MEMO – INV3701 MAY/JUNE 2019
MCQ QUESTIONS 1 to 30
ANSWER EXPLANATION
1 3
Alpha is an asset’s excess risk adjusted return, the value by
2 3 which the returns exceed risk (risk is measured by the required
return)
The minimum level of expected return that an investor requires
3 2 to invest, given the asset’s riskiness
WACC= 0.667 x 10(1-0.3) + 0.33(8)
4 2 = 4.669 + 2.64
=7.31%
1 Requirement rate of return
5
V = Bo + [ROE - /r-g] x Bo
6 1
= 10 + [0.2 -0.1/0.1-0.05] x 10
= 10 + 20
= 30
Re = 3.5 +0.5(2.4) +1.4(0.7) +0.9(1.0)
7 2 = 6.58
D1 = 1.2
8 2 P1 =56
r =8%
Using NPV
CF0 = 0
CF1= 1.2+56
I/YR =8
NPV =52.96
Undervalued (MP < IV) Buy the asset,
Overvalued (MP > IV) Sell it or don’t buy.
9 1 Fairly valued (MP = IV) Hold
+27815657602
, Persistent and recurring components of earnings are important in
10 3 determining intrinsic value.
Zero growth model
11 1
V= D/r
=5/0.09
= R55.56
• Stock selection
12 2 • Extracting market expectations
• Evaluating co-operate events
• Expression of fairness
• Communication tool
• Evaluation if business strategies and models
13 2 Gains from sale of building
14 3 If the investor takes a control perspective (majority ownership)
15 1 Value = Earnings/required return + PVGO
PVGO = 100 - 10/0.12
=100 -83.33
= 16.67
16 1
17 2 FCFE = FFCF - Interest expense (1-tax) + Net Borrowing
• FCFE is to value the equity capital providers share in a
18 2 company
• FCFF is to value the firm to all investors (both debt and
equity capital providers). FCFF may be preferred to FCFE if,
for instance, the firm’s capital structure is expected to
change significantly in the future (i.e., taking on a lot more
debt)
19 2 FCFE = NI + NCC – Fix (inv) – WC (inv) + NB
FCFE = 520 +150 -160 -100 +60
= R470 million
1 FCFF = NI +NNC+Int (1 -T) -FCInv -WCInv +PD
20 =520 +150 +75(0.7)-160-100
= 462.5
+27815657602
MCQ QUESTIONS 1 to 30
ANSWER EXPLANATION
1 3
Alpha is an asset’s excess risk adjusted return, the value by
2 3 which the returns exceed risk (risk is measured by the required
return)
The minimum level of expected return that an investor requires
3 2 to invest, given the asset’s riskiness
WACC= 0.667 x 10(1-0.3) + 0.33(8)
4 2 = 4.669 + 2.64
=7.31%
1 Requirement rate of return
5
V = Bo + [ROE - /r-g] x Bo
6 1
= 10 + [0.2 -0.1/0.1-0.05] x 10
= 10 + 20
= 30
Re = 3.5 +0.5(2.4) +1.4(0.7) +0.9(1.0)
7 2 = 6.58
D1 = 1.2
8 2 P1 =56
r =8%
Using NPV
CF0 = 0
CF1= 1.2+56
I/YR =8
NPV =52.96
Undervalued (MP < IV) Buy the asset,
Overvalued (MP > IV) Sell it or don’t buy.
9 1 Fairly valued (MP = IV) Hold
+27815657602
, Persistent and recurring components of earnings are important in
10 3 determining intrinsic value.
Zero growth model
11 1
V= D/r
=5/0.09
= R55.56
• Stock selection
12 2 • Extracting market expectations
• Evaluating co-operate events
• Expression of fairness
• Communication tool
• Evaluation if business strategies and models
13 2 Gains from sale of building
14 3 If the investor takes a control perspective (majority ownership)
15 1 Value = Earnings/required return + PVGO
PVGO = 100 - 10/0.12
=100 -83.33
= 16.67
16 1
17 2 FCFE = FFCF - Interest expense (1-tax) + Net Borrowing
• FCFE is to value the equity capital providers share in a
18 2 company
• FCFF is to value the firm to all investors (both debt and
equity capital providers). FCFF may be preferred to FCFE if,
for instance, the firm’s capital structure is expected to
change significantly in the future (i.e., taking on a lot more
debt)
19 2 FCFE = NI + NCC – Fix (inv) – WC (inv) + NB
FCFE = 520 +150 -160 -100 +60
= R470 million
1 FCFF = NI +NNC+Int (1 -T) -FCInv -WCInv +PD
20 =520 +150 +75(0.7)-160-100
= 462.5
+27815657602
