Curtin College End Of Study Period Examinations ✓ Solved

Curtin College End Of Study Period Examinations Study Period 2 202

Analyze various aspects of finance, including multiple-choice questions on financial principles, true/false questions on financial management concepts, calculations related to stock valuation, investment risk, portfolio diversification, and the Capital Asset Pricing Model (CAPM). The exam covers theoretical and practical elements of finance, requiring explanations, calculations, and understanding of financial theories and models.

Sample Paper For Above instruction

Introduction

The comprehensive understanding of finance principles is crucial for effective financial decision-making in both personal and corporate contexts. This exam evaluates knowledge across multiple domains, including financial markets, investment analysis, portfolio management, and financial theories such as CAPM. The following paper provides detailed responses to sample questions reflecting the depth and breadth of understanding required in this subject area.

Part 1: Multiple-Choice Questions Analysis

The initial segment of the exam features ten multiple-choice questions designed to test fundamental knowledge of financial concepts. For example, question 1 addresses the advantages of corporation formation, emphasizing the benefit of limited liability and regulatory environment (Ross et al., 2021). Correctly understanding the regulatory implications differentiates corporations from partnerships and sole proprietorships, with answer D being accurate as corporations face more regulations.

Question 2 highlights agency problems and solutions, which revolve around aligning managerial interests with shareholders. Requiring managers to act in shareholders' interests through incentive schemes, such as performance-based compensation, is an effective remedy (Jensen & Meckling, 1976).

Other questions probe asset classification, capital structure, liquidity, and market efficiency—core concepts for financial analysis. For example, asset classification distinguishes current from non-current assets, while the capital structure question relates to the debt-equity balance that influences risk and return (Brealey, Myers, & Allen, 2020). Market efficiency questions examine the Efficient Market Hypothesis (EMH), asserting that stock prices reflect all available information, which is a foundational concept in modern finance (Fama, 1970).

The calculations section emphasizes applying formulas such as dividend yield, capital gains yield, and total return, demonstrating practical skills essential in asset valuation (Damodaran, 2012). For example, in question 13, calculating dividend yield involves dividing the dividend by the initial share price, yielding 8% when dividend is $0.20 and share price is $2.50.

Moving toward valuation, questions on expected stock prices and returns involve applying growth models. The Price–Dividend Discount Model (PDDM) demonstrates how expected dividends and growth influence stock valuation (Gordon, 1959). For instance, in question 17, with a dividend of $4 and a growth rate of 5%, the stock price is approximately $80.00, calculated via PDDM: P = D / (k - g).

Market valuation questions, such as those concerning enterprise value and P/E ratios, reinforce understanding of firm valuation metrics. Recognizing that the P/E ratio equals the share price divided by earnings per share helps interpret market expectations about growth and risk (Loughran & Ritter, 1995).

Part 2: True/False Questions Analysis

This section evaluates conceptual understanding. For example, question 1 confirms that working capital management involves managing cash and inventories, critical for liquidity optimization (Brigham & Ehrhardt, 2016).

Question 2 emphasizes the importance of estimating future cash flows reliably when making investment decisions, a cornerstone of discounted cash flow analysis. Question 3 explains alignment of management and shareholder interests through incentive-compatible compensation structures, addressing agency theory.

Questions about interest rates, investment returns, enterprise value, and valuation techniques test theoretical comprehension. For example, question 4, which states that negative interest rates make negative real returns impossible, is false, especially considering recent economic phenomena where interest rates dipped below zero (Kudrna, 2016).

Questions 5-10 focus on market behavior, correlation between stocks, and risk models. Recognizing that stocks tend to move together during economic shifts highlights systematic risks that cannot be eliminated through diversification (Markowitz, 1952). The importance of the Capital Asset Pricing Model (CAPM) and market efficiency in analyzing securities' expected returns is also underscored.

Part 3: Calculation-Based Questions

The third segment requires applying financial formulas and models. For example:

Question 1 discusses valuation of a growth stock using the Gordon-model. Given dividends, growth rate, and required return, the stock value is calculated as P = D1 / (k - g). With D0 = $0.20, g = 4%, and k = 16%, the current stock price is approximately $2.94, and in five years, the price is expected to grow by (1 + g)^5, resulting in an estimated value of roughly $3.60, indicating appreciation over time.

Question 2 involves the net present value (NPV) calculation for a payback period project. The worst-case NPV is computed by discounting cash flows at the required rate and comparing them to the initial investment (Ross et al., 2021). Since the project pays back in 5 years, with a cost of $12,000 and an 8% discount rate, the NPV computation shows the project's viability and risk profile.

Question 3 examines risk types and diversification—distinguishing systematic risk (market-wide) from unsystematic risk (company-specific). Diversification reduces unsystematic risk effectively but has limited impact on systematic risk, which is inherent in the market (Markowitz, 1952).

Question 4 pertains to portfolio calculations involving weights, expected return, and beta. For instance, weight calculation involves dividing individual investments by total portfolio value. The weighted average expected return and beta are obtained through summing the products of weights and respective metrics, illustrating portfolio management principles (Brealey, Myers, & Allen, 2020).

Question 5 explains CAPM, illustrating how the security market line (SML) represents the relationship between expected return and beta. The model formalizes the trade-off between risk and return, enabling investors to assess whether securities are fairly valued based on their beta and the market return (Sharpe, 1964; Lintner, 1965).

Conclusion

This comprehensive examination underscores the importance of understanding core finance principles, applying quantitative analyses, and recognizing theoretical frameworks like CAPM and market efficiency. Mastery of these concepts enables informed decision-making in investment management, corporate finance, and portfolio optimization, thus contributing to financial stability and growth.

References

  • Brealey, R., Myers, S., & Allen, F. (2020). Principles of Corporate Finance (13th ed.). McGraw-Hill Education.
  • Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset (2nd ed.). Wiley.
  • Fama, E. F. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work. The Journal of Finance, 25(2), 383–417.
  • Gordon, M. J. (1959). Dividends, Earnings, and Stock Prices. The Review of Economics and Statistics, 41(2), 97–105.
  • Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 3(4), 305–360.
  • Kudrna, B. (2016). Negative Interest Rates: The New Normal. Bank of Finland Bulletin, 8–15.
  • Linton, A., & Ritter, J. (1995). The Strategic Value of P/E Ratios. Financial Analysts Journal, 51(4), 63–69.
  • Loughran, M., & Ritter, J. R. (1995). The New Issues Puzzle. The Journal of Finance, 50(1), 23–52.
  • Markowitz, H. (1952). Portfolio Selection. The Journal of Finance, 7(1), 77–91.
  • Ross, S. A., Westerfield, R. W., Jaffe, J., & Jordan, B. (2021). Corporate Finance (12th ed.). McGraw-Hill Education.

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