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EFN2D11 CGA-Canada,2011 Page 1 of 6 CGA-CANADA ADVANCED CORPORATE FINANCE FN2 EXAMINATION December 2011 Marks Time:4 Hours Notes:1.Questions 1 and 2 are multiple choice.For these questions,select the best answer for each of the unrelated items.Answer each of these items in your examination booklet by giving the number of your choice.For example,if the best answer for item(a)is(1),write(a)(1)in your examination booklet.If more than one answer is given for an item,that item will not be marked.Incorrect answers will be marked as zero.Marks will not be awarded for explanations.2.Except for multiple-choice questions,answers should include all supporting calculations where appropriate.3.If you provide alternative answers to Questions 3,4,5,or 6,only the first answer will be marked.If you wish to change your answer,you must cross out the answer you do not wish to submit for marking.12 Question 1 Note:2 marks each a.Which of the following is consistent with the strong form of market efficiency?1)Investors who follow insiders trading patterns always make additional returns.2)The market price of a banks shares does not change when it announces a plan to take expected loan loss reserves on some of its loans.3)The strategy of buying high beta stocks before an expected bull market yields better results than the market portfolio.4)An active trading strategy yields similar returns to a nave buy-and-hold strategy.b.Which of the following best describes diversification?1)Diversification can be achieved by combining 2 stocks as long as the correlation coefficient is less than 1.2)Diversification reduces systematic risk.3)Standard deviation is the best measure of the risk of a well-diversified portfolio.4)The market portfolio has a beta of 0.c.Which of the following is the best example of a conflict of interest between management and shareholders?1)Management borrows heavily to fund risky projects.2)Management moves production overseas to take advantage of low-cost labour.3)Management fights against a takeover bid despite the market consensus that it is the most reasonable bid.4)Management voluntarily recalls defective products.d.Which of the following best describes project financing?1)Project financing refers to a firm financing a large project on a stand-alone basis using equity capital only.2)In project financing,projects are usually operated as independent legal entities separate from their sponsors.3)Project financing has high agency costs as many sponsors are involved.4)Project financing limits sponsors debt capacity with restrictive covenants.Continued.