applied business finance

© Macleay College 2022. 1
FINAL EXAMINATION COVER SHEET
TRIMESTER 1 – 2022
STUDENT INFORMATION
NAME Course Title
ID NUMBER
Signature
and Date
EXAMINATION INFORMATION
SUBJECT AFB204 – Applied Business Finance
READING TIME N/A WRITING TIME N/A
NO. OF PAGES INCLUDING COVER SHEET AND BLANK PAGE 05
TOTAL MARKS IN EXAM 100 % OF FINAL GRADE 50
EXAMINATION STRUCTURE
Sections Weighting Marks
1. Short Answer and Calculation Questions 4 questions 40% 40
2. Written and Practical Questions 3 questions 60% 60
TOTAL 100% 100
INSTRUCTIONS
1. This is a Take-home exam. Textbooks, dictionaries, and notes are allowed in the exam.
2. This is an individual exam. You must not speak to other students or look at others’ work.
3. Create a new word document and on top of the first-page type your StudentID_First_ Name_ Last _Name_
Lecturer’s Name_T1 2022.
4. Do NOT rewrite the question in your exam answers. Just write the number of the question.
5. The typed answers must need to be submitted in Turnitin in Moodle within 24 hours of the given timeframe.
6. Important note: please write all answers in your own words. Any direct match on Turnitin will result in zero marks
for the question.
© Macleay College 2022. 2
Section 1: Short Answer Questions (40 Marks)
You are required to attempt 4 questions out of the given 5 questions below.
Question 1. (10 marks)
Briefly discuss the difference between simple and compound interest. Does a loan where interest
is compounded monthly, but you do not have to make the first loan payment for six months save
you money? Explain.
Expected word count: 150 words
Question 2. (10 marks)
Discuss net present value. What are the four parts of the basic present value equation? Briefly
explain all four terms.
Expected word count: 150 words
Question 3. (10 marks)
Classify the following as systematic or unsystematic risk.
i. The short-term interest rates increased unexpectedly.
ii. Oil prices increased unexpectedly
iii. A producer lost a multimillion-dollar liability suit.
iv. Company lost a huge amount of money because of covid 19 lockdowns.
Question 4. (10 marks)
What are different financing options for a business? Is there any standard or easily identifiable
debt-equity ratio that will maximize the value of a firm? Why or why not?
Expected word count: 150 words
Question 5. (10 marks)
Indicate the impact of the following corporate actions on cash using the letter I for an increase, D
for a decrease or N when no change occurs.
© Macleay College 2022. 3
a) Real estate is purchased and paid for with current debt.
b) A dividend is paid with funds received from the sale of debt
c) Inventory is bought on credit.
d) A current bank loan is repaid.
e) Next year’s taxes are prepaid.
f) Preference shares are issues
g) Sales are made on credit
h) Interest on non-current debt is paid
i) Payments for previous sales are collected
j) The accents payable balance is reduced.
Section 2: Written and Practical Calculations (60 Marks)
You are required to attempt 3 questions out of the given 4 questions below. Each question is worth
20 marks. You need to answer all required parts of a chosen question as some questions have
subparts.
Question 1. (20 marks)
The following information relates to MHP Ltd.
MHP has 7 million ordinary shares on issue, which are currently trading for $12.00 each. These
shares are expected to pay an annual dividend of $1.00 next year, and this dividend is expected to
grow at a constant rate of 2% in perpetuity.
MHP has 5 million preference shares on issue, which are currently trading for $10.00 each, giving a
total market value of $50 million. They pay an annual dividend of 50 cents per share.
MHP has 10,000 bonds outstanding with a face value of $1,000 each, which have 5 years to maturity
and pay an-annual 10% coupon. The yield on the bonds is 10% p.a. SHP’s corporate tax rate is
30%.
i. What is MHP’s cost of debt? (2 marks)
ii. What is MHP’s cost of preference share capital? (2 marks)
iii. What is MHP’s cost of ordinary share capital? (2 marks)
iv. What is MHP’s Weighted Average Cost of Capital (WACC)? (14 marks)
© Macleay College 2022. 4
Question 2. (20 marks)
(a) What is the payback period method, briefly explain? What is the payback criterion decision
rule? Expected word count: 150 words
(b) Swan fashions imposes a payback period method to its below international investment
projects. If the company has the following two projects. According to payback, which project
should be accepted, and which should be rejected?
Year Cash flow (A) Cash flow (B)
0 -$75,000 -$125,000
1 $33,000 $29,000
2 $36,000 $32,000
3 $19,000 $35,000
4 $9000 $240,000
Question 3. (20 marks)
Sweet memories flight school is presented with two mutually exclusive projects. The required
return for both projects is 13%.
Year Project A Project B
0 -$140,000 -$559,000
1 $61,500 $259,300
2 $93,400 $168,400
3 $68,100 $154,800
4 $40,500 $110,400
a. What is IRR for each project? 8 marks
b. What is NPV for each project? 8 marks
c. What if either of the projects should the company accept? 4 marks
© Macleay College 2022. 5
Question 4. (20 marks)
a. Interpret the following term ‘2/10, net 30’ from the credit sales topic.
b. List and explain all the steps of the Voluntary bankruptcy/ liquidation process.
Expected word count: 250 words
END OF EXAM