Corporate Financial Management
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Paper Code: ACFI213 Page 2 of 10
ACFI213 Corporate Financial Management for Non-Specialist Students
Specimen Exam Paper
Answer ALL Questions (3.333 Marks for Each Question; 0.01 Mark Added)
Question 1
Which of the following statements is true?
a) The risk that can be reduced by diversification is referred to as systemic risk.
b) Security market line represents the combination between the expected return and
risk measured as standard deviation of stochastic returns.
c) Negative covariance indicates that returns of two assets tend to move in opposite
directions.
d) Arbitrage pricing theory (APT) tells investors in advance what the risk factors are.
e) None of the others.
Question 2
Consider the following statements.
1. Public limited company refers to a company that is listed in the Main market.
2. Issuing the non-voting shares increases the firm’s financial distress risk.
Which of the following options is correct?
Statement 1; Statement 2
a) False; True
b) True; False
c) True; True
d) False; False
Question 3
offer their owners a fixed rate of dividend each year. If a firm has
insufficient profits, then the amount paid to the owners of would be
reduced, which does not lead to the firm’s bankruptcy.
a) Ordinary shares
b) Voting rights
c) Warrants
d) Preference shares
e) None of the others
Paper Code: ACFI213 Page 3 of 10
Question 4
Consider the conflict of interests between shareholders and managers of a given
company. Choose what is not one of ways to align the actions of managers with the
interests of shareholders?
a) Linking rewards of managers to shareholder wealth improvements
b) Sackings
c) Selling shares and the takeover threat
d) Information flow
e) None of the others
Question 5
What is meant by the term 'internal rate of return'?
a) Length of time before the cumulated stream of forecasted cash flows equals the
initial investment.
b) The present value of future cash flows of a project net the initial cost of the project.
c) A rate of return that equates the present value of future cash flows of a project with
the initial cost of the project.
d) Sum of discounted future cash flows of a project.
e) None of the others.
Question 6
You plan to invest £15,000 in the shares of a company. The value of the shares increases
by 7.0 percent per year, and you will hold the shares for 5 years. What will be the 5-year
holding period return (HPR)?
a) 7.0%
b) 28.7%
c) 35.0%
d) 40.3%
e) 42.8%
Question 7
Which of the following statements is false?
a) Increasing the leverage ratio (i.e., higher debt-to-equity ratio) can sometimes
increase the firm’s weighted average cost of capital by increasing the probability of
financial distress.
b) The cost of capital is the rate which companies must offer to persuade people to
buy and hold their shares.
c) The cost of capital is affected by the level of investors’ risk tolerance.
d) Assume that CAPM holds. The greater the total risk of a share, the higher the cost
of equity.
e) None of the others.
Question 8
Which of the following statements is true?
a) The replicating portfolio method requires to use the correctly estimated required
return so as to calculate the present value of future cash flows of the investment
project (with managerial flexibility) of consideration.
b) Consider the real option analysis. The replicating portfolio method requires to find
the “twin security”, where such a twin security's returns should be independent of
the cash flows of the investment project (with managerial flexibility) of consideration.
c) Consider the binomial process of the share price and the replicating portfolio
method to calculate the premium of a call option to purchase one unit of the share.
Changes in the up-state probability p do not affect the premium of the call option as
long as the current share price is independent of the up-state probability p.
d) Consider the European call option of which exercise date is the next period. If the
next-period spot price of the share is lower than the exercise price, then the call
option seller's next-period cash flow is negative.
e) None of the others.
Question 9
Which of the following statements is true?
a) Real options method ignores the time value of money.
b) In selecting one out of two mutually exclusive projects, a firm must select a project
with the higher internal rate of return in order to maximize wealth of its
shareholders.
c) Discounted payback method does not take into account the time value of money.
d) Traditional method of calculating the net present value (NPV) ignores the possibility
that managers have a flexibility to affect the probability distribution of future cash
flows of a project.
e) None of the others.