Department

FinanceCourse Code

MGFB10H3Professor

Derek ChauStudy Guide

FinalThis

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MGTC03

Principles of Finance

Final Examination

Winter 2007

Time Allowed: 3 hours

Instructions

1. Write your First/Last Name and Identification # (student number) on the

General Purpose Answer Sheet (Scantron) and fill the corresponding ovals. Use a

No.2 pencil.

2. Write your name and student number on the cover page of the examination

answer book.

3. You are allowed to bring two hand-written letter size crib sheets.

4. Financial calculator is allowed.

5. There are 11 pages in this question paper (including PV tables).

Part A:

Answer all 30 multiple choice questions on the General Purpose Answer Sheet by filling

the ovals with a No. 2 pencil.

Part B:

Answer all 5 questions in the examination answer book with a Black/Blue pen. Show all

your steps.

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Part A: Answer all 30 questions by choosing the best answer, 1.5% each.

1. When using the capital asset pricing model for determining which investment

projects are acceptable, the acceptable criterion is:

a. projects with internal rate of return greater than the risk-free rate are accepted

b. projects with internal rate of return above the security market line are rejected

c. accept all projects that lie above the security market line

d. Both a and b

e. Both a and c

2. A firm collects 50% of its sales during the month of the original sale, 40% of its

sales one month after the original sale, and 10% of its sales two months after the

original sale. The company expects sales of $20,000 in August, $30,000 in

September, $40,000 in October and $50,000 in November. How much money is

expected to be collected in October?

a. $23,000

b. $40,000

c. $44,000

d. $54,000

e. None of the above

3. The key to the accuracy of a cash budget is the accuracy of the:

a. estimation of tax disbursements

b. forecasted depreciation expenses

c. estimation of credit collection experience

d. forecast of sale

e. None of the above

4. Find the standard deviation of return of a two-asset portfolio where 19% is invested

in Asset1 and 81% is invested in Asset2. The standard deviation of return of Asset1

is 31.22% and the standard deviation of return of Asset2 is 30.01%. The correlation

coefficient of return is 0.466.

a. 30.01%

b. 31.22%

c. 34.28%

d. 0%

e. None of the above

5. Mary needs to find the portfolio expected return with 25% of invested funds in the

first stock, 42% in the second stock, and 33% in the third. Assume that the stock

expected returns are 17.86%, 16.46%, and 15.91% respectively.

a. 14.97%

b. 19.47%

c. 13.36%

d. 16.63%

e. None of the above

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6. Use the Capital Asset Pricing Model to find the beta for a security. The expected

return on the security is 14.24%, the risk-free rate is 6.52%, and the expected return

on the market portfolio is 13.98%.

a. 1.242

b. 1.035

c. 0.828

d. 0.724

e. None of the above

7. Which of the following is NOT true?

a. Beta is a measure of systematic risk.

b. The market portfolio includes all assets.

c. The market portfolio has a beta of one.

d. The risk-free asset has a beta of zero.

e. None of the above

8. The net present value and the profitability index methods for evaluating projects:

a. always give the same accept-reject signal for independent projects

b. the profitability index is the relative comparison of net cash flows while the net

present value is the absolute comparison of net cash flows

c. the profitability index is preferable because it shows relative capital

effectiveness

d. Both a and b

e. Both a and c

9. Which of the following amounts is closest to the end value of investing $3,000 for

¾ year at a continuously compounded rate of 12%?

a. $3,163

b. $3,263

c. $3.283

d. $3,297

e. $3,317

10. An investment project is most likely to be accepted by the payback period rule and

not accepted by the NPV rule if the project has:

a. a large initial investment with moderate positive cash flows over a very long

period of time

b. a very large negative cash flow at the termination of the project

c. most of the cash flow at the beginning of the project

d. constant cash flows over the duration of the project

e. None of the above

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