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Finance - Tutorial 5 (34), Study Guides, Projects, Research of Finance

Detail Summery about Finance Tutorial,Department of Accounting and Finance,M.Sc. FinanceAndM.Sc. International Accounting and Financial Studies<br />

Typology: Study Guides, Projects, Research

2010/2011

Uploaded on 09/11/2011

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Department of Accounting and Finance
M.Sc. Finance
And
M.Sc. International Accounting and Financial Studies
Finance I and II
Wednesday 9th January 2008 10.00am – 1.00pm (3 hours)
Instructions for Candidates
Answer ALL Questions from Section A (in the spaces provided),
ONE Question from Section B (in the answer book)
and ONE Question from Section C (in the answer book)
[Failure to comply will result in papers not being marked]
Calculators must not be used to store text and/or formulae nor be capable of
communication. Invigilators may require calculators to be reset. All answers are to be
written in the spaces provided in ink. Please write clearly as illegible writing cannot be
marked. If more space is required the answer can be continued on the back of the
page where the question appears. Failure to follow these requirements will lead to
a deduction of marks.
To Be Issued: Discount Tables
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Department of Accounting and Finance

M.Sc. Finance

And

M.Sc. International Accounting and Financial Studies

Finance I and II

Wednesday 9 th January 2008 10.00am – 1.00pm (3 hours)

Instructions for Candidates

Answer ALL Questions from Section A (in the spaces provided),

ONE Question from Section B (in the answer book)

and ONE Question from Section C (in the answer book)

[Failure to comply will result in papers not being marked]

Calculators must not be used to store text and/or formulae nor be capable of communication. Invigilators may require calculators to be reset. All answers are to be written in the spaces provided in ink. Please write clearly as illegible writing cannot be marked. If more space is required the answer can be continued on the back of the

page where the question appears. Failure to follow these requirements will lead to a deduction of marks.

To Be Issued: Discount Tables

Family Name:

Other Name:

Course (please indicate by ticking appropriate box)

M.Sc. Finance M.Sc. IAFS

For Examiners Use Only

SECTION A TOTAL

MARKS

b) Determine the approximate value of its IRR.

c) Determine the approximate value of its payback period and discounted

payback period and comment on your results.

Q2. Drefach Ltd is considering an investment in an open cast mining operation. The

project will require an outlay of £10m at the outset and is expected to produce a constant annual net cash flow of £2.638 million for the next four years. In year five the sale of some equipment will boost the net cash flow to £4.49 million. The mining will stop at the end of year five and in year six the company will incur a cost of £2.0 million to restore the land to its former state. Determine the modified rate of return on the investment if the company’s required rate of return is 8 per cent.

Q3. a) Digivision is expected to pay a dividend of 18p per share next year and its

current share price is 200p. Shares of this risk are expected to yield 12 per cent or so. What rate of growth is Digivision expected to produce if its share price can be explained by the Gordon growth model?

Q4. Braehead Manufacturing has been offered a contract to supply some components to

Pollock Pumps for the next five years. The work would be undertaken in the company’s factory where it has considerable spare capacity. The components will be produced using for machinery that it has been planning to sell. This machinery was bought five years ago for £12 million and now has a book and tax value of £ million. It has been written off for tax purposes on a straight line basis over an assumed working life of ten years, as required by the tax authorities. If sold now it is anticipated that it would realise £2.4 million. It would have little or no resale value if used to produce the components for the next five years. The project would require an investment in working capital of £2 million. The contract would be for 4 million units a year at a price of £2.00 each. The cost of production estimated by the factory accountant, excluding the cost of the factory space and machinery, is as follows:

Materials £0.40 per unit Labour £0.80 per unit Power etc. £0.20 per unit Overheads £0.40 per unit

The overheads are allocated on the basis of direct labour costs. Is this a profitable investment if the required rate of return is 8 per cent and the tax rate is 40 per cent?

Q5. a) Given the following variance-covariance matrix for five securities determine

the risk of an equally weighted portfolio of the five securities.

Q6. The expected rate of return on the market portfolio is 16 per cent with a standard

deviation of 20 per cent and the risk free rate is 6 per cent. Determine the composition of an efficient portfolio that offers an expected return of 8½ per cent. Determine the standard deviation of this portfolio and its beta.

Q7. The expected return on security A is 20.4 per cent and its beta has been estimated at

1.2 whereas the expected return on security B is 14.4 per cent and it has a beta of

0.7. Determine the risk free rate and the expected return on the market, assuming the expected returns can be explained by the CAPM.

Q9. Ayr plc has two divisions, one produces specialised radio equipment and the other

components for electronic monitoring sets. The demand for radio equipment is steady but the demand for the components, produced in a more automated capital intensive process is highly cyclical. The radio division accounts for 70 per cent of the company’s business and the components division for the residual 30 per cent. Management is setting the cost of capital for these divisions. The risk free rate is 6 per cent and the expected return on the market is 15 per cent. The beta of the company’s shares have been estimated at 1.55 and the company is financed by 40 per cent debt and 60 per cent equity. There is a company quoted on the stock market that simply produces specialised radio equipment and its shares have a beta of 0.8: this company is financed 75 per cent equity and 25 per cent debt. What rates of return should be set for the two divisions of Ayr plc?

Q10. The cost of a call with an exercise price of 120p on a share currently selling at 102p

is 16p. Draw a profit graph for a covered call, and determine the profit at the expiry of the call for the following share prices

Share Price 80 90 100 110 120 130 140

Profit

Profit

Share Price

Q11. Draw a profit graph for a straddle and a strangle and comment briefly on when

these strategies might be employed.

Profit

Share Price

[Pleas e Turn Over]

(3 marks)