TEST 2 - 2021 - Attempt Review

10/14/21, 9:32 PM TEST 2 - 2021: Attempt review
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TEST 2 - 2021
Started on Thursday, 14 October 2021, 7:01 PM

State Finished
Completed on Thursday, 14 October 2021, 9:30 PM
Time taken 2 hours 28 mins
Marks 21.00/60.00
Grade 35.00 out of 100.00
Question 1
Correct
Mark 2.00 out of 2.00
Telecom Namibia is evaluating its cost of capital under alternative financing arrangements. In consultation with investment
bankers, Telecom expects to be able to issue new debt at par with a coupon rate of 8% and to issue new preferred stock with a
N$2.50 per share dividend at N$25 a share. The common stock of Telecom is currently selling for N$20.00 a share. Telecom
expects to pay a dividend of N$1.50 per share next year. Market analysts foresee a growth in dividends in Invest stock at a rate of
5% per year. Telecom marginal tax rate is 35%.
Determine the after-tax cost of debt for Telecom
Answer: 5.2 
rd= 0.08 (1 – 0.35)
= 0.52 or 5.2%
The correct answer is: 0.52
https://elearning.nust.na/elearn/mod/quiz/review.php?attempt=1394966&cmid=320465 1/22
Question 2
Correct
Suppose a company uses only debt and internal equity to finance its capital budget and uses CAPM to compute its cost of equity.
Company estimates that its WACC is 12%. The capital structure is 75% debt and 25% internal equity. Before tax cost of debt is
12.5 % and tax rate is 20%. Risk free rate is 6% and market risk premium is 8%.
What is the cost of equity for the company?
Answer: 18 
WACC = WDKD(1 -Tc) + WEKE
0:12 = 0.75(0.125)(1 - 0:20) + 0:25KE
0:12 = 0:075 + 0:25 KE

0.12 – 0.075 = 0.25KE
0.045 = 0.25KE
KE = 0.18 or 18%
Question 3
Correct
The ____________ of a company is (are) potentially the most effective instrument of good corporate governance.
a. top executive officers

b. common stock shareholders
c. financial managers
d. board of directors 
The correct answer is: board of directors
Question 4
Incorrect
Which of the following statements is not true about cost of capital?
a. The cost of equity is the rate of return required by bondholders

b. Cost of capital it is the cost of funds raised by the company 
c. The cost of common stock is the return required on the stock by investors in the marketplace
d. Cost of capital it is the return that different types of funds suppliers have to be paid to get them to put and keep funds in the
company.
The correct answer is: The cost of equity is the rate of return required by bondholders
Question 5
Correct
As a truly African company employing more than 6,200 people in various business sectors, the Ohlthaver & List Group is rooted
in, and committed to, Africa and all her people. Today, O&L is Namibia’s largest privately held group of companies, with revenues
contributing roughly 4% to GDP. It has business interests in food production, fishing, beverages, farming, retail trade, information
technology, property leasing and development, renewable power generation, marine engineering, steel retailing, advertising and
the leisure and hospitality industry.
The parent companies of Olfitra are O&L Holdings (Proprietary) Limited and List Trust Company (Proprietary) Limited, with the
controlling shareholder of the O&L Group being the Werner List Trust. With annual revenues of over N$5 billion, O&L is a major
contributor to state coffers and is in the position of being a significant contributor to GDP in Namibia. Wherever it operates, this
diverse group is actively engaged in uplifting the lives of its employees, its consumers, and society generally. The following
information relates to company A and company B under O&L Holdings (Proprietary) Limited
Particulars Company A Company B
Sales volume (units) 60 000 15 000
Fixed cost (N$) 700 000 1 400 000
Variable cost per unit (N$) 10 75
Interest 12% Debt 48 000 78 000
Selling price per unit (N$) 30 250
Determine the total contribution for company A
Answer: 1200000 
Sales volume (units) 60,000 15,000

Less variable cost per unit 10 75
Contribution per unit 20 175

Total contribution 1,200,000 2,625,000

Less fixed cost 700,000 1,400,000

EBIT 500,000 1,225,000

Less interest 12% on debt 48,000 78,000

EBT 452,000 1,147,000
The correct answer is: 1200000
Question 6
Correct
Which of the following is not true about capital structure?
a. Capital structure is also known as capitalisation

b. Proportion of various types of securities is known as capital structure. 
c. All of these
d. Capital structure and financial structure are different
The correct answer is: Proportion of various types of securities is known as capital structure.
Question 7
Incorrect
The Marine Bay Company has common stock outstanding that has a current price of N$20 per share and a N$0.5 dividend.
Marine Bay’s dividends are expected to grow at a rate of 3% per year, forever. The expected risk-free rate of interest is 2.5%,
whereas the expected market premium is 5%. The beta on Marine Bay’s stock is 1.2.
What is the cost of equity to 4 decimal places for Marine Bay using the Dividend Growth Model?
Answer: 5.575 
KE = {[$0.50(1 + 0.03)] /$20} + 0.03

