Essay on Financial Decision Making

1252 Words Oct 25th, 2014 6 Pages
RMIT FINAL EXAMINATION

FACULTY OF BUSINESS
SCHOOL OF ECONOMICS AND FINANCE

BAFI-1100 FINANCIAL DECISION MAKING

FIRST SEMESTER 2004

DATE:

TIME:

INSTRUCTIONS:

1. This is a CLOSED BOOK EXAMINATION

2. The examination represents 60% of the assessment in this subject.

3. All answers are to be made on the examination paper.

4. All questions should be attempted; there is no choice between questions

5. The use of a calculator is permitted, however laptop computers are not permitted to be brought into the examination room.

6. Students are advised to show all workings for questions involving calculations.

Question 1.

(a) Consider an investment that has cash flows of $500 at the
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a. What is each project's payback period? b. What is each project's net present value? c. What is each project's internal rate of return? d. Fully explain the results of your analysis. Which project do you prefer?

a. 3.2years, 5 years b. $12,656, $13,400 c. 17%, 15%

(3 + 3 + 2 = 8 marks)
Question 2

It is now January 1, 2001. O’Loughlin Dynamics Inc. (OLD) has just developed a solar panel capable of generating 200 percent more electricity than any solar panel currently on the market. As a result, OLD is expected to experience a 15 percent annual growth rate for the next 5 years. By the end of 5 years, other firms will have developed comparable technology, and OLD’s growth rate will slow to 5 percent per year indefinitely.

Stockholders require a return of 12 percent on OLD’s stock. The most recent annual dividend (Do), which was paid yesterday, was $1.75 per share.

a. Calculate OLD’s expected dividends for 2001, 2002, 2003, 2004, and 2005. b. Calculate the value of the stock today, PO. c. Calculate the expected

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