151. A private company has earnings per share of Tk 8 and 5m shares. Comparable listed companies trade on a P/E of 12.5. An adviser proposes a 20% discount because the shares are not marketable. What equity value results?

A) Tk 400m, based on a value of Tk 100 per share less a 20% discount for lack of marketability
B) Tk 40m, based on earnings per share of Tk 8 multiplied by the P/E ratio of 12.5, with no allowance for the number of shares
C) Tk 320m, based on a value of Tk 80 per share less a further 20% discount for lack of marketability
D) Tk 500m, based on a value of Tk 100 per share, because the discount for lack of marketability applies only to minority holdings

Correct: A complex P/E valuation of unquoted company

Value per share = 8 × 12.5 = 100. Less 20% = 80. For 5m shares = Tk 400m. Applying the discount twice gives 320, and ignoring the share count gives 40.

152. A bond with face value Tk 1,000 pays an 8% coupon annually and has three years to redemption at par. Investors require a yield of 10%. What is the approximate price, and why?

A) About Tk 1,000, at par because the coupon is paid every year until redemption
B) About Tk 950, below par because the coupon is lower than the required yield
C) About Tk 800, because the bond is valued as the coupon divided by the required yield
D) About Tk 1,050, above par because the coupon is lower than the required yield

Correct: B complex Bond valuation

Price = 80 × 2.487 + 1,000 × 0.751 = 199 + 751 = 950. When the required yield exceeds the coupon, the price is below par. 80/10% = 800 would value a perpetuity and ignore redemption.

153. A firm has Tk 100m available. Projects cannot be divided. A costs 50m with NPV 15m, B costs 40m with NPV 14m, C costs 30m with NPV 9m, and D costs 20m with NPV 6m. Which selection maximises NPV?

A) A and B, giving NPV of Tk 29m, because the highest profitability index project should be chosen first and then the next project that is affordable
B) A, C and D, giving NPV of Tk 30m for the whole Tk 100m, which beats picking B and A by profitability index ranking at Tk 29m
C) A, B and D, giving NPV of Tk 35m, because all projects with a positive NPV should be accepted whatever the capital available
D) B, C and D, giving NPV of Tk 29m, because those projects have the lowest total cost and therefore leave Tk 10m of capital unused

Correct: B complex Capital rationing

Feasible sets: A+B 29; A+C+D 30 (cost 100); B+C+D 29 (cost 90). A+B+D costs 110 and is not feasible. Ranking by profitability index works when projects are divisible, not when they are indivisible.

154. A project has an NPV of +Tk 20m. The present value of its sales revenue is Tk 200m. By what percentage can the sales revenue fall before the NPV becomes zero, and what is a limitation of the method?

A) Sales can fall by 10%, and the method takes account of interactions between sales, costs and discount rate in a single measure
B) Sales can fall by 10% (if costs are unchanged)
C) Sales can fall by 1%, because the NPV is a small proportion of the investment, and the method needs a complete probability distribution
D) Sales can fall by 20%, because the NPV is Tk 20m, and the method gives the probability that sales will fall by that amount

Correct: B complex Sensitivity analysis

Sensitivity = 20/200 = 10% change in PV of sales. The method varies one factor at a time and gives no probability, so it is a limited guide to risk.

155. A company earns EPS of Tk 20, retains 40% of earnings and earns 15% on retained funds. The dividend just paid was Tk 12, and investors require 14%. What is the growth rate and the share value (ex-dividend)?

A) Growth is 9% (60% × 15%) and the value is about Tk 218
B) Growth is 6% (40% × 15%) and the value is about Tk 150
C) Growth is 15% and the value cannot be computed because the growth rate is higher than the required return
D) Growth is 6% (40% × 15%) and the value is about Tk 159

Correct: D complex Growth from retained earnings

g = retention × return = 0.4 × 15% = 6%. P0 = 12 × 1.06/(0.14 − 0.06) = 12.72/0.08 = 159. Using D0 instead of D1 gives 150.

