(a)  What are rating agencies and are they regulated?                                        (5 marks) (b)  The COVID-19 pandemic has had far reaching impacts on business and society around the world. Consider top governance trends for 2021.                           (8 marks) COVID-19 has decimated many economies and many small and medium sized businesses have struggled to find sources of business finance during the crisis. Discuss.                                                                                      (12 marks) Total 25 Marks

Section A: Multiple Choice.

 

Answer ALL the questions in Section A by selecting one from a), b), c) or d).

Select the answer closer to your calculation. Each question is worth one mark of the overall total.

 

YOU MUST INCLUDE YOUR CALCULATIONS

 

 

1. Your business expects to receive a payment of £9000 one year from now. What is the present value of this payment assuming a discount rate of 12%?

 

1. £10,080
2. £8,036
3. £7,500
4. £1,080

 

2. If interest rates fall, what will be the effect on the price of a 8% treasury bill?

 

1. Price will rise
2. Price will fall
3. There will be no impact on the price
4. Price will remain the same, but the interest received will rise

 

3. The principal agent problem can be exaggerated by:

 

a.     Increasing corporate governance regulation

b.     Symmetric information

c.     Efficient markets

d.     Managerial compensation based on stock price

 

4. A stocks intrinsic value (V₀):

 

1. Is the combined value of all its expected future cash flows
2. Always is equal to the stock price
3. Always differs from the stock price
4. Remains the same over time

 

5. Market efficiency is reduced by:
   1. Increased access to data
   2. Asymmetric information
   3. Improved monitoring
   4. Enhanced data analytics

 

 

 

Use the following expectations on Stocks X and Y to answer the following five questions

 

	Probability	Stock X	Stock Y
Bear Market	0.2	2%	12%
Normal Market	0.4	5%	10%
Bull Market	0.4	18%	6%

 

6. What is the expected return of Stock X?

 

a.       10%

1. 4%
2. 3%
3. 6%

 

7. What is the expected return of Stock Y?

 

a.     10%

b.     8%

1. 12%
2. 8%

 

 

8. What is the standard deviation of return on Stocks X?

 

a.     10.6%

8. 5%
9. 7%
10. 7%

 

 

9. What is the standard deviation of return on Stocks Y?

 

10. 6%

b.     8.5%

9. 7%
10. 7%

 

 

10. Assume that of your £1,000 portfolio, you invest £400 in Stock X and £600 in Stock Y. What is the expected return on your portfolio?

 

a.     6%

b.     8%

c.     10%

d.     12%

 

For the following two questions refer to the information below:

 

The management of FDM Plc. are currently evaluating an investment in products costing £12,000.  Anticipated net cash inflows are over four years with £4,000 received at the end of year 1, 2, 3 and 4.

 

11. If the discount rate is 8%, calculate the projects Net Present Value (NPV).

 

a.     – £1,692

b.     – £692

c.     £692

d.     £1,692

 

12. If the discount rate was 10% and applying the NPV rule:

 

a.     The project should be accepted

b.     The project should be rejected

c.     More information is required

d.     The project has a zero NPV

 

13. You are valuing a project that is expected to earn a one-time cash flow of £400m in four years. You estimate a discount rate of 8%. What is the present value of this cash flow?

 

a.     £544m

b.     £94m

c.     £294m

d.     £370m

 

 

14. An investment offers a perpetual cash flow of £650 every year. The required return on the investment is 7%. The PV of the investment is?

 

a.     £928

b.     £9,286

c.     £86

d.     £28

 

15. Suppose a perpetual bond has been issued at par £1000 with coupon interest payment £60.00 Now 10 years after issue the required rate falls to 4%. What is the current value / price of this bond?

 

1. £1,000
2. £35
3. £1400
4. £70

 

 

 

 

 

For the following four questions refer to the information below:

 

	E(R)	σ
Asset A	9%	3%
Asset B	14%	7%

 

 

 

 

16. Calculate the expected return of the two-asset portfolio to an investor with 40% invested in Asset A and 60% invested in Asset B

 

a.     7%

b.     11%

c.     14%

d.     18%

 

17. Calculate the portfolios risk. The covariance between the two assets is 5.

 

a.     21%

b.     11%

c.     5%

d.     2%

 

 

18. Calculate the portfolios correlation

 

a.     0

b.     – 0.24

c.     0.6

d.     0.28

 

19. If instead the investor invested 75% of his wealth in Asset B, the portfolio expected return would:

 

a.     Increase

b.     Decrease

c.     Not change

d.     Increase or decrease

 

20. FDM ltd issues a three-year bond with a 12% coupon rate and interest repayable annually. The bond is priced at its face value of £100 and the market rate of interest is 8%. What is its current value?

 

a.     £97

b.     £110

c.     £70

d.     £800

 

Total 20 Marks

 

Section B

 

USING YOUR OWN WORDS, answer any TWO questions.

All questions are worth 25 marks of the overall total.

 

Maximum of 1000 words per question (include word count per question)

Include your references below each question

 

1.

• Compare and contrast four different types of business structures.             (5 marks)

 

(b)  Manager and shareholders may not always have the same objectives. Using agency theory, discuss the potential conflict from this principal-agent relationship.

 (8 marks)

 

• Provide a detailed account of how ‘superstar’ firms have come to dominate the world economy and how Covid-19 has impacted them.                  (12 marks)

 

Total 25 marks

 

 

 

2. • Explain what you understand by Aggregate Demand Consumer and what will cause the Aggregate Demand curve to shift.                    (5 marks)

 

• The global economy is expected to grow 6.0% in 2021. Discuss the key factors that will affect global growth predictions for 2022.                                          (8 marks)

 

• “Business leaders are acknowledging that they must take sustainability factors into account in order to achieve long-term financial success and ensure the viability of their business model” Discuss.                                                               (12 marks)

 

Total 25 Marks

 

 

(a)  What are rating agencies and are they regulated?                                        (5 marks)

 

(b)  The COVID-19 pandemic has had far reaching impacts on business and society around the world. Consider top governance trends for 2021.                           (8 marks)

 

• COVID-19 has decimated many economies and many small and medium sized businesses have struggled to find sources of business finance during the crisis. Discuss.                                                                                      (12 marks)

 

Total 25 Marks

 

END OF EXAMINATION

 

MGT7036 – Formula

 

Present Value

 

Present Value of Perpetuity

 

 

Net Present Value:

 

 

 

 

 

 

Accounting Rate of Return

 

 

 

 

 

 

Expected return on an asset:

 

 

 

 

 

Risk of an asset:

 

 

 

 

 

 

 

 

Expected Return of a Two-Asset Portfolio

 

 

 

 

 

Risk of a Two-Asset portfolio

 

 

 

 

 

 

Covariance and Correlation

 

COV_ij = r_ij s_i  s_j

 

 

 

 

CITATION

 

 

 

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