Business Finance Past Paper PDF

Business finance Chapter 01 **Instructions** Choose your answer by clicking the radio button next to your choice and then press \'Submit\' to get your score. Top of Form **Question 1** Which of these activities does **not** exclusively come within the scope of corporate financial decision-maki...

Business finance Chapter 01 **Instructions** Choose your answer by clicking the radio button next to your choice and then press \'Submit\' to get your score. Top of Form **Question 1** Which of these activities does **not** exclusively come within the scope of corporate financial decision-making? **a) **How much should be invested? **b) **How much is to be allocated to the marketing budget? **c) **Which type of finance should be chosen? **d) **How much finance should be raised? **Question 2** A great deal of financial theory is based on the concept of free markets and in particular the theory of: **a) **perfect competition. **b) **monopolistic competition. **c) **monopoly. **d) **oligopoly. **Question 3** Asymmetric information occurs because**:** **a) **one party to a financial transaction has more information than another. **b) **stock market prices on the internet lag real time prices by up to fifteen minutes. **c) **not all investors understand company accounts and balance sheets. **d) **not all shareholders are able to attend company annual general meetings. **Question 4** Which of the following is **not** a fundamental concept in Corporate Finance? **a) **Net present value. **b) **The relationship between risk and return. **c) **The business cycle. **d) **Double-entry book-keeping. **Question 5** Which of the following is a legitimate reason why firm value maximization is preferred to profit maximization as the ideal goal for the firm? **a) **Value takes account of both profit and cash flow. **b) **Value or discounted cash flow is less ambiguous than profit. **c) **Value takes account of depreciation. **d) **Profit is too concerned with the longer term. **Question 6** What does the general principle of disclosure and transparency mean? **a) **The company is obliged to reveal all holding companies, strategic alliances, and joint ventures to the government. **b) **The company is obliged to reveal all investment plans to employees. **c) **The company is obliged to reveal all information in a timely manner which could have a significant effect on shareholder welfare. **d) **The company is obliged to lodge audited accounts with Companies House. **Question 7** Which of the following people or institutions is **not** the author of a corporate governance code? **a) **International Corporate Governance Network. **b) **Cadbury. **c) **OECD. **d) **Harvard-Yale. **Question 8** What is the stakeholder view of the firm? **a) **Shareholders should eventually be returned their stake in the firm. **b) **The firm must honour its wider social obligations as well as making money. **c) **The only obligation on the firm is to maximize profit. **d) **The firm exists to maximize return. **Question 9** Why did the credit crunch occur? **a) **Because of low levels of credit and interest. **b) **Because of an unwillingness to securitize the cash flows from financial assets. **c) **Because of lower-than-expected default rates on US mortgages. **d) **Because of bank overexposure to CDOs and CDS. **Question 10** What is the Grameen bank? **a) **A US investment bank dealing in CDOs. **b) **A Bangladeshi bank specializing in microfinance. **c) **A Japanese bank specializing in Forex trading. **d) **A British hedge fund. Chapter 2 Top of Form **Question 1** If *C~0~* stands for the initial cash flow, *r* - for the rate of interest (annual), and *n* -  for the number of periods (years), then **future value (FV)** is given by the following formula: **a)  ** ch02q01a.jpg **b)  **  **c)  **  ch02q01c.jpg **d)  **  **Question 2** If *C~n~* stands for the value of the cash flow after *n* periods (years), *r* - for the rate of interest (annual), and *n* - for the number of periods (years), then **present value (PV)** is given by the following formula: **a)  **  ch02q02a.jpg **b)  **  **c)  **  ch02q02c.jpg **d)  **  **Question 3** If I~0~ stands for the initial investment at time 0, C~1~ - for cash flow after one year, and *r* - for the rate of interest, then the **net present value (NPV)** for **1 period** is given by the following formula: **a)  **  ch02q03a.jpg **b)  **  **c)  **  ch02q03c.jpg **d)  **  **Question 4** Which investment will be characterized by the **highest** monetary return at the end of the investment horizon? Assume annual compounding. **a)  ** 5 years at the interest rate of 5% per year. **b)  ** 7 years at the interest rate of 3% per year. **c)  ** 4 years at the interest rate of 9% per year. **d)  ** 2 years at the interest rate of 6% per year. **Question 5** Which of the following represents the future value of £1,000 invested at 10% per annum for 10 years? **a)  ** £2,500 **b)  ** £1,913 **c)  ** £2,594 **d)  ** £2,600 **Question 6** Using the NPV criteria, a project should be selected when: **a)  ** Its NPV is positive or zero. **b)  ** Its NPV is equal to zero. **c)  ** Its NPV is negative. **d)  ** Its outflows are greater than its inflows. **Question 7** Why is it sometimes possible to obtain inconsistent results between Internal Rate of Return (IRR) and Net Present Value (NPV) for the purposes of comparison between two or more projects? **a)  ** Because they are measured in different units. **b)  ** Because IRR does not take account of the time value of money. **c)  ** Because NPV does not take account of the time value of money. **d)  ** Because the NPVs \'cross over\' as the discount rate is increased. **Question 8** Which of the following is **not** true with respect to the Accounting Rate of Return (ARR)? **a)  ** It is based on accounting concepts such as accounting profit and depreciation. **b)  ** It takes account of the time value of money. **c)  ** The hurdle rate is arbitrary. **d)  ** The definition of both profit and capital can be somewhat arbitrary and variable. **Question 9** The fundamental principle of the application of Discounted Cash Flow (DCF) techniques to investment appraisal is: **a)  ** To incorporate all incremental cash flow. **b)  ** To incorporate all sunk cost. **c)  ** To incorporate all relevant depreciation. **d)  ** To absorb all company overheads. **Question 10** Which of the following is **not** a criticism of payback? **a)  ** It ignores potentially valuable cash flow after the cut-off point. **b)  ** The cut-off point for recovery of investment outlay is arbitrary. **c)  ** The technique cannot be adapted to discounted cash flow **d)  ** It may help to resolve large amounts of uncertainty. Chapter 3 **Question 1** Which of the following is **not** a characteristic of wholesale markets? **a) **Firms deal with other firms. **b) **Lending and borrowing is coordinated through banks. **c) **Borrowing and lending is not intermediated. **d) **Very large quantities of money are at stake. **Question 2** Which of the following world stock exchanges were in the top five by value of transaction in 2009? **a) **London Stock Exchange. **b) **Shanghai Stock Exchange. **c) **Deutsche Börse. **d) **Hong Kong Exchanges. **Question 3** Which of the following is **not** a characteristic of a preference share? **a) **Ranks last for payment in the event of company liquidation. **b) **Unpaid dividend accrues until it can be paid. **c) **Do not usually have voting rights unless dividends fall into arrears. **d) **It is more like debt than a share in its characteristics. **Question 4** Which of the following is the correct expression for the percentage return on a share? **a) **R~t~ = (d~t~ + P~t~ - P~t-1~)/P~t-1~ **b) **R~t~ = (d~t~ + P~t~ - P~t-1~) **c) **R~t~ = (d~t~ + P~t~ - P~t-1~)/ d~t~ **d) **R~t~ = (-d~t~ - P~t~ + P~t-1~)/P~t-1~ **Question 5** Which of the following is **not** one of the qualities which makes debt attractive to firms? **a) **The cost of debt is generally less than the cost of share capital and hence can lower the overall cost of capital for a firm. **b) **Debt interest only gets paid when the company is making a profit. **c) **It reduces the amount of corporate tax payable by firms by reducing the amount of taxable profit. **d) **The required return on debt is lower because, from the lender\'s point of view, debt is less risky than equity. **Question 6** Which of the following is **not** a money market instrument? **a) **Bonds. **b) **Treasury bills. **c) **Certificates of deposit (CDs). **d) **Commercial paper (CP). **Question 7** Which of the following is **not** a defining quality of a bond? **a) **Dividend yield. **b) **Maturity. **c) **Face value. **d) **Coupon payment frequency. **Question 8** What is the value of a 6%, five year bond with annual coupons and face value equal to £1,000, if the current yield to maturity