= 0.05575 = 0.0558 or 5.58%
Question 8
Not answered
Marked out of 2.00
Katima Building Ltd has equity with a market value of N$20 million and debt with a market value of N$10 million. Treasury bills that
mature in one year yield 8% per year and expected return on the market portfolio over the next year is 18%. The beta of Katima
Building Ltd’s equity is 0.90. The firm pays no taxes.
What is Katima Building Ltd’s debt to equity ratio?
Answer: 
Debt/Equity ratio = MVD / MVE

= $10 million/$ 20 million
= 0.50
Question 9
Correct
Which of the following is not a pattern of capital structure?
a. Equity shares and Preference shares

b. Equity shares, preference shares and debentures
c. Equity shares and short-term borrowings 
d. Equity shares only
The correct answer is: Equity shares and short-term borrowings
Question 10
Correct
In a typical loan amortization schedule, the dollar amount of interest paid each period.
a. decreases with each payment 

b. remains constant with each payment
c. none of these
d. increases with each payment
The correct answer is: decreases with each payment
Question 11
Correct
Which of the following is the method for determining the cost of equity?
a. Capital asset production model

b. Earnings per share
c. Capital asset pricing model 
d. Dividend Per Share
The correct answer is: Capital asset pricing model
Question 12
Correct
The Marine Bay Company has common stock outstanding that has a current price of N$20 per share and a N$0.5 dividend.
Marine Bay’s dividends are expected to grow at a rate of 3% per year, forever. The expected risk-free rate of interest is 2.5%,
whereas the expected market premium is 5%. The beta on Marine Bay’s stock is 1.2.
What is the cost of equity to three decimal places for Marine Bay using the Capital Asset Pricing Model?
Answer: 8.5 
KE = 0.025 + (0.05) 1.2 = 0.025 + 0.06

= 0.085 or 8.5%
Question 13
Correct
Determine the cost of preferred stock for Telecom
Answer: 10 
rp = $2.50/$25
= 0.10 or 10%
Question 14
Incorrect
In a typical loan amortization schedule, the total dollar amount of money paid each period.
a. remains constant with each payment

b. decreases with each payment 
c. increases with each payment
d. None of these
The correct answer is: remains constant with each payment
Question 15
Correct
The true cost of debt is ______________
a. the cost of debt after tax because interest expense increases the firm tax liability
b. the cost of debt after tax because interest expense is part of operational cost
c. the cost of debt after tax because interest expense is deductible expense for tax purpose 
d. the cost of debt after tax because interest expense is irrelevant
The correct answer is: the cost of debt after tax because interest expense is deductible expense for tax purpose
Question 16
Correct
The decision function of financial management can be broken down into the decisions.
a. financing and dividend

b. investment, financing, and asset management 
c. capital budgeting, cash management, and credit management
d. financing and investment
The correct answer is: investment, financing, and asset management
Question 17
Correct
This type of risk is avoidable through proper diversification.
a. portfolio risk
b. systematic risk
c. total risk
d. unsystematic risk 
The correct answer is: unsystematic risk
Question 18
Correct
Which of the below statements is the shortcoming of the security market line approach?
a. The estimation of beta, which varies over time 

b. Only applicable to companies currently paying dividends
c. It is easy to understand and use
d. The absence of systematic risk in the market
The correct answer is: The estimation of beta, which varies over time
Question 19
Correct
Fixed cost (N$) 700 000 1 400 000
Interest 12% Debt 48 000 78 000
Determine the total contribution for company B
Answer: 2625000 
Sales volume (units) 60,000 15,000
Less variable cost per unit 10 75
Contribution per unit 20 175
Total contribution 1,200,000 2,625,000

Less fixed cost 700,000 1,400,000

EBIT 500,000 1,225,000

Less interest 12% on debt 48,000 78,000

EBT 452,000 1,147,000
Question 20
Not answered
Marked out of 2.00
Fixed cost (N$) 700 000 1 400 000
Interest 12% Debt 48 000 78 000
Determine the Degree of Combined Leverage (DCL) for company A to 2 decimal places
Answer: 
DOL = Contribution/EBIT = 1 200 000/500 000 =2.4
DFL = EBIT/EBT = 500 000/452 000 =1.1062

