Homework answers / question archive / BS1136 Introduction to Finance SECTION A   Answer ALL questions Question 1                                                                               [25 marks] 1

BS1136 Introduction to Finance SECTION A   Answer ALL questions Question 1                                                                               [25 marks] 1

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BS1136 Introduction to Finance

SECTION A  

Answer ALL questions

Question 1                                                                               [25 marks]

1.1 A balance sheet is considered backward-looking in the sense that it: A) records historic, not current values.

2. does not estimate future values. 
3. is not useful in assessing current 
4. records costs over many previous periods.

 

1.2 A firm has £6 million in total revenues, £2.5 million in cost of goods sold, £600,000 in depreciation expenses and £110,000 in interest expenses. Calculate the EBIT.

1. £2,790,000
2. £2,900,000
3. £3,500,000 D) £6,000,000

 

1.3 An increase in depreciation expense will (other things equal): A) increase net income.

2. decrease net income.
3. increase taxable income.
4. decrease the market value of assets. 

 

1.4 Given the following compounding periods, which one yields the lowest effective annual rate given a stated future value at Year 10 and an annual percentage rate of 11 percent?  A) Annual

B) Semi-annual 

4. Daily 
5. Continuous 

 

1.5 Jean-Luc Picard has just retired with savings of £2 million. He expects to live for 30 years and to earn 9% a year on his savings. Assuming that he spends the money at the start of each year, how much can Jean-Luc spend each year?  

1. £194,672.7028
2. £66,666.6667
3. £178,598.8099 D) £150,742.2723

 

1.6 The cash flows of a project should: A) be computed on a pretax basis.

2. include all sunk costs and opportunity costs.
3. include all incremental and opportunity costs.
4. include all incremental, opportunity and financing costs related to new debt acquired to finance the project.

 

1.7 Which one of the following statements concerning the standard deviation is correct? A) The standard deviation is a measure of total return.

2. The higher the standard deviation, the higher the expected return.
3. The standard deviation varies in direct relation to increases in dividend yield.
4. The lower the standard deviation, the less certain the rate of return in any one given year.

 

1.8 Which one of the following is the best example of systematic risk?

1. The price of coffee beans declines sharply
2. The airline pilots of a firm go on strike
3. The Bank of England increases interest rates
4. People become diet conscious and avoid fast food restaurants

 

1.9 Inside information has the least value when financial markets are: A) weak form efficient.

2. semi weak form efficient.
3. semi strong form efficient.
4. strong form efficient.

 

1.10 The common stock of ABC Inc has a beta of 2.34 and an actual expected return of 21.36 percent. The risk-free rate of return is 3.2 percent and the market rate of return is 12.4 percent. Which one of the following statements is true given this information?

1. The actual expected stock return will graph above the security market line.
2. The stock is currently underpriced.
3. The actual expected stock return indicates the stock is currently overpriced.
4. The answer cannot be determined from the information given.