FM - Ch. 7, 8 & 9

Dough Co has decided to increase its daily purchases of doughnuts by 100 boxes. A box of doughnuts costs $2 and sells for $3 in normal shops. Any boxes not sold in normal shops are sold through Dough’s economy shop for $1. Dough estimates the following probabilities to selling the additional boxes:

Normal Economy Probability

shop sales shop sales

60 40 0.6

100 0 0.4

What is the expected value of Dough’s decision to buy 100 additional boxes of doughnuts?

• 1. $28

• 1. $40

• 1. $52

• 1. $68

Blane Co purchases a new machine for $340,000. The machine is expected to increase annual cash flows by $110,000 per year for the next four years. The appropriate discount rate is 4%.

Using the discounted payback period method, approximately how many years will it take for Blane to recover its investment?

• 1. 3.09 years

• 1. 3.16 years

• 1. 3.37 years

• 1. 3.58 years

Which of the following limitations is common to the calculations of payback period, discounted payback, internal rate of return and net present value?

• 1. They do not consider the time value of money

• 1. They require multiple trial and error calculations

• 1. They require knowledge of a company’s cost of capital

• 1. They rely on the forecasting of future data

The NPV of a project is $56,000. The PV of revenue is $380,000, the PV of variable costs is $240,000 and the PV of fixed costs is $80,000.

What is the sensitivity of the project to changes in sales volume?

• 1. 14.7%

• 1. 23.3%

• 1. 40.0%

• 1. 93.3%

A company’s current share price is $4. The company then makes a 2 for 3 rights issue at an issue price of $2.

What is the theoretical ex-rights price?

• 1. $2.50

• 1. $2.80

• 1. $3.00

• 1. $3.20

Which of the following is the most likely effect of a scrip issue of shares?

• 1. Decreases the debt/equity ratio of the company

• 1. Decreases earnings per share

• 1. Increases the share premium account

• 1. Increases the share price

Which of the following is correct according to dividend irrelevance theory?

• 1. A company should maintain a stable dividend policy or risk losing investors

• 1. Shareholders prefer higher dividends and lower potential capital gains because a dividend today is without risk whereas future share price growth is uncertain

• 1. The pattern of dividends does not affect shareholder wealth

• 1. A dividend can only be paid if there are sufficient distributable reserves

In order to invest, a venture capitalist would normally expect which of the following?

• 1. High dividends

• 1. Board representation

• 1. At least 50% of the investment’s equity

• 1. Long-term involvement in the organisation

Which of the following sources of equity finance is NOT available to an SME?

• 1. IPO

• 1. Business angel

• 1. Crowdfunding

• 1. Government grants

Which of the following statements about convertible debt is correct?

• 1. It is usually cheaper to service than non-convertible debt

• 1. It can only be used by companies whose shares are listed on the stock market

• 1. It does not affect the financial gearing ratio

• 1. If conversion takes place, it will generate additional finance for the company