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MGT6174 MGT6174 1 MANAGEMENT SCHOOL MOCK EXAM PAPER
FINANCIAL MANAGEMENT
1.5 HOURS The exam paper consists of TWO sections. Answer ANY 1 question from Section A (total of 40 Marks)
Answer ANY 2 questions from Section B (total of 60 Marks) 100 MARKS IN TOTAL Candidates may use university authorised calculators.
MGT6174 MGT6174 MGT6174 2 SECTION A – ANSWER ANY 1 QUESTION
Question 1 Explain the Discounted Cash Flows (DCF) and Relative Valuation (RV) approaches to investment valuation.
Include in your answer a discussion of the main advantages and disadvantages
of these two approaches, as well as a brief discussion of when each approach works the best. [40 marks] [800 words]
Question 2 Critically discuss the main functions of financial markets and intermediaries
in the context of the current financial system. Please note that merely providing a list is not
sufficient for a good answer. Instead, your answer should focus on discussing why you think these functions are important. [40 marks] [800 words]
END OF SECTION A [TOTAL SECTION A MARKS 40] MGT6174 MGT6174 3 SECTION B – ANSWER ANY 2 QUESTIONS
Question 3 Medics plc., a UK firm of medical equipment, reported earnings per share (EPS) in 2005 of £3.95
and paid dividends per share (DPS) of £0.68. Its earnings are expected to grow by 16% from 2006 to 2010,
but the growth rate is expected to decline each year after that to a stable growth rate of 6% in 2015.
The payout ratio is expected to remain unchanged from 2006 to 2010, after which it is expected to
increase each year to reach 60% in steady state. Medics’s stock is expected to have a beta of 1.25 from 2006 to 2010,
after which the beta would decline each year to reach 1.00 by the time the firm becomes stable. Further,
the risk-free rate is 6.25% p.a. and the market risk premium 5.5% p.a. REQUIRED: A. Assuming that the
growth rate declines linearly and that the payout ratio increases linearly, from 2011 to 2015, estimate
the dividends per share each year from 2006 to 2015. [15 marks] [300 words] B. Estimate the expected
price of Medics at the end of 2015. [5 marks] [100 words] C. Estimate the value per share of Medics,
using the three-stage dividend discount model. [10 marks] [200 words] [Total: 30 marks] [Total: 600 words]