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FINANCE MULTIPLE CHOICE EXAM QUESTIONS
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FINANCE MULTIPLE CHOICE EXAM QUESTIONS
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FINANCE MULTIPLE CHOICE EXAM QUESTIONSWhich of the following is least likely to be consistent with the optimal, primary objective
of the finance manager?
a) Maximise the current stock price.
b) Maximise the current market value of equity.
c) Increase the wealth of owners.
d) Increase economic value of corporate assets.
e) Maximise profits. - Answers-e) Maximise profits.
You manage an investment portfolio that is made up of 25%, 3 month Treasury Bills.
26% S&P /NZX50 index and 50% shares of Company X. Examination of the data of
Company X shows that it has a beta of 1.6. The 3 month Treasury Bills yield a return of
3.5% and the expected return on the S&P/NZX50 index is 7.5%. Assume the market is
efficient and the CAPM theory applies.
What is the market risk premium?
a) 3.5%
b) 4.0%
c) 6.7%
d) 7.5%
e) 7.7% - Answers-b) 4.0%
= (Rm - Rf)
= 7.5% - 3.5%
= 4.0%
You manage an investment portfolio that is made up of 25%, 3 month Treasury Bills.
26% S&P /NZX50 index and 50% shares of Company X. Examination of the data of
Company X shows that it has a beta of 1.6. The 3 month Treasury Bills yield a return of
3.5% and the expected return on the S&P/NZX50 index is 7.5%. Assume the market is
efficient and the CAPM theory applies.
Using the CAPM, what is the expected return on the shares of Company X?
a) 9.9%
b) 8.5%
c) 11.5%
d) 3.5%
e) 7.5% - Answers-a) 9.9%
Rp = Rf + Beta x (Rm - Rf)
Rp = 3.5% + 1.6 x (4%)
Rp = 9.9%
,You manage an investment portfolio that is made up of 25%, 3 month Treasury Bills.
26% S&P /NZX50 index and 50% shares of Company X. Examination of the data of
Company X shows that it has a beta of 1.6. The 3 month Treasury Bills yield a return of
3.5% and the expected return on the S&P/NZX50 index is 7.5%. Assume the market is
efficient and the CAPM theory applies.
What is the expected return on the entire investment portfolio?
a) 3.5%
b) 11.9%
c) 7.7%
d) 8.2%
e) 6.7% - Answers-c) 7.7%
rp = wj x rj
rp = 25% (3.5) x 25%(7.5%) x 50%(9.9%)
rp = 7.7%
After-tax earnings of Company A are $50,000. Company A has 200,000 shares
outstanding in the market. The average price earnings (P/E) ratio of companies that are
in the same industry and have similar size as Company A is 16. What is the share price
of Company A using the P/E multiple approach?
a) $4.00
b) $5.00
c) $6.00
d) $3.00
e) $7.00 - Answers-Pa = (50,,000) x 16
Pa = $4
Regarding interest rate risk, of greatest concern to bond holders is:
a) Steady interest rates because there are no trading opportunities.
b) Falling interest rates because bond holders get less return.
c) Rising interest rates because bond value decreases.
d) Falling interest rates because bond value increases.
e) All of the above. - Answers-c) Rising interest rates because bond value decreases.
If the expected return is greater than the required return on an asset, rational investors
will:
a) Sell the asset, which will drive the price up and cause expected return to reach the
level of the required return.
b) Sell the asset, which will drive the price down and cause the expected return to reach
the level of required return.
c) Buy the asset, which will drive the price up and cause expected return to rise to the
level of required return.
,d) Buy the asset, which will drive the price up and cause expected return to decrease to
the level of the required return.
e) Refuse to trade the asset at any price. - Answers-d) Buy the asset, which will drive
the price up and cause expected return to decrease to the level of the required return.
A 10-year bond with a face value of $1,000 pays an annual coupon rate of 8%. It has 5
years until maturity. The current market price of the bond is $990. Using the
approximation formula, what is its yield to maturity (YTM)?
a) 8.14%
b) 8.24%
c) 8.00%
d) 8.56%
e) 9.00% - Answers-b) 8.24%
rd = (I + ((M - Bo) / n)) / ((M + Bo) / 2)
rd = (80 + ((1000 - 990) / 5)) / ((1000 + 990) / 2)
rd = 8.24%
According to the expectations theory, an upward sloping yield curve results from:
a) An expectation of increasing inflation rates in the future.
b) An expectation of decreasing inflation rates in the future.
c) An expectation that the inflation rate will be stable over time.
d) Longer-term securities being riskier than shorter-term securities.
e) Shorter-term securities being riskier than longer-term securities. - Answers-a) An
expectation of increasing inflation rates in the future.
Which of the following statements is correct?
a) If an investor buys 500 shares of Westpac on the stock exchange from other
investors, this is a secondary market transaction.
b) Private securities are generally more liquid than publicly traded securities.
c) Money markets are where short-term, liquid securities are traded, whereas capital
markets represent the markets for long-term debt and ordinary shares.
d) Statements A and C are correct.
e) All of the above statements are correct. - Answers-d) Statements A and C are
correct.
Freshfurt is a newly established furniture company in Northshore. The company will
start paying dividends to its shareholders from year 3. Freshfurt will pay a dividend of
$0.40 per share at the end of year 3 and from year 3 onwards dividends are expected to
grow constantly at 10% per annum. The required rate of return is 25%. What is the
current price of a Freshfurt share?
a) $1.71
, b) $2.93
c) $2.67
d) $1.37
e) $1.50 - Answers-a) $1.71
P3 = D1 / (r - g) *solve for third year
P3 = 0.4 x (1 + 0.10) / (0.25 - 0.10)
P3 = 2.93
P0 = D0 x (1 + g1)^t / (1 + r)^t + (1 / (1 +r)^n x Dn + 1 / (r - g2))
P0 = 0.4 x 2.93 / (1 + 0.25)^3
P0 = $1.71
Which of the following statements is true?
a) Ordinary shares cost less than preference shares.
b) Preference shares, by their nature, cannot be valued.
c) Preference shares cost the same as ordinary shares.
d) Preference shares are valued by adding 5% to the value of ordinary shares.
e) Preference shares typically provide holders with a fixed annual dividend. - Answers-
e) Preference shares typically provide holders with a fixed annual dividend.
The WACC is:
a) The minimum return a firm must earn on its investments.
b) The cost of investing in a capital market.
c) Irrelevant for companies not listed on a stock exchange.
d) To be maximised in a company to ensure profitability is improved.
e) Both A and D. - Answers-a) The minimum return a firm must earn on its investments.
Allfresh Limited has preference shares that pay an annual dividend of $0.40 per share.
The current market price of the shares is $3.50. The current company tax rate is 28%.
What is the current cost of the preference share capital?
a) 8.23%
b) 14.63%
c) 11.43%
d) 10.23%
e) 9.43% - Answers-c) 11.43%
rp = Dp /Np
rp = 0..50
rp = 11.43%
_____ projects do not compete with each other. The acceptance of one ______ the
others from consideration.
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