156. A company pays interest of Tk 30m a year on its borrowing and pays tax at 25%. What is the annual tax saving and the after-tax cost of the interest, and what is the main risk of increasing debt further?

A) Tax saving Tk 7.5m and after-tax cost Tk 22.5m, and more debt carries no extra risk because the interest is tax-deductible
B) Tax saving Tk 30m and after-tax cost nil, because interest is fully deductible and so debt finance costs the company nothing
C) Tax saving Tk 7.5m and after-tax cost Tk 22.5m
D) Tax saving Tk 22.5m and after-tax cost Tk 7.5m, but more debt increases fixed obligations and the risk of financial distress

Correct: C complex Tax shield on debt

Tax saved = 25% × 30 = 7.5; after-tax interest = 22.5. Higher gearing raises fixed payments and the probability of distress, which offsets the tax benefit.

157. A company has 4m shares trading at Tk 100. It makes a 1-for-4 rights issue at Tk 80. What are the theoretical ex-rights price and the value of a right for each existing share?

A) TERP is Tk 90 and the value of a right is Tk 10 per existing share, so a holder of 1,000 shares has rights worth about Tk 10,000
B) TERP is Tk 96 and the value of a right is Tk 16 per existing share, so a holder of 1,000 shares has rights worth about Tk 16,000
C) TERP is Tk 100 and the value of a right is nil, because a rights issue does not change the price of the existing shares in the market
D) TERP is Tk 96 and the value of a right is Tk 4 per existing share, so a holder of 1,000 shares has rights worth about Tk 4,000

Correct: D complex Rights issue

TERP = (4 × 100 + 1 × 80)/5 = 96. Rights value per existing share = 100 − 96 = 4; per new share 96 − 80 = 16, and a holder of 1,000 shares can buy 250 new shares: 250 × 16 = 4,000.

158. A donor wishes to fund a scholarship of Tk 600,000 payable at the end of next year, and growing by 2% a year thereafter for ever. The discount rate is 8%. What sum must be set aside now?

A) Tk 10m
B) Tk 7.5m
C) Tk 6.0m
D) Tk 30m

Correct: A complex Growing perpetuity

PV of a growing perpetuity = first payment/(r − g) = 600,000/(0.08 − 0.02) = 10m. Without growth it would be 7.5m.

159. An analyst consistently earns abnormal returns by studying published financial statements and announcements. Which form of the efficient market hypothesis does this contradict?

A) The strong form only, because the weak form is about public information, which analysts use to find abnormal returns
B) None of the forms, because efficient markets allow abnormal returns when the analyst is skilled in financial statement analysis
C) The weak form only, because the semi-strong form says that public information is a source of abnormal returns for analysts
D) The semi-strong form, because public information is claimed to be already reflected in share prices

Correct: D difficult Market efficiency

Abnormal returns from public information contradict the semi-strong form (and therefore the strong form). The weak form is concerned with past price patterns.

160. A growing company is choosing between a bank loan and a new share issue. Which THREE are advantages of debt finance? (Select THREE.)

Multiple response
A) Payments of interest are optional in poor years
B) Interest is normally tax-deductible
C) Existing shareholders' control is not diluted
D) No security or covenants are ever required by lenders
E) The cost of debt is usually lower than the cost of equity

Correct: B, C, E difficult Debt compared with equity

Tax relief, no dilution and a lower required return are advantages. Interest is a contractual obligation, and lenders usually ask for security or covenants.

161. Which THREE are reasons why NPV is generally preferred to IRR for investment appraisal? (Select THREE.)

Multiple response
A) IRR can give multiple answers when cash flows change sign more than once
B) NPV measures the absolute increase in shareholder wealth
C) IRR is always unreliable for conventional projects
D) NPV gives a consistent ranking of mutually exclusive projects of different scale
E) NPV ignores the time value of money

Correct: A, B, D difficult NPV and IRR

NPV shows the amount of wealth added, ranks mutually exclusive projects consistently, and avoids multiple-IRR problems. IRR is reliable for conventional single projects, and NPV does use the time value of money.