DCL = DOL x DFL = 2.4 x 1.1 = 2.6548 = 2.65
Question 21
Incorrect
A loan of N$150 000 was granted to you by a commercial bank, bonded against your property at an interest rate of 16% per
annum compounded quarterly. According to the loan agreement you are required to pay off the loan in equal quarterly instalments
over a period of three years.
What is the total interest paid at the end of period two
Answer: 55285.36 
Period Opening Payment Interest at Principal Closing

balance 4% balance
1 150 000 15 983 6000 9 983 140 017
2 140 017 15 983 5601 10382 129 635
N$6000+N$5601 =N$11601
Question 22
Not answered
Marked out of 2.00
The covariance of the returns on the two securities, A and B is -0.0005. The standard deviation of A’s returns is four percent, and
the standard deviation of B’s returns is six percent. What is the correlation to four decimal places between the returns of A and B?
Answer: 
Correlation =-0.005/0.04 x 0.06 = -0.2083

Question 23
Not answered
Marked out of 2.00
Katima Building Ltd has equity with a market value of N$20 million and debt with a market value of N$10 million. Treasury bills that
mature in one year yield 8% per year and expected return on the market portfolio over the next year is 18%. The beta of Katima
Building Ltd’s equity is 0.90. The firm pays no taxes.
What is Katima Building Ltd’s cost of equity capital?
Answer: 
Ke = Krf + β [KM - Krf]
= 0.08 + 0.90 [0.18 - 0.08]

= 0.17 or 17%
Question 24
Not answered
Marked out of 1.00
A statistical measure of the degree to which two variables (e.g., securities' returns) move together.
a. certainty equivalent
b. variance
c. covariance
d. coefficient of variation
The correct answer is: covariance
Question 25
Not answered
Marked out of 2.00
You need to deposit N$10 000 in two years as a down payment for your car. If you can earn 9%, how much do you have to invest
(to the nearest whole number) to make sure that you have the N$10 000 ready to pay for your car?
Answer: 
PV = FV/ (1+r) ^n
= N$10 000/(1+0.09)²
=N$8416.80
= 8 417
Question 26
Not answered
Marked out of 2.00
Suppose a company uses only debt and internal equity to finance its capital budget and uses CAPM to compute its cost of equity.
Company estimates that its WACC is 12%. The capital structure is 75% debt and 25% internal equity. Before tax cost of debt is
12.5 % and tax rate is 20%. Risk free rate is 6% and market risk premium is 8%.
What is the beta of the company?
Answer: 
KE = 18% = Rf + β(Rm - Rf )
18% = 6% + β(8%)
18% - 6% = β(8%)
β = 12%/8% = 1.5
Question 27
Not answered
Marked out of 2.00
Determine the amount of quarterly payments to the nearest whole number
Answer: 
PV=PMT x PVIFA at 4% for 12 period

PMT= PV/PVIFA at 4% for 12 periods
= N$150 000/9.3851

=N$15 982.78
= N$15 983
Question 28
Not answered
Marked out of 1.00
The market price of a share of common stock is determined by:
a. the president of the company.

b. the stock exchange on which the stock is listed.
c. individuals buying and selling the stock.
d. the board of directors of the firm.
The correct answer is: individuals buying and selling the stock.
Question 29
Not answered
Marked out of 2.00
Fixed cost (N$) 700 000 1 400 000
Interest 12% Debt 48 000 78 000
Determine the Degree of Combined Leverage (DCL) for company B to 2 decimal places
Answer: 
DOL = Contribution/EBIT = 2 625 000/1 225 000 =2.1429
DFL = EBIT/EBT = 1 225 000/1 147 000 =1.0680

DCL = DOL x DFL = 2.1429 x 1.0680= 2.2886 = 2.29
Question 30
Not answered
Marked out of 1.00
The __________ would be an example of a principal, while the _________ would be an example of an agent.
a. shareholder; bondholder
b. manager; owner
c. accountant; bondholder
d. shareholder; manager
The correct answer is: shareholder; manager
Question 31
Not answered
Marked out of 1.00
"Shareholder wealth" in a firm is represented by:
a. the market price per share of the firm's common stock.

b. the book value of the firm's assets less the book value of its liabilities.
c. the amount of salary paid to its employees.
d. the number of people employed in the firm.
The correct answer is: the market price per share of the firm's common stock.
Question 32
Not answered
Marked out of 1.00
What are the earnings per share (EPS) for a company that earned $100,000 last year in after-tax profits, has 200,000 common
shares outstanding and $1.2 million in retained earning at the year end?
Answer: 
=100 000/200 000
= 0.5
Question 33
Not answered
Marked out of 1.00
The term capital structure refers to the relationship between:
a. Current assets and current liabilities

b. Sum of all non-current assets
c. Debentures, preference share, and equity share capital
The correct answer is: Debentures, preference share, and equity share capital
Question 34
Not answered
Marked out of 1.00
The focal point of financial management in a firm is:
a. the number and types of products or services provided by the firm.

