Shares in Crate Co have an expected rate of return of 9% and a beta of 0.8. Shares in Lore Co have a beta of 1.2. The expected market rate of return is 10%.
Using the Capital Asset Pricing Model (CAPM), what is the expected rate of return for shareholders in Lore Co?
Sonoran Co recently evaluated an investment project that had an initial cash outlay followed by positive annual net cash flows over its life. The company employed the internal rate of return (IRR) and discounted payback period (DPP) methods for the investment appraisal. Later, it was discovered that the cost of capital figure used was incorrect and that the correct figure was higher.
What will be the effect on the IRR and DPP of correcting for this error?
Antares Co and Sirius Co have identical business risk and operating characteristics. Antares Co has financial gearing and Sirius Co is entirely financed by equity. Both companies pay out all their profits in dividends but Antares Co earns twice as much profit before interest and tax as Sirius Co. Antares Co has equity with a market value of $34 million and debt with an equilibrium market value of $15 million. Sirius Co has equity with an equilibrium market value of $24 million. The tax rate is 20%.
According to Modigliani and Miller (with taxes), what is the predicted value of the equity of Antares Co?
It has been claimed that the weighted average cost of capital (WACC) should only be used to evaluate investment decisions, involving discounted cash flow calculations, where:
1.Theproposed project does not alter the business risk profile of the business.
2.TheWACC reflects the long-term capital structure of the business.
Which ONE of the following combinations (true/false) is correct?
Better Inc, a US-based company, expects to receive €800,000 in two months’ time for consultancy services provided to the Austrian government. It wishes to be certain of the amount to be received and will use the derivatives market to achieve this.
Which one of the following actions should the company take NOW to hedge the risk?
A business holds an inventory item with an economic order quantity of 800 units. Supply lead times and usage rates for the item are as follows:
MaximumAverageMinimum
Supply lead time20 days12 days6 days
Daily usage25 units20 units10 units
The business wishes to avoid any risk of running out of this inventory item.
What is the size of the buffer inventory (using average figures) and the maximum level of inventory?
An analysis of the financial statements of Ordos Co revealed the following:
1. A higher than average inventory holding period
2. A lower than average acid-test ratio
3. A higher than average payment period for trade payables
4. A lower than average sales to fixed assets ratio
Which TWO of the above factors are consistent with overtrading?
The following comments were recently made, relating to methods of issuing shares by a public company:
1. An offer for sale is an invitation to the public to buy shares that are not yet in issue.
2. A placing is an invitation to selected investors to buy either new shares or shares already in issue.
Which ONE of the following combinations (true/false) is correct?
A company is considering a project for investment which will cost $70,000 now and another $10,000 in year five.
The company has a cost of capital of 8%. The project has the following discounted cash flows:
YearDiscounted Cash Flows
$
123,148
230,007
319,846
414,701
What is its discounted payback period in years and months (to the nearest month)?
Pecking order theory states that, when financing new investment opportunities, a business will prefer to use:
1. Internal finance rather than external finance.
2. Equity rather than debt.
Which ONE of the following combinations (true/false) concerning the above statements is correct?
Arcturus Co has recently purchased goods costing $12,000 from a supplier. The supplier has offered credit terms of 3/15, net 40. If a cash discount is taken, payment will be made on the last possible day. The opportunity cost of funds for Arcturus Co is 30%.
What is the net saving, or net cost, at the normal time of payment of taking a cash discount?
A business is considering various investment projects, with each expected to have an initial cash outflow followed by positive cash inflows over the rest of its life. The operations director has stated that the net present value and internal rate of return methods will, if correctly applied to each individual project, always give projects with the same characteristics:
1. Accept or reject decision for individual projects
2. Priority ranking for those projects that are acceptable
Which of the following combinations (true/false) is correct?
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