This study source was downloaded by 100000793843797 from CourseHero com on 12 31 2021 00 49 23 GMT 06 00 https www coursehero com file 12409200 MAF203 revision questions hints updated EXAMINATION PAPER FACULTY OF BUSINESS AND LAW Department of Finance TEMPLATE FOR MAF203 EXAM Unit Code MAF203 Unit Name Business Finance Writing Time 2 hours Reading Time 15 Minutes This examination is CLOSED BOOK Instructions for Candidates 1 This paper consists of 7 questions 2 This paper carries 60 marks 3 ALL QUESTIONS MUST BE ANSWERED 4 A formula sheet along with present value and future value tables are provided at the end of this examination paper 5 Both scientific and financial calculators are allowed for this examination THIS PAPER MUST REMAIN IN THE EXAMINATION ROOM Materials authorised for this examination must be in accordance with Deakin University policy This study source was downloaded by 100000793843797 from CourseHero com on 12 31 2021 00 49 23 GMT 06 00 https www coursehero com file 12409200 MAF203 revision questions hints updated REVISION QUESTIONS TO ASSIST EXAM PREPARATION Question 1 a Luke and Monica are proud parents of baby Lily who is 2 years old They want to send Lily to Presbyterian Ladies College PLC a prestigious private girl school when Lily enters secondary college They estimate that to fully fund the cost of Lily s secondary education they will need to have 120 000 at the time Lily is 13 years old They currently have 10 000 in an education fund for Lily which will be invested at 8 per annum until she reaches 13 They also intend to make monthly contributions into an investment account that pays 12 per annum i e 1 per month with annual compounding What is the monthly contribution if they were to achieve their saving objective of 120 000 when Lily is 13 years old b James Holloway has just won a television game show There are two ways in which James can receive his price Option 1 a once off payment of 65 000 in 12 months Option 2 a payment of 5000 a month for 12 months with the payment increasing by 0 5 every month Assuming that the monthly discount rate is 1 5 and that interest rate compounds monthly which option is financially better for James Hint a The FV of 5000 is 1 10 000 1 008 11 23 316 19 The balance required for Lily s cost of secondary education is 120 000 23 316 39 96 683 61 The monthly contribution is therefore 1 1 96 683 61 1 0 01 132 1 0 01 b PV of Option 1 is 1 65 000 1 0 015 12 54 365 18 PV of Option 2 is 1 1 1 1 56 013 02 Option 2 is therefore better for James Question 2 a Why is share valuation more difficult than bond valuation b HRL Technologies stocks currently sell for 29 per share The company last paid a dividend of 2 50 and the dividend is expected to grow at a perpetual rate of 2 per annum Investors require a 12 return on HRL Technologies stocks What is the intrinsic value of this stock and whether you would consider HRL Technologies a good buy at 29 per share Hint a In contrast to coupon payments on bonds size and timing of dividend cash flows are less certain Ordinary shares are true perpetuities in that they have no final maturity date Unlike rate of return or yield on bonds rate of return on ordinary shares cannot be observed directly b The intrinsic value of the stock is This study source was downloaded by 100000793843797 from CourseHero com on 12 31 2021 00 49 23 GMT 06 00 https www coursehero com file 12409200 MAF203 revision questions hints updated 0 1 2 5 1 0 02 0 12 0 02 25 50 The current market value is greater than the intrinsic value so it s not a good buy Question 3 a Do you think CSR activities contradict corporations goal of shareholders wealth maximisation Why or why not b Renfro Rentals has issued bonds that have a 10 coupon rate payable semi annually The bonds mature in 8 years have a face value of 1 000 and a yield to maturity of 8 5 What is the price of the bonds c A stock is trading at 80 per share The stock is expected to have a year end dividend of 4 per share and it is expected to grow at some constant rate g throughout time The stock s required rate of return is 14 If markets are efficient what is your forecast of g Question 4 a McDowell Industries sells on terms of 3 10 net 30 Total sales for the year are 912 500 Forty percent of customers pay on the 10th day and take discounts the other 60 pay on average 40 days after their purchases What is the days sales outstanding What is the average amount of receivables What would happen to average receivables if McDowell toughened its collection policy with the result that all non discount customers paid on the 30th day b The Zocco Corporation has an inventory conversion period i e DSI of 60 days an average collection period i e DSO of 38 days and a payables deferral period i e DPO of 30 days Assume that cost of goods sold is 75 of sales What is the length of the firm s cash conversion cycle If Zocco s annual sales are 3 421 875 and all sales are on credit what is the firm s investment in accounts receivable How many times per year does Zocco turn over its inventory Hint a This study source was downloaded by 100000793843797 from CourseHero com on 12 31 2021 00 49 23 GMT 06 00 https www coursehero com file 12409200 MAF203 revision questions hints updated i 0 4 10 0 6 40 28 days ii 912 500 365 2 500 sales per day 2 500 28 70 000 Average receivables iii 0 4 10 0 6 30 22 days 912 500 365 2 500 sales per day 2 500 22 55 000 Average receivables Sales may also decline as a result of the tighter credit This would further reduce receivables Also some customers may now take discounts further reducing receivables b i cycleconversionCash perioddeferralPayablesperiodcollectionsReceivableperiodconversionInventory 60 38 30 68 days ii Average sales per day 3 421 875 365 9 375 Investment in receivables 9 375 38 356 250 iii Inventory turnover 365 60 6 08 Question 5 a BugBusters Australia is considering replacing a machine with a new machine that has a four year life The purchase of this new machine has a cost of 700 000 shipping cost of This study source was downloaded by 100000793843797 from CourseHero com on 12 31 2021 00 49 23 GMT 06 00 https www coursehero com file 12409200 MAF203 revision questions hints updated 80 000 and an installation charge of 20 000 This machine will not require any additional working capital The old project can be salvaged for 120 000 currently The old machine …