b. the creation of value for shareholders.
c. the minimization of the amount of taxes paid by the firm.
d. the dollars profits earned by the firm.
The correct answer is: the creation of value for shareholders.
Question 35
Not answered
Marked out of 2.00
Determine the closing balance at the end of period two
Answer: 
Period Opening Payment Interest at Principal Closing

balance 4% balance
1 150 000 15 983 6000 9 983 140 017
2 140 017 15 983 5601 10382 129 635
Question 36
Not answered
Marked out of 1.00
Carrie has a "certainty equivalent" to a risky gamble's expected value that is less than the gamble's expected value. Carrie shows
a. a strange outlook on life.

b. risk aversion.
c. risk indifference.
d. risk preference.
The correct answer is: risk aversion.
Question 37
Not answered
Marked out of 2.00
Determine the cost of equity for Telecom
Answer: 
re = $1.50/$20 + 5%
= 7.5% + 5%
= 12.5% or 0.125
Question 38
Not answered
Marked out of 1.00
The long-run objective of financial management is to:
a. maximize return on investment.

b. maximize market share.
c. maximize the value of the firm's common stock.
d. maximize earnings per share.
The correct answer is: maximize the value of the firm's common stock.
Question 39
Not answered
Marked out of 4.00
If Telecom raises capital using 45% debt, 5% preferred stock, and the rest common stock, what is Telecoms cost of capital to 4
decimal places?
Answer: 
rd= 0.08 (1 – 0.35) = 0.52 or 5.2%
rp = $2.50 / $25 = 10%

re = $1.50 / $20 + 5% = 7.5% + 5% = 12.5%
WACC = [0.45 (0.052)] + [0.05 (0.10)] + [0.50 (0.125)]

WACC = 0.0234 + 0.005 + 0.0625 = 0.0909 = 9.09%
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Question 40 Contact
Not answered
13 Jackson Kaujeua Street, Windhoek, Namibia
Marked out of 1.00
 Phone: +264-61-207-2580

E-mail: tlu@nust.na
The cost of capital most appropriate for a firm operating in a number of sectors is the___
a. cost of equity plus cost of debt

Deployed by TLU and Theme developed by LMSACE.com. Hosted by DICT
b. cost of equity plus cost of debt plus cost of preference shares
c. divisional
Data retention cost of capital
summary
Get thed.mobile
weighted average cost
app
Namibia of capital
University of Science and Technology (NUST) - This VLE is hosted by DICT - (C) 2018.
The correct answer is: divisional cost of capital
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10/14/21, 9:32 PM TEST 2 - 2021: Attempt review

Started on Thursday, 14 October 2021, 7:01 PM

Mark 2.00 out of 2.00

Determine the after-tax cost of debt for Telecom

rd= 0.08 (1 – 0.35)

Mark 2.00 out of 2.00

WACC = WDKD(1 -Tc) + WEKE

0:12 = 0.75(0.125)(1 - 0:20) + 0:25KE

0:12 = 0:075 + 0:25 KE

Mark 1.00 out of 1.00

a. top executive officers

The correct answer is: board of directors

Mark 0.00 out of 1.00

Which of the following statements is not true about cost of capital?

a. The cost of equity is the rate of return required by bondholders

Mark 2.00 out of 2.00

Particulars Company A Company B

Sales volume (units) 60 000 15 000

Fixed cost (N$) 700 000 1 400 000

Variable cost per unit (N$) 10 75

Interest 12% Debt 48 000 78 000

Selling price per unit (N$) 30 250

Determine the total contribution for company A

Particulars Company A Company B

Sales volume (units) 60,000 15,000

Less variable cost per unit 10 75

Contribution per unit 20 175

The correct answer is: 1200000

Mark 1.00 out of 1.00

Which of the following is not true about capital structure?

a. Capital structure is also known as capitalisation

Mark 0.00 out of 2.00

KE = {[$0.50(1 + 0.03)] /$20} + 0.03

The correct answer is: 0.0558

Marked out of 2.00

What is Katima Building Ltd’s debt to equity ratio?

Debt/Equity ratio = MVD / MVE

The correct answer is: 0.5

Mark 1.00 out of 1.00

Which of the following is not a pattern of capital structure?

a. Equity shares and Preference shares

The correct answer is: Equity shares and short-term borrowings

Mark 1.00 out of 1.00

a. decreases with each payment 

The correct answer is: decreases with each payment

Mark 1.00 out of 1.00

a. Capital asset production model

The correct answer is: Capital asset pricing model

Mark 2.00 out of 2.00

KE = 0.025 + (0.05) 1.2 = 0.025 + 0.06

The correct answer is: 0.085

Mark 2.00 out of 2.00

Determine the cost of preferred stock for Telecom

The correct answer is: 0.1

Mark 0.00 out of 1.00

a. remains constant with each payment

The correct answer is: remains constant with each payment

Mark 1.00 out of 1.00

The true cost of debt is ______________