1/6 EXAMINATION QUESTION PAPER: January 2019 Module code:FE5002Component number:002 Module title:Corporate Finance and InvestmentModule leader:Date:21 January 2019 Start time:10:00Duration:1.5 hoursExam type:In-Class-Test, Unseen and ClosedMaterials supplied:NoneMaterials permitted:Non-programmable calculatorWarning:Candidates are warned that possession of unauthorised materials in an examination is a serious assessment offence.Instructions to candidates:This In-Class-Test has two sections.Section A has one question which is compulsory. This question carries 40 marks.Section B has four questions. Each question carries 30 marks. Students should answer TWO questions only. Answer each question on a new pageSubmit all workings and calculationsDO NOT TURN PAGE OVER UNTIL INSTRUCTED© London Metropolitan University
2/6SECTIONA This section has one question which is compulsoryand must be answered.Question 1FUTON Co. has capital of £120,000 available for new investments. The company has identified five projects with the following detailed information:Required:
(a)Calculate the NPV earned if the projects are divisible.(15 marks)
(b)Calculate the NPV earned if the projects are not divisible.(10 marks)(c)Discuss the reasons why capital rationing may arise.(15 marks)Total40 marksProjectInitial InvestmentNPV£000£000A4525B10035C5529D6018E49-10
3/6SECTION B This section has three questions. Students should answer TWO questions only. Question 2VUITONPlc has the following information taken from the statement of financial position as:£mOrdinary shares of £0.5 each12Reserves 77% loan notes10The company’s ordinary shares are currently quoted at £1.65 each share. The loan notes are irredeemable and have a market value of £105 per £100 nominal value. VUITON pays corporate tax at 19% and is expected to earn a consistent profit of £4millionin each future year.
(a)Define the Weighted Average Cost of Capital. (10 marks)(b)The Usingmarket values for weighting, calculate:i.The cost of equity capital(6marks)ii.The post-tax cost of debt capital(6 marks)iii.Theweighted average cost of capital (8marks)Total30 marks
Question 3NewtonPlc has the following information taken from the statement of financial position as:Equity£millionOrdinary shares of £1each25Reserves 530Non-current liabilities12% loan notes8The company is considering options of financing an investment projectwhich required an initial capital of £1million.
(a)Discuss the current capital structure for the company. (5 marks)
(b)Calculate the gearing (leverage) ratio for the company. (5 marks)(c)Advisethe director of Newton Plc sources of financing this project and their impact on the gearing of the company.(20marks)Total30 marks
4/6Question 4
(a)Provide a graph to illustrate the Security Market Line.(5 marks)
(b)‘The CAPM model is a vital tool for corporate financial managers.’ Discuss critically.(25 marks)Total30 marks
Question 5`Share valuation models are only as good as the data used and the context in which they are applied.’Explore this statement by comparing and contrasting three Share Pricing Models. Total30 marksEnd of Examination Paper