162. Which THREE are typically money market instruments? (Select THREE.)

Multiple response
A) Long-term debentures
B) Certificates of deposit
C) Treasury bills
D) Commercial paper
E) Ordinary shares

Correct: B, C, D difficult Money market instruments

Money market instruments are short-term debt securities. Ordinary shares and long-term debentures are capital market instruments.

163. A company wishes to use its existing WACC as the discount rate for a new project. Which TWO conditions should hold? (Select TWO.)

Multiple response
A) The project is much riskier than the existing operations
B) The project has about the same business risk as the company's existing operations
C) The project is in a different industry and uses different financing
D) The project is financed only by retained earnings
E) The project does not change the company's capital structure significantly

Correct: B, E difficult WACC assumptions

WACC reflects the existing business risk and financing mix. If risk or gearing change materially a project-specific rate is needed.

164. A board is setting its dividend policy. Which THREE factors are relevant? (Select THREE.)

Multiple response
A) Profitable investment opportunities that could use retained earnings
B) The number of employees in the finance department
C) Availability of cash and profit to pay dividends
D) The colour of the company's logo
E) Shareholders' preferences for income or growth and their tax position

Correct: A, C, E difficult Dividend policy factors

Dividend policy depends on liquidity, investment needs and shareholder preferences, together with legal limits. The logo and finance department size are irrelevant.

165. Under the capital asset pricing model, which THREE inputs determine the cost of equity? (Select THREE.)

Multiple response
A) The expected market risk premium
B) The equity beta of the company
C) The company's interest cover
D) The risk-free rate of return
E) The coupon rate on the company's bonds

Correct: A, B, D difficult Cost of equity factors

CAPM uses the risk-free rate, beta and market risk premium. Bond coupon and interest cover are not inputs.

166. Which TWO features indicate a finance lease rather than an operating lease? (Select TWO.)

Multiple response
A) The lessee pays a rental only when the asset is used
B) The lease term covers most of the economic life of the asset
C) The lessor is responsible for maintenance and the lease can be cancelled at short notice
D) The lessee does not record any liability for the lease
E) The lessee bears most of the risks and rewards of ownership

Correct: B, E difficult Finance and operating leases

A finance lease transfers the risks and rewards and covers most of the asset's life. Maintenance by the lessor and cancellability point to an operating lease.

167. A family-owned company is considering a listing. Which THREE are consequences of an initial public offering? (Select THREE.)

Multiple response
A) It imposes disclosure and governance requirements
B) It guarantees a rising share price after listing
C) It removes all public scrutiny of the company
D) It raises new capital and can provide an exit for early investors
E) It gives shares a market and improves liquidity

Correct: A, D, E difficult Initial public offering

A listing raises capital, improves liquidity and adds disclosure obligations. It increases scrutiny and cannot guarantee a price.

168. Which THREE methods are used to take risk into account in investment appraisal? (Select THREE.)

Multiple response
A) Sensitivity analysis
B) Ignoring all uncertain cash flows
C) Scenario analysis
D) A risk-adjusted discount rate
E) Using the shortest possible payback only for every project

Correct: A, C, D difficult Risk analysis in appraisal

Sensitivity, scenarios and risk-adjusted rates are standard. Ignoring uncertain flows or relying only on payback is not a rigorous treatment of risk.

169. Under the trade-off theory of capital structure, which TWO statements are correct? (Select TWO.)

Multiple response
A) Equity is always cheaper than debt
B) Higher gearing increases the expected costs of financial distress
C) The optimal capital structure is always 100% debt
D) The cost of debt is independent of the level of gearing
E) Debt brings tax benefits because interest is deductible

Correct: B, E difficult Trade-off theory

The theory balances the tax shield against distress costs. The cost of debt normally rises with gearing, and neither all equity nor all debt is optimal.

