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DIVISION OF ACCOUNTING & FINANCE
INVP001 CORPORATE FINANCE
SAMPLE MULTIPLE CHOICE QUESTIONS
INVP001 SAMPLE MULTIPLE CHOICE QUESTIONS
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Q1. If you have a choice to earn simple interest on £10,000 for three years at 8% or
compound interest at 7.5% for three years which one will pay more and by how
much?
A Simple interest by £1,500
B Compound interest by £22.97
C Compound interest by £150.75
D Simple interest by £150.00
E None of the above.
Q2. You have deposited £1,500 in an account that promises to pay 8% compounded
quarterly for the next five years. How much will you have in the account at the end
of five years?
A £1,598.33
B £2,228.92
C £2,203.99
D £ 6991.44
E None of the above.
Q3. You need £2,000 to buy a new sofa. If you have £500 to invest at 14% compounded
annually, how long will you have to wait to buy the sofa?
A 6.58 years.
B 8.42 years.
C 10.58 years.
D 10.75 years.
E 12.27 years
Q4. What amount would you have at the end of 7 years if you invested £9,000 at a
continuously compounded rate of 11%?
A £18,685.44
B £19,369.83
C £15,930.00
D £19,437.90
E None of the above.
Q5. Would you accept a project which is expected to pay £10,000 a year for 10 years if
the initial investment is £60,000 and your required rate of return is 10%?
A Yes the NPV is £17,217.
B Yes the NPV is £ 1,446.
C No the NPV is -£10,000.
D No the NPV is -£15,369.
E No the NPV is -£22,738.
INVP001 SAMPLE MULTIPLE CHOICE QUESTIONS
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Q6. Which of the following correctly orders the investment rules of average accounting
return (AAR), internal rate of return (IRR), and net present value (NPV) from the
most desirable to the least desirable?
A AAR, IRR, NPV
B AAR, NPV, IRR
C IRR, NPV, AAR
D NPV, AAR, IRR
E NPV, IRR, AAR.
Q7. An investment project has the following cash flows:
t = 0 t = 1 t = 2 t = 3 t = 4
-250 +75 +125 +100 +50
Assume that the cash flows occur evenly over the life of the project. If the cost of
capital is 12%, what is the discounted payback period?
A 2.5 years.
B 2.7 years.
C 3.38 years.
D 1.40 years.
E 1.25 years.
Q8. How many IRRs are possible for the following cash flows?
t = 0 t = 1 t = 2 t = 3 t = 4
-100 +50 +30 -100 +20
A One.
B Two.
C Three.
D Four.
E Five.
Q9. A bond with a 7% coupon that pays interest semi-annually and is priced at par will
have a market price of _____ and interest payments of _____ each.
A $1,007; $70
B $1,070; $35
C $1,070; $70
D $1,000; $35
E $1,000; $70
INVP001 SAMPLE MULTIPLE CHOICE QUESTIONS
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Q10. Consider a bond with a $1,000 face value and a coupon rate of 11% that pays
interest semi-annually and has 3 years to maturity. The market requires an interest
rate of 10% on bonds of this risk. What is the bond's price? (Round your answer
to the nearest whole number).
A $1,014
B $1,055
C $ 888
D $1,025
E $1,000.
Q11. Mortgage Instruments plc is expected to pay dividends of £1.03 next year. The
company has just paid dividends of £1.00. This growth rate is expected to continue
indefinitely. How much should be paid for the company’s shares if the appropriate
discount rate is 5%? (Round your answer to the nearest whole number).
A £20
B £21
C £34
D £50
E £52.
Q12. A stock is currently selling for £34.50 a share. The current dividend for this stock
is £1.60 and dividends are expected to grow at a constant rate of 10% per year
thereafter. What must be the required rate of return on the stock?
A 4.90%
B 5.36%
C 14.64%
D 15.10%
E 13.19%
Q13. You buy 100 shares of stock today at £20 each. At the end of the year, you
receive a total of £400 in dividends, and your stock is worth £2,500 in total.
What is your Holding Period Return?
A 20%
B 45%
C 50%
D 90%
E None of the above.
INVP001 SAMPLE MULTIPLE CHOICE QUESTIONS
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Q14. What is the standard deviation of the returns on a stock given the following
information?
State of Probability of Rate of Return
Economy State of Economy if State Occurs
Boom 10% 16%
Normal 60% 11%
Recession 30% -8%
A 5.80%
B 7.34%
C 8.38%
D 9.15%
E 9.87%
Q15. In the language of Modern Portfolio Theory, the portfolio with the lowest
possible risk that lies on the opportunity set is called:
A the efficient frontier.
B the minimum variance portfolio.
C the upper tail of the efficient set.
D the tangency portfolio.
E None of the above.
Q16. The separation principle states that an investor will:
A choose any efficient portfolio and invest some amount in the riskless asset
to generate the expected return.
B choose an efficient portfolio based on individual risk tolerance or utility.
C never choose to invest in the riskless asset because the expected return on
the riskless asset is lower over time.
D invest only in the riskless asset and tangency portfolio choosing the weights
based on individual risk tolerance.
E All of the above.
Q17. The risk-free rate of return is 4% and the market risk premium is 8%. What is the
expected rate of return on a stock with a beta of 1.28 if the CAPM holds?
A 9.12%
B 10.24%
C 13.12%
D 14.24%
E 15.36%
Q18. A stock has a beta a 1.14 and an expected return of 11.6%. The risk-free rate of
return is 4%. What is the expected return on the market if the CAPM holds?
