Question: Consider the advantages and disadvantages of investment appraisal techniques used by managers to make long-term investment decisions.

25 Oct 2022,9:33 PM

 

 

1. Your business expects to receive a payment of £15000 one year from now. What is the present value of this payment assuming a discount rate of 5%?

 

1. £15005

2. £14706

3. £14286

4. £15750

 

2. If interest rates rise, what will be the effect on the price of a 3% corporate bond?

 

1. Price will rise

2. Price will fall

3. There will be no impact on the price

4. Price will remain the same, but the interest received will rise

 

3. The assumed objective for finance is:

 

a.     Maximisation of profit

b.     Maximisation of market share

c.     Maximisation of empire

d.     Maximisation of shareholder wealth

 

4. The principle agent problem can be diminished by:

 

a.     Reducing Corporate governance regulation

b.     Asymmetric information

c.     Inefficient markets

d.     Managerial compensation based on market share.

 

5. A stock is overvalued if the intrinsic value (V₀):

 

1. V₀ = Stock Price

2. V₀ ≥ or ≤ Stock Price

3. V₀ < Stock Price

4. V₀ > Stock Price

 

6. Asymmetric information is

 

a.     How investments support a particular transaction

b.     When parties to a transaction have the same information as each other

c.     When one party has better information than another

d.     Expenses incurred as a result of buying and selling securities

 

7. You are valuing a project that is expected to earn a one-time cash flow of £500m in four years. You estimate a discount rate of 8%. What is the present value of this cash flow?

 

a.     £294m

b.     £94m

c.     £368m

d.     £138m

 

8. One of the main causes of costs increases for UK firms over the past two years has been:

 

1. The depreciation of sterling against the euro

2. The appreciation of sterling against the euro

3. The increase in the value of sterling against major currencies

4. The appreciation of sterling against the US dollar

 

9. An investment offers a perpetual cash flow of £400 every year. The required return on the investment is 11%. The PV of the investment is?

 

a.     £36

b.     £363

c.     £3636

d.     £36363

 

10. Suppose a perpetual bond has been issued at par £1000 with coupon interest payment £30.00 Now 10 years after issue the required rate rises to 5%. What is the current value / price of this bond?

 

1. £600

2. £1000

3. £1040

4. £800

 

11. FDM ltd issues a two-year bond with a 6% coupon rate and interest repayable annually. The bond is priced at its face value of £100 and the market rate of interest is 12%. What is its current value?

 

a.     £90

b.     £40

c.     £60

d.     £100

 

12. The annual payment to a bond holder is called a:

 

1. default provision

2. dividend

3. perpetuity

4. coupon

 

13. In the event of a company going into liquidation, who would normally have the highest priority for payment?

 

1. Ordinary shareholders

2. Deferred ordinary shareholders

3. Bond holders

4. Preference shareholders

5. The internal rate of return is:

 

1. The rate of return at which the NPV is 0

2. The rate of return at which the NPV is increasing

3. The rate of return at which the NPV is greater than the profitability index

4. The rate of return at which the NPV is falling

 

15. You are considering a one-year investment. If you invest £600 you are promised £618 in a year’s time. What rate is this investment paying?

 

1. £18

2. 03%

3. 3%

4. 3%

 

Use the following expectations on Stocks X and Y to answer the following four questions

 

	Probability	Stock X	Stock Y
Bear Market	0.2	-20%	6%
Normal Market	0.3	10%	10%
Bull Market	0.5	20%	12%

 

16. What is the expected return of Stock X ?

 

a.       10.2%

8. 5%

9. 4%

10. 9%

 

17. What is the expected return of Stock Y?

 

a.     10.2%

b.     9%

5. 4%

6. 5%

 

18. What are the standard deviations of returns on Stocks X and Y?

 

Stock X               Stock Y

a.     13%                    2.3%

5. 169% 13%

6. 3% 13%

7. 13% 169%

 

19. Assume that of your £1,000 portfolio, you invest £300 in Stock X and £700 in Stock Y. What is the expected return on your portfolio?

 

a.     6%

b.     10%

c.     16%

d.     20%

 

For the following two questions refer to the information below:

 

The management of FDM Plc. are currently evaluating an investment in products costing £15,000.  Anticipated net cash inflows are over three years with £6,000 received at the end of year 1, 2 and 3.

 

20. If the discount rate is 8%, calculate the projects Net Present Value (NPV).

 

a.     - £4,620

b.     - £462

c.     £462

d.     £4,620

 

21. If the discount rate was 6% and applying the NPV rule:

 

a.     The project should be accepted

b.     The project should be rejected

c.     More information is required

d.     The project has a zero NPV

 

22. Which of the following sources of finance is NOT an external source of finance?

 

a.     Working Capital

b.     Debt Finance

c.     Private Equity Finance

d.     Public Equity Finance

 

For the following four questions refer to the information below:

 

	E(R)	σ
Asset A	8	6
Asset B	15	3

 

 

23. Calculate the expected return of the two-asset portfolio to an investor with equal amounts invested in each asset.

 

a.     7

b.     12%

c.     14%

d.     10%

 

24. Calculate the portfolios risk. The covariance between the two assets is 5.

 

a.     1.3%

b.     13.8%     

c.     3.7%

d.     10%

 

25. Calculate the portfolios correlation

 

a.     0

b.     0.28

c.     0.6

d.     -0.28

 

 

26. If instead the investor invested 75% of his wealth in Asset A, the portfolio expected return would:

 

a.     Increase

b.     Decrease

c.     Not change

d.     Increase or decrease

 

27. A bear market:

 

a.     Characterised by investor confidence that strong results will continue

b.     Is a market condition in which prices of securities are falling

c.     Is a market condition in which prices of securities are rising

d.     Occurs in an economy with low inflation

 

28. Which of the following is a role of the London Stock Exchange?

 

a.     To regulate banks

b.     To authorise brokers

c.     To price securities

d.     To provide a market for securities

 

29. Which of the following is an example of a capital structure decision?

 

a.     Issuing new shares

b.     Buying a new factory

c.     Reducing inventory levels

d.     Increasing staffing levels

 

30. Retained earnings are often a preferred source of finance due to:

 

a.     The tax shield on debt.

b.     Issue costs

c.     Decision making freedom

d.     Dilution of ownership

 

Total 30 Marks

 

 Section B

 

Answer IN YOUR OWN WORDS any TWO questions.

 

All questions are worth 25 marks of the overall total.

 

Maximum of 1000 words per question (include word count per question)

 

1.

(a)  Manager and shareholders may not always have the same objectives. Using agency theory, discuss the potential conflict from this principal-agent relationship.

(8 marks)

 

(b)    Using recent case studies, discuss the impact poor governance can have on share price.

(12 marks)

 

Total 20 marks

 

2. • Distinguish between the methodological approaches to fundamental and technical analysts to predict the growth trends of stocks.

(8 marks)

 

• Thirteen years on from collapse of Lehman Brothers,

 

• Discuss the legacy of the Lehman Brothers collapse.

• Consider how human psychology impacts on financial markets.

(12 marks)

 

Total 20 Marks

 

3.  

(a)  Consider the advantages and disadvantages of investment appraisal techniques used by managers to make long-term investment decisions.

(8 marks)

 

• The Bank of England’s primary functions include maintaining monetary stability and overseeing financial stability of the UK financial system. Discuss.

 (12 marks)