BUSN1015 Foundations of Finance
Sample Exam Paper Solutions
Section A – Multiple Choice Questions [30 Marks]
Please answer all multiple-choice questions for this section on a single page in the answer
booklet provide
...
BUSN1015 Foundations of Finance
Sample Exam Paper Solutions
Section A – Multiple Choice Questions [30 Marks]
Please answer all multiple-choice questions for this section on a single page in the answer
booklet provided. Entries made on this exam script will not be graded. There is only one correct
answer per question. Each question in this section is worth 2 marks.
Question 1A
Which of the following is not a true capital-raising event for a company?
A. Primary market transaction
B. Secondary market transaction
C. Initial public offering
D. A corporate loan from a bank
Question 2A
Which of the following is NOT one of the five basic corporate finance functions?
A. External financing function
B. Capital budgeting function
C. Risk management
D. Auditing
Question 3A
Which of the following organisations is disadvantaged by unlimited personal liability?
A. Sole proprietorship
B. Partnership
C. Propriety limited company
D. Options A and B are both correct.
Question 4A
Shareholders are said to have a residual claim on a company’s assets. What does this mean?
A. Shareholders have limited liability in their investment.
B. Shareholders do not receive any payoff from the company until all creditors are paid.
C. Shareholders are allowed to recover their investment first if the company experiences
financial distress.
D. Shareholders have priority in electing the board of directors for the company.BUSN1015 Foundations of Finance
Sample Exam Paper
2
Question 5A
Emma International has EBIT of $35 million, debt with a market value of $30 million and a
required return on assets of 13%. Assuming a corporate tax rate of 40%, what is company’s
value?
A. + $230,769,231
B. + $281,230,769
C. + $92,307,692
D. – $38,461,538
Value of Levered Company = Value of Unlevered company + PV of Interest Tax shield
= $35 000 000 / 0.13 + $30 000 000 x 0.40 = $281 230 769
Question 6A
Which statement correctly describes Proposition I of Modigliani and Miller?
A. The value of the company is independent of its capital structure.
B. If there is no default risk, companies should exclusively use debt to finance projects.
C. If there is no default risk, companies should exclusively use equity to finance projects.
D. The value of the company’s tax shields depends solely on the amount of debt issued.
Question 7A
Never-Crash Airlines Ltd has increased its annual ordinary dividend by 4% in each of the years
that the company has existed. If you believe that the company can continue to do so indefinitely,
then what price would you be willing to pay for Never-Crash Airline’s if the required rate of
return is 7% and the dividend that the company just paid was $6?
A. $85.83
B. $166.67
C. $171.67
D. $208.00
P0 =
$6 x 1.04
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