Southern College
Kolej Selatan
南方学院
Final Examination
Semester 1 / Year 2008
COURSE
COURSE CODE
TIME
DEPARTMENT
LECTURER
: CORPORATE FINANCE
: FINE3003
: 2 1/2 HOURS
: MANAGEMENT
: KAN YOKE YUE
Student’s ID
Batch No.
:
:
Notes to candidates:
1) The question paper consists of 9 pages and 2 sections.
2) Section A: Answer ALL questions.
Section B: Answer all of the THREE questions
3) Write all the answer in the answer booklet.
4) Return the question paper and answer booklet.
CORPORATE FINANCE
Section A (Multiple Choice Questions)
(25 questions x 1 marks = 25 marks)
Answer All the questions. Write the answer in the answer booklet.
1.
Which of the following is a measure of relative dispersion used in comparing the risk of assets
with differing expected returns?
(a) correlation
(b) coefficient of variation
(c) mean
(d) standard deviation
2.
Given the following expected returns and standard deviations of assets A, B, C, and D, which
asset should the prudent financial manager select?
Asset
A
B
C
D
Expected Return
12%
16%
14%
30%
Standard Deviation
6%
12%
10%
18%
(a) Asset A
(b) Asset B
(c) Asset C
(d) Asset D
3.
Asset A and Asset B have the same expected return. The two assets are negatively correlated.
Combining the two assets together will result in a portfolio with _________ level of expected
return and _________ level of risk.
(a) a higher; a lower
(b) the same; a higher
(c) the same; a lower
(d) a lower; a higher
4.
The share of Scomi Berhad is more volatile than the KLCI performance. The beta of the Scomi
(a) is greater than 1.
(b) is less than 1.
(c) is 1.
(d) cannot be determined.
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CORPORATE FINANCE
5.
War, inflation, and the condition of the foreign markets are all examples of
(a) diversifiable risk.
(b) nondiversifiable risk.
(c) economic risk.
(d) unsystematic.
6.
A firm has an issue of preferred stock outstanding that has a stated annual dividend of $5. The
required return on the preferred stock has been estimated to be 13 percent. The value of the
preferred stock is _________.
(a) $0.38
(b) $13
(c) $38
(d) $65
7.
According to the efficient market theory,
(a) prices of actively traded stocks can be under- or over-valued in an efficient market, and
bear searching out.
(b) prices of actively traded stocks can only be under-valued in an efficient market.
(c) prices of actively traded stocks do not differ from their true values in an efficient market.
(d) prices of actively traded stocks can only be over-valued in an efficient market.
8.
The use of the _________ is especially helpful in valuing firms that are not publicly traded.
(a) liquidation value
(b) book value
(c) P/E multiple
(d) present value of the dividends
9.
Tan & Tan Company’s stock is currently selling for $80.00 per share. The expected dividend
one year from now is $4.00 and the required return is 13 percent. What is Tan & Tan’s dividend
growth rate assuming that dividends are expected to grow at a constant rate forever?
(a) 8%
(b) 9%
(c) 10%
(d) 11%
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CORPORATE FINANCE
10.
The _________ feature allows the bondholder to change each bond into a stated number of
shares of stock.
(a) call
(b) convenant
(c) put
(d) conversion
11.
If the required return is greater than the coupon rate, a bond will sell at
(a) par.
(b) a discount.
(c) a premium.
(d) book value.
12.
The cost of each type of capital depends on the
(a) risk-free cost of that type of funds.
(b) business risk of the firm.
(c) financial risk of the firm.
(d) All of the above.
13.
A firm has a beta of 1.3. The market return equals 15 percent and the risk-free rate of return
equals 6 percent. The estimated cost of common stock equity is
(a) 6 percent.
(b) 11.7 percent.
(c) 9 percent.
(d) 17.7 percent.
14.
The _________ is the rate of return required by the market suppliers of capital in order to
attract their funds to the firm.
(a) yield to maturity
(b) internal rate of return
(c) net present value
(d) cost of capital
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CORPORATE FINANCE
15.
A firm has determined its cost of each source of capital and optimal capital structure, which is
composed of the following sources and target market value proportions:
Source of Capital
Long-term debt
Preferred stock
Common stock equity
Target Market
Proportions
25%
10
65
After-Tax Cost
6%
10
18
The weighted average cost of capital is
(a) 1.5 percent.
(b) 11.7 percent.
(c) 14.2 percent.
(d) 15.2 percent.
16.
According to the residual theory of dividends, if the firm’s equity need is less than the amount
of retained earnings, the firm would
(a) borrow to pay the cash dividend.
(b) declare a dividend equal to the remaining balance.
(c) pay no cash dividends.
(d) not need to consider its dividend policy.
17.
A firm has the following stockholders’ equity balances:
Common stock at par
Paid-in capital in excess of par
Retained earnings
$500,000
1,500,000
2,200,000
In states where the firm’s legal capital is defined as the par value of its common stock, the
maximum cash dividend the firm could pay is
(a) $1,500,000
(b) $3,700,000
(c) $4,200,000.