A 7.60%
B 8.04%
C 9.33%
D 10.67%
E 12.16%
INVP001 SAMPLE MULTIPLE CHOICE QUESTIONS
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Q19. A portfolio contains two assets. The first asset comprises 40% of the portfolio and
has a beta of 1.2. The other asset has a beta of 1.5. The portfolio beta is:
A 1.35
B 1.38
C 1.42
D 1.50
E 1.55
Q20. Which one of the following stocks is correctly priced according to the CAPM if
the risk-free rate of return is 2.5% and the market risk premium is 8%?
Stock Beta Realized Return
A .68 8.2%
B 1.42 13.9%
C 1.23 11.8%
D 1.31 12.6%
E .94 9.7%
A A
B B
C C
D D
E E
Q21. Two firms A and B have identical fixed costs and sell the same product for the same
price in the market. The variable costs of B are higher than A. This means:
A B has higher operating leverage than A
B A has higher operating leverage than B
C The operating leverage of both A and B are the same since the price of the
products is the same
D The contribution margin of B is higher than A
E None of the above
Q22. A firm has a Beta of 1.3 and debt comprises of 40% of total capital. What is the
firm’s asset Beta?
A 0.33
B 0.52
C 0.78
D 0.86
E We cannot calculate with knowing the beta of the firm’s debt
Q23. The cost of capital can be reduced through:
A Increasing the bid ask spread in the quoted price of a firm in the market
B Increasing asymmetric information between investors and the firm
C Reducing liquidity in shares of the firm
D Examining historical returns only to estimate the cost of capital
E Decreasing the level of information asymmetry between investors and the
firm
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Q24. Beta is determined by:
(i) The cyclicality of revenues
(ii) Operating leverage
(iii) The WACC
(iv) The industry in which the firm operates
(v) The market in which the firm is quoted
A i), ii), iii) and iv)
B i), ii), iii), iv) and v)
C i), ii) and iii)
D iii), iv)
E ii), iii) and iv)
Q25. In estimating a firm’s Beta:
A We should always use 5 years’ worth of daily market data
B We should use forward looking data
C We should only use the FT as our source
D We should use data from a stock market in which the company’s shares are
actively traded
E None of the above
Q26. If the Asset Beta of a firm is 0.8 and the gearing ratio is 0.6, what is the Equity
Beta, assuming the Beta of debt is zero?
A 2.0
B 1.3
C 0.5
D 0.8
E None of the above
Q27. A firm has an Asset Beta of 1.2, an Equity Beta of 1.0 and a gearing ratio of 0.4.
What is the firm’s Debt Beta?
A 2.0
B 1.5
C 1.0
D 0.8
E 0.5
Q28. MM’s 1958 Proposition II states:
A The WACC rises with increasing leverage
B The WACC stays constant with increasing or decreasing leverage
C The WACC falls with falling leverage
D The WACC increases with increasing leverage
E The WACC increases to a point of maximisation as leverage increases,
reaching a certain optimal level
INVP001 SAMPLE MULTIPLE CHOICE QUESTIONS
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Q29. Bertie is an entrepreneur who owns 10% of the outstanding shares in Bassetts Plc,
which has announced a 1 for 10 rights issue with a subscription price of £10 per
share. The current share price prior to the rights issue is £12 per share. If the number
of shares in Bassetts Plc is 10 million, what is the theoretical ex-rights price?
A £11.00 per share
B £10.28 per share
C £11.82 per share
D £12.82 per share
E £13.00 per share
Q30. Graham’s Diary Plc has announced a rights issue to raise £100m for a new dairy
plant which is aiming to process 50 million litres of milk per week. The share price
is £15 per share and there are 300 million shares in issue. If the subscription price
for the rights issue is £13 per share, how many rights are needed to buy one share?
A 39
B 40
C 45
D 46
E 13
Q31. Blackstone Minerals Plc is planning to repurchase part of its ordinary share equity
by issuing corporate debt. As a result, the firm’s debt–equity ratio is expected to
rise from 25 per cent to 40 per cent. The firm currently has £15 million worth of
debt outstanding. The cost of this debt is 5 per cent per year. Blackstone expects to
have an EBIT of £5 million per year in perpetuity and pays no taxes. What is the
expected return on the equity of the firm after the share repurchase?
A This cannot be calculated from the given data
B 10.6%
C 11.8%
D 12.8%
E 9.8%
Q32. Rubens Juice Plc has a debt-to-equity ratio of 20%, a cost of equity of 9% and a
cost of debt before tax of 5%. If the corporate tax rate is 19% what is the WACC
of the company?
A 12.5%
B 15.3%
C 14.2%
D 17.6%
E None of the above
INVP001 SAMPLE MULTIPLE CHOICE QUESTIONS
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Q33. According to Pecking order theory:
A Cash, then equity, then debt should be used to raise additional finance
B Debt, then cash, then equity should be used to raise additional finance
C Cash, then debt, then equity should be used to raise additional finance
D Private equity, then debt, then cash should be used to raise additional finance
E None of the above
Q34. The optimal capital structure of a firm occurs when:
A When the WACC is maximised
B When the WACC is minimised
C When the marginal costs of equity finance are equal to the marginal costs of
debt finance
D When the value of the unlevered firm is equal to the value of the levered firm
E When the Risk-free rate equals the cost of capital for the firm