks]
QuestionB9
Drawapayoffdiagramforacalloptionfromthepointofviewoftheoptionwriter(i.e.a
shortcalloption),withanexercisepriceof$50,onthefollowingsetofaxes.
[2marks]
Payoff
SharePrice
25 30
35 40 45
50
55
60
65
70
75
QuestionB10(Circlethecorrectanswers)
[1mark]
Ifthepriceoftheunderlyingassetofaput
INCREASE/DECREASE
optionincreases,doesthevalueofthe
optionincreaseordecrease?
[1mark]
IftheriskͲfreerateofreturnincreases,
INCREASE/DECREASE
doesthevalueofacalloptionincreaseor
decrease?
[TotalforSectionB:20marks]
FIN1FOF–FundamentalsofFinance
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