(d) $2,200,000.
18.
A firm has current after-tax earnings of $1,000,000 and has declared a cash dividend of
$600,000. The firm’s dividend payout ratio is
(a) 1.67 percent.
(b) 40.0 percent.
(c) 6.0 percent.
(d) 60 percent.
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CORPORATE FINANCE
19.
_________ involves the combination of firms in unrelated businesses.
(a) Congeneric merger
(b) Conglomerate merger
(c) Horizontal merger
(d) Vertical merger
20. If the P/E paid is less than the P/E of the acquiring company, the effect on the earnings per share
of the acquired company will be
(a) positive.
(b) neutral.
(c) negative.
(d) uncorrelated.
21.
A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate outstanding.
The issue pays interest annually and has 10 years remaining to its maturity date. If bonds of
similar risk are currently earning 8 percent, the firm’s bond will sell for _________ today.
(a) $1,066.90
(b) $603.90
(c) $463
(d) $1603.90
Company
Ford (F)
22.
Coupon
11.0
Maturity
July 31, 2009
Last Price
65.50
EST
Spread
104
EST
UST
10
VOL.
(000s)
5,100
On this trading day, the number of McLeod bonds which changed hands was (Table 6.1)
(a) 5,100.
(b) 51,000.
(c) 510,000.
(d) 5,100,000.
23.
Timber Processing Corporation is considering issuing preferred stock. The preferred stock
would have a par value of $75, and a 5.50 percent dividend. What is the cost of preferred stock
for Timber Processing Corporation if flotation costs would amount to 5.5 percent of par value?
(a) 5.50%.
(b) 5.27%.
(c) 7.73%.
(d) 5.82%.
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CORPORATE FINANCE
24.
Through the effects of financial leverage, when EBIT increases, earnings per share will
(a) increase.
(b) decrease.
(c) remain unchanged.
(d) change in an undetermined direction.
25.
The optimal capital structure is the one that balances
(a) return and risk factors in order to maximize profits.
(b) return and risk factors in order to maximize earnings per share.
(c) return and risk factors in order to maximize market value.
(d) return and risk factors in order to maximize dividends.
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CORPORATE FINANCE
Section B (Essay Questions)
Answer all of the THREE questions
Question 1
(Total 25 marks)
(a) Describe the relationship between the required return and the coupon interest that will
cause a bond to sell at discount / premium / par value.
(6 marks)
(b) Calculate the value of a $20,000 par value bond paying quarterly interest at an annual
coupon interest rate of 10% and having 4 years until maturity if the required return on
similar-risk bonds is currently 8% annual rate paid quarterly.
(8 marks)
(c) Chemical Corp issued 1,000 debentures with a total principal value of $2,000,000. The
bonds have a coupon interest rate of 8%. What is the total interest expense per year
associated with this bond issue?
(5 marks)
(d) Describe three differences between stock and bond.
( 6 marks)
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CORPORATE FINANCE
Question 2
(Total 25 marks)
(a) Compare the difference between constant-payout-ratio dividend policy and regular
dividend policy. What are the effects of these policies?
(9 marks)
(b) Pharmacare Company has 100,000 shares outstanding. The company recorded
earnings available for common stockholder of $400,000 recently. The company intends
to pay a 10% stock dividend.
On of the shareholder, Mr. Sam currently holds 5,000 shares of Pharmacare. The
current market price of the Pharmacare share is $60.
(i)
Calculate the earnings per share of Pharmacare?
(3 marks)
(ii)
What proportion of the company does Mr. Sam currently own? Explain.
(3 marks)
(iii) What proportion of the compnay will Mr. Sam own after the stock dividend?
(3 marks)
(iv) What is the current PE ratio of Pharmacare?
(3 marks)
(v)
At what market price would you expect the stock to sell after the stock
dividend?
(4 marks)
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CORPORATE FINANCE
Question 3
(Total 25 marks)
(a) What is congeneric merger? Give an example of congeneric meger.
(4 marks)
(b) Data for BookTalk Company and Smart Education Company are given in the following
table.
Item
Earnings available for common stock
Number of shares of common stock
outstanding
Market price per share
BookTalk
$500,000
100,000
Smart Education
$200,000
40,000
$75
$60
BookTalk is considering merging with Smart Education by swapping 1.5 shares of its
stock for each share of Smart Education stock.
BookTalk expects its stock to sell at the same price/earnings (P/E) multiple after the
merger as before merging.
(i)
Calculate the ratio of exchange in market price.
(3 marks)
(ii) Calculate the earnings per share (EPS) and price/earnings (P/E) ratio for each
company.
(8 marks)
(iii) Calculate the price/earnings (P/E) ratio used to purchase Smart Education.
(3 marks)
(iv) Calculate the postmerger earnings per share (EPS) for BookTalk.
(4 marks)
(v) Calculate the expected market price per share of the merged firm.
(3 marks)
000
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