FINANCIAL MANAGEMENT 1

| October 29, 2015

MBALN-622 Financial Management
Assignment 1
Financial Management – Theory and Application
Deadline
As per the VLE
Learning Objectives for Course
1. Obtain a comprehensive understanding of the financial environment and
adequately define financial terms
2. Have an ability and readiness to formulate, examine and defend business case
judgments, as well as recognize ethical dilemmas and corporate social
responsibility issues in Finance,
3. Conceptually understand the main theories of Corporate Finance and have a
commitment to their practical mathematical application
4. Compare and appraise theories that underlie current thinking in Corporate
Finance and Investment, demonstrate and evaluate how these theories can be
applied in practical situations,
5. Demonstrate effective oral communication of complex ideas and arguments,
possess developed listening skills.
Guidelines for assignment
 This is an individual assignment
 Ground your answer in relevant theory
 Plagiarism and reproduction of someone else’s work as your own will be
penalized
 Make use of references, where appropriate – Use Harvard or APAreferencing
method.
 Late submission implies a deduction of 10 marks per day
 Structural elements should include an introduction, main body, and aconclusion
 Weight – 40%
 Word count guidance: 2500 words (There are 3 Parts to this Assignment)
 Type of assignment: Excel Assessed Work Folder
 Start / Finish : as per the VLE
 Learning Outcome Assessed: 1,2,3,4
PART 1
Assume that for a car manufacturer, Chrysler Ford. Your boss, the chief financial officer, has just handed you
the estimated cash flows for two proposed projects. Project L involves adding a new item to the firm’s
ignition line; it would take some time to build up the market for this product, so the cash inflows would increase
over time. Project S involves an add-on to an existing line, and its cash flows would decrease over time. Both
projects have 3-year lives, because Chrysler is planning to introduce entirely new models after 3years.
Here are the projects net cash flows (in thousands ofdollars):
Expected after-tax
Project
S
net cash flows (CFt)
Year (t) Project S Project L 0 1 2 3
0 ($100) ($100) -100 70 50 20
1 70 10
2 50 60
Project
L
3 20 80
0 1 2 3
-100 10 60 80
Depreciation, salvage values, net working capital requirements, and tax effects are all included in these cash flows.
The CFO also made subjective risk assessments of each project, and he concluded that both projects have risk
characteristics which are similar to the firm’s average project. Chrysler’s weighted average cost of capital is 10%.
You must no determine whether one or both of the projects should be accepted.
Required
Evaluate the projects using the 5 key techniques: (1) payback period, (2) discounted payback period, (3) net
present value, (4) internal rate of return, and (5) modified internal rate of return.
Identify those projects that will lead to the maximization of the firm’s stock price.
Part 2
Critically appraise the appraisal techniques above. Discuss their limitations, the social and
ethical factors that should also be considered when making suchdecisions.
Part 3
Multiple Choice Questions and Short Answers
Please attempt all answers.
Q1. Which of the following is correct? The bid quote represents the rate atwhich
1. the dealer will buy foreign currency from you.
2. the dealer will sell foreign currency to you.
3. you can buy the foreign currency from thedealer.
4. None of these
Q2. Sole proprietorship is an owner’s only
business.
False
True
Q3. Which of the following is correct? A stakeholder is
1. anyone geographically close to the firm’s headquarters.
2. Anyone with a claim on the cash flows of the firm.
3. any governmental agency
4. All of these.
Q4. Which of the following is correct? Corruption in business
1. creates inefficiencies in an economy.
2. inhibits growth in an economy.
3. slows the rate of economic growth in a country.
4. all of these
Q5. Which senior executive, when he or she is guilty of serious misconduct, can subject the firm
to the most serious losses in financial wealth?
1. Chief Technology Officer
2. Chief Financial Officer
3. Chief Risk Officer
4. Chief Executive Officer
Q6. Which of the following is correct? With regard to information, a central idea of fairness
suggests that
1. outsiders should not be allowed to trade since, by definition, they are at adisadvantage.
2. insiders should never be able to trade.
3. decisions should be made on an even playing field.
4. insiders should be able to trade whenever theywant.
Q7. Which of the following is correct? Secondary financial markets are similarto
1. direct auction markets.
2. new-car markets.
3. used-car markets.
4. all of these.
Q8. Which of the following is correct? The ease with which a security can be sold and converted
into cash is called
1. convertibility.
2. book value.
3. marketability.
4. none of these.
Q9. Which is the following indices is not a broad market average index?
1. CAC-40
2. DAX
3. FTSE 100
4. Amex Oil Index
Q10. Use the following table to calculate the expected return for theasset.
Return Probability
0.10 0.25
0.20 0.50
0.25 0.25
What is the asset’s expected return?
1. 20.00%
2. 18.75%
3. 17.50%
4. 15.00%
Q11. Use the following table to calculate the expected return for theasset.
Return Probability
0.05 0.10
0.10 0.15
0.15 0.50
0.25 0.25
What is the asset’s expected return?
1. 12.50%
2. 15.75%
3. 13.75%
4. 16.75%
Q12. The return distribution for an asset is as shown in the following table. What are the missing
values if the expected return is 10 per cent?
Return Probability
0.10 0.25
X 0.50
X 0.25
1. 0.20
2. 0.15
3. 0.10
4. None of these.
Q13. Explain the difference between systematic and non-systematic risk.
Q14. Which of the following is correct? In computing the NPV of a capital budgeting project, one
should NOT
1. estimate the cost of the project.
2. ignore the salvage value.
3. make a decision based on the project’s NPV.
4. discount the future cash flows over the project’s expectedlife.
Q15. Which of the following is correct? The net present value
1. uses the discounted cash flow valuation technique.
2. will provide a direct measure of how much the firm value will change because of the capital
project.
3. is consistent with shareholder wealth maximisation goal.
4. All of these.
Q16. Which of the following is correct? Disadvantages of the payback method include the
following.
1. It ignores the time value of money.
2. It is inconsistent with the goal of maximising shareholder wealth.
3. It ignores cash flows beyond the payback period.
4. All of these.
Q17. Which one of the following statements about IRR is NOT true?
1. The IRR is the discount rate that makes the NPV greater than zero.
2. The IRR is a discounted cash flow method.
3. The IRR is an expected rate of return.
4. None of these.
Q18. Which of the following is correct? When estimating the cost of debt capital for the firm, we
are primarily interested in
1. the cost of short-term debt.
2. the cost of long-term debt.
3. the coupon rate of the debt.
4. none of these.
Q19. Which of the following is correct? The recommended model to estimate the cost of
ordinary shares for a firm is
1. a one-stage constant growth model.
2. a multistage growth model.
3. the CAPM.
4. none of these.
Q20. Which of the following is correct? Disadvantages of going public include all EXCEPT
1. The transparency that results from this compliance can be costly forsome firms.
2. The costs of complying with ongoing listing and disclosure requirements.
3. The high cost of the IPO itself.
4. Managers’ tendency to focus on long-

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