170. A company wants to reduce its need for working capital finance. Which THREE actions would help? (Select THREE.)

Multiple response
A) Reducing inventory with just-in-time purchasing
B) Speeding up the collection of receivables
C) Extending the credit period given to customers
D) Holding larger safety stocks as a precaution
E) Negotiating longer, but fair, payment terms with suppliers

Correct: A, B, E difficult Reducing working capital need

Faster collection, lower inventory and longer payables reduce the investment in working capital. Longer customer credit and larger stocks increase it.

171. A finance manager applies appraisal rules. Consider the following statements. For each statement, select Yes if it is correct and No if it is not.

Yes/No grid

1. A project with a positive NPV increases shareholder wealth if the cash flows are achieved.   Yes

2. A project with an IRR equal to the cost of capital has an NPV of zero.   Yes

3. Sunk costs should be included in the NPV.   No

4. NPV is unaffected by the choice of discount rate.   No

5. NPV uses discounted cash flows at the cost of capital.   Yes

Correct: Y, Y, N, N, Y difficult NPV decision rules

(1) Yes. (2) Yes. (3) No: sunk costs are not incremental. (4) No: NPV depends on the rate. (5) Yes.

172. An analyst reviews simple appraisal methods. Consider the following statements. For each statement, select Yes if it is correct and No if it is not.

Yes/No grid

1. Discounted payback ignores the time value of money.   No

2. The accounting rate of return uses accounting profits and not cash flows.   Yes

3. Payback is easy to understand and emphasises liquidity.   Yes

4. Payback measures the profit a project will make.   No

5. Payback ignores cash flows beyond the payback period.   Yes

Correct: N, Y, Y, N, Y difficult Payback and ARR

(1) No: it discounts the flows. (2) Yes. (3) Yes. (4) No: payback measures time to recover the investment. (5) Yes.

173. A treasurer compares sources of finance. Consider the following statements. For each statement, select Yes if it is correct and No if it is not.

Yes/No grid

1. Secured debt gives lenders a charge over assets.   Yes

2. Debt interest is a contractual obligation, but dividends are discretionary.   Yes

3. Ordinary shareholders bear residual risk and so require a higher return than lenders.   Yes

4. Preference shares always carry voting rights equal to ordinary shares.   No

5. Retained earnings are a free source of finance with no cost.   No

Correct: Y, Y, Y, N, N difficult Equity and debt finance

(1) Yes. (2) Yes. (3) Yes. (4) No: preference shares usually carry limited or no voting rights. (5) No: retained earnings carry the opportunity cost of shareholders' required return.

174. An investor considers risk and return. Consider the following statements. For each statement, select Yes if it is correct and No if it is not.

Yes/No grid

1. Beta measures the sensitivity of a share's returns to market returns.   Yes

2. Systematic risk can be removed completely by holding more shares.   No

3. The market risk premium is the difference between the market return and the risk-free rate.   Yes

4. A share with a beta greater than 1 is less volatile than the market.   No

5. Diversification can eliminate specific (unsystematic) risk.   Yes

Correct: Y, N, Y, N, Y difficult CAPM and portfolio theory

(1) Yes. (2) No: systematic risk cannot be diversified away. (3) Yes. (4) No: a beta above 1 means more volatile. (5) Yes.

175. A student calculates present values. Consider the following statements. For each statement, select Yes if it is correct and No if it is not.

Yes/No grid

1. A higher discount rate gives a lower present value of future cash flows.   Yes

2. Discounting is the same process as compounding.   No

3. The present value of an annuity is the cash flow multiplied by the cumulative discount factor.   Yes

4. A taka received today is worth more than a taka received in a year.   Yes

5. A perpetuity with no growth has a present value equal to the annual cash flow multiplied by the discount rate.   No

Correct: Y, N, Y, Y, N difficult Time value of money

(1) Yes. (2) No: compounding adds growth over time and discounting is its reverse. (3) Yes. (4) Yes. (5) No: the present value equals the annual cash flow divided by the discount rate.