ECOM104 Applied Corporate Finance 2020

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Main Examination Period 2020 – January – Semester A

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ECOM104 Applied Corporate Finance 2020

YOU ARE NOT PERMITTED TO READ THE CONTENTS OF THIS QUESTION PAPER UNTIL INSTRUCTED TO DO SO BY AN INVIGILATOR.

Answer TWO questions from Section A, ONE question from Section B and ONE question from Section C. Section A carries 40 marks, Section B carries 30 marks and Section C carries 30 marks. All sub-questions carry 10 marks, unless indicated otherwise.

If you answer more questions than specified, only the first answers (up to the specified number) will be marked. Cross out any answers that you do not wish to be marked

Calculators are permitted in this examination.  Please state on your answer book the name and type of machine used.

Complete all rough workings in the answer book and cross through any work that is not to be assessed.

Possession of unauthorised material at any time when under examination conditions is an assessment offence and can lead to expulsion from QMUL. Check now to ensure you do not have any notes, mobile phones, smartwatches or unauthorised electronic devices on your person. If you do, raise your hand and give them to an invigilator immediately.

It is also an offence to have any writing of any kind on your person, including on your body. If you are found to have hidden unauthorised material elsewhere, including toilets and cloakrooms it will be treated as being found in your possession. Unauthorised material found on your mobile phone or other electronic device will be considered the same as being in possession of paper notes. A mobile phone that causes a disruption in the exam is also an assessment offence.

EXAM PAPERS MUST NOT BE REMOVED FROM THE EXAM ROOM

Section A

Answer TWO questions

Question 1

  1. What is the difference between earnings per share (EPS) and Diluted EPS measures? Define both measures.
    • marks]
  2. What is a dividend discount model? What is the main advantage of this model over the Capital Asset pricing model (CAPM) and Arbitrage Pricing Theory (APT) approaches?
    • marks]

Question 2

  1. Financial data are presented in three main sections in the Cash Flow Statements. What are they?
    • marks]
  2. Define the certainty equivalence principle (CEQ) and explain the intuition behind it. Would you expect an industry with a higher discount factor (cost of capital) to have higher or lower CEQ values?
    • marks]

Question 3

  1. In the Balance Sheet financial statement, what does“receivables” mean? How are the traded securities valued? Does “receivables” appear on the asset or liabilities side of the Balance Sheet?
    • marks]
  2. What is a trend analysis? Provide two examples and explain the limitations of trend analysis.
    • marks]

Turn Over

Section B

Answer ONE question

Question 4

You work as an analyst for Dreamscape, Inc. In preparation for the end of financial year general meeting you are asked to help your manager with the firm’s financial statements.

You are given the following key financial data and the firm’s income statement.

  1. Prepare a common-size income statement for Dreamscape, Inc. for the year ended on 31 Dec [20 marks]
  1. Evaluate the companyʹs performance against industry average ratios and compare with the last yearʹs results. [10 marks]

 

Question 5

You are employed as an analyst by a well-known venture capital company and you cover the sports sector. You have obtained the following Balance Sheet and Income Statement information for Golf Corp which is one of the companies in your portfolio.

Calculate the following ratios for 2002 and provide a brief interpretation of the results.

 

  1. Leverage ratios: total debt ratio and debt to equity ratio. Efficiency ratios: total assets turnover ratio and inventory turnover ratio.
    • marks]
  2. Liquidity ratios: current ratio and quick ratio. Profitability ratios: net profit margin and return on assets.
    • marks]

 

Section C

Answer ONE question

Question 6

What is the purpose of the cash-flow statement? How are cash-flow statements structured and what are the potential limitations of such an approach? [30 marks]

Question 7

How can the quality of financial statements be undermined? Discuss in detail and explain, giving a numerical example. How can the choice of depreciation method distort the accuracy of reportable earnings? [30 marks]

Question 8

Discuss the Modigliani-Miller (MM) Capital Structure Theorem and its underlying assumptions. Provide a simple proof of the theorem. What role does the “no arbitrage” argument play in the proof? [30 marks]

End of Paper

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