is 6%? **a) **£1,089 **b) **£920 **c) **£1,200 **d) **£1,000 **Question 9** As which type of cash flow is an equity share usually valued? **a) **An annuity cash flow. **b) **A risk-free cash flow. **c) **A perpetuity cash flow. **d) **An erratic cash flow. **Question 10** Under which of the following market efficiency regimes would technical analysis not generate abnormal returns? **a) **Weak market efficiency. **b) **Semi-strong market efficiency. **c) **Strong form market efficiency. **d) **All three. Chapter 4 In the context of imperfect and asymmetric information, how does the stock market react to the signal of a cut in dividend by a company? **a) **The market sells, share price is lowered. **b) **The market buys, share price is raised. **c) **The market does not react, price remains the same. **d) **None of the above. It depends on how the information is interpreted. **Question 2** Which of the following is **not** a reason why companies are not always entirely clear on their dividend policy? **a) **For fear of giving away sensitive information. **b) **In order to maintain a managerial advantage over shareholders. **c) **Because they do not know how much is available for dividends. **d) **Companies have different abilities to communicate. **Question 3** In both their dividend model and capital gearing model, Modigliani and Miller use which of the following principles? **a) **The value of the firm is fundamentally determined by its capital gearing ratio. **b) **The value of the firm is fundamentally determined by the NPV of the firm\'s projects. **c) **The value of the firm is fundamentally determined by its dividend policy. **d) **The value of the firm is fundamentally determined by the ability of managers to communicate with the capital markets. **Question 4** Which of the following is **not** a fundamental assumption made by Modigliani and Miller? **a) **No taxes. **b) **There is imperfect information. **c) **Firms can be classified into distinct risk classes. **d) **Possible to borrow and lend at the risk-free rate. **Question 5** In a simple perfect capital market, what happens if dividends are brought forward? **a) **Share price goes up. **b) **It is impossible to know. **c) **Share price goes down. **d) **Share price remains the same. **Question 6** In a simple perfect capital market, what happens if dividends are delayed? **a) **Share price goes up. **b) **It is impossible to know. **c) **Share price goes down. **d) **Share price remains the same. **Question 7** What are home-made dividends and why would investors \'make\' them? **a) **Home-made dividends represent sales of stock by relatively impatient investors. **b) **Home-made dividends represent purchases of stock by relatively impatient investors. **c) **Home-made dividends represent sales of stock by relatively patient investors. **d) **Home-made dividends represent purchases of stock by relatively patient investors. **Question 8** What is Gordon\'s \'bird in the hand\' fallacy? **a) **Investors prefer early resolution of uncertainty and apply a lower discount rate to later dividends. **b) **Investors prefer early resolution of uncertainty and apply a higher discount rate to later dividends. **c) **Investors prefer later resolution of uncertainty and apply a higher discount rate to later dividends. **d) **Investors prefer later resolution of uncertainty and apply a lower discount rate to later dividends. **Question 9** What does pecking order theory say? (The \< or = sign represents company preference here.) **a) **Internal capital \< debt \< external equity. **b) **Internal capital = debt = external equity. **c) **Internal capital \> debt \> external equity. **d) **External equity \> debt \< internal capital. **Question 10** Which of the following refers to a moral hazard problem? **a) **The kind of firm which is desperate to raise equity is not the kind of firm in which you would care to invest. **b) **There are insufficient safeguards to ensure basic honesty in business. **c) **Directors may be engaging in insider trading. **d) **Once the firm raises equity to solve a financing problem, it may relax and not work hard enough on the shareholders\' behalf. ANSWERS CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 ----------- ----------- ----------- ----------- 1.B 1.D 1.B 1.D 2.A 2.D 2.B 2.C 3.A 3.A 3.A 3.B 4.D 4.C 4.A 4.B 5.B 5.C 5.B 5.D 6.C 6.A 6.A 6.D 7.D 7.D 7.A 7.A 8.B 8.B 8.D 8.B 9.D 9.A 9.C 9.C 10.B 10.C 10.D 10.D