QUESTION 1 Which of the following best describes the intrinsic value of a firm?

A. The current market value of its total assets.

B. The difference between the historical values of its assets and liabilities.

C. The long term value of the firm.

D. The current market value of the firm.

E. Total assets minus long term debt.

QUESTION 2 A company wishes to borrow £21 million to invest in a project. There is a 60% probability that the project will result in a net cash inflow of £50 million and a 40% probability that the project will result in a net cash inflow of £15 million. The company's only activity is the project. Assuming a zero discount rate, how much will the company have to repay in the favourable state (£50 million) for a bank to be willing to make the loan?

A. £21 million

B. £25 million

C. £26 million

D. £28 million

E. None of the above

QUESTION 3 Holding all else constant, what does an increase in dividend imply?

A. A higher retention rate

B. A decrease in earnings per share

C. Lower cash flows

D. Higher cash flows

E. None of the above

QUESTION 4 A firm wishes to raise £1.2 million by issuing debt to finance a project. If the project succeeds the firm will be able to repay the debt but if it fails it will only be able to repay £0.8 million. The probability of failing is 20%. Assuming a discount rate of zero, what is the amount the debtholders will require to be repaid if the project is successful?

A. £1.2 million

B. £0.4 million

C. £0.2 million

D. £1.3 million

E. None of the above.

QUESTION 5 If it is impossible to make excess profits by trading on insider information, which of the following describes the highest level of market efficiency supported?

A. No level of efficiency is supported

B. Weak form efficiency

C. Semi-strong form efficiency

D. Strong form efficiency

E. None of the above

QUESTION 6 According to the pecking order theory, which source of funds would a company choose to use last to finance a project?

A. Convertible Bonds

B. Equity

C. Retained earnings

D. Debt

E. None of the above

QUESTION 7 If a market is weak-form efficient it is impossible to make excess profits by trading on a particular information set. Which one of the following information sets gives the best definition of that information set?

A. Trends in past share prices

B. Publicly available information

C. Privately available information

D. All information, both publicly available and privately available.

E. None of the above.

QUESTION 8 Which of the following groups is a company's financial distress NOT likely to affect adversely?

A. The company's competitors

B. The company's employees

C. The company's suppliers

D. The community where the company is based.

E. None of the above

QUESTION 9 A company's share price is currently £5 and there are 2,000 shares in issue. The company is considering issuing 1,000 new shares and will make the issue at the current share price. Management believe that their share price is currently undervalued and that, when the market learns of a new product the company has invented, the company's equity market value will increase by £2,000. If they make the issue immediately, what will the share price be when the market learns of the new product?

A. £4.00

B. £5.67

C. £6.00

D. £6.21

E. None of the above

QUESTION 10 Which of the following is true of the asset substitution problem?

A. Debt provides an incentive for firms to take on unnecessary risk, substituting riskier investment projects for less risky projects.

B. Equity holders may want to keep a firm operating when its liquidation value exceeds its operating value.

C. Equity holders have a tendency to take on only riskless projects, even when they have negative NPV.

D. Equity holders will prefer projects that pay off slower even if these projects have a negative NPV.

E. None of the above

QUESTION 11 Which of the following announcements is likely to lead to a decrease in share price?

A. An issue of equity.

B. An increase in leverage.

C. A share repurchase.

D. An increase in dividend payout.

E. None of the above

QUESTION 12 If a company was liquidated, which of the following would be paid first?

A. Preference shareholders

B. Ordinary shareholders

C. Senior debtholders

D. Junior debtholders

E. Senior managers

QUESTION 13
Assume the cash flows arising from a project are the only potential source of cash flow for a company and the company currently owes £2 million debt at an interest rate of 10% per annum. Project A, in one year's time, will either have a cash inflow of £1 million with a probability of 40% or a cash inflow of £4 million with a probability of 60%. In one year's time, the company will be closed and the proceeds distributed to shareholders. What is the expected cash inflow for shareholders in one year's time?

A. £0.6 million

B. £0.8 million

C. £1.8 million

D. £2.8 million

E. None of the above

QUESTION 14 According to corporate finance theory, which of the following statements is true about leverage in a firm's capital structure?

A. Shareholders prefer a lower leverage ratio than that preferred by management

B. Shareholders prefer a higher leverage ratio than that preferred by management.

C. A small debt obligation limits management's ability to use corporate resources in ways that do not benefit investors.

D. Lower leverage can lead to higher tax savings.

E. None of the above

QUESTION 15 For which of the following types of firms is the cost of financial distress particularly high?

A. Firms whose product quality is not an important factor.

B. Firms whose products that do not require follow-up service.

C. Firms with extremely low leverage.

D. Firms whose employees and suppliers require specialized capital or training.

E. None of the above

QUESTION 16 Which one of the following could lead to conflict (agency problem) between managers and shareholders?

A. Merging with companies in other industries to diversify risk.

B. The level of debt financing.

C. Time devoted to seek new ventures

D. Spending on corporate perquisites (i.e. purchase of a new corporate jet).

E. All of the others (A to D) could give rise to agency problems

QUESTION 17 According to the pecking order theory, which of the following sources of funds would a company choose to use first to finance a project?

A. Convertible bonds

B. Equity

C. Debt

D. Retained earnings

E. None of the above

QUESTION 18 Which of the following provides the best explanation for why managers may try to increase the current price of their shares?

A. Pressure from short-term shareholders

B. Threat that a competitor is threatening a hostile takeover of their company

C. Bonuses paid on the basis of the increase in the company's share price over the year

D. Manager's retirement at the end of the year

E. All of the above

QUESTION 19 In which of the following pairs of principal/agent relationships is the agent named first?

A. shareholders/management

B. auditor/firm

C. vehicle owner/mechanic

D. investors/fund managers

E. None of the above

QUESTION 20 Strong-form market efficiency states that the market incorporates all information into stock prices. Which of the following statements best describes the implications of strong-form market efficiency?

A. An investor can only earn risk-free rates of return.

B. An investor can always rely on technical analysis.

C. An insider or corporate officer cannot outperform the market by trading on the inside information.

D. An investor cannot earn more than market return.

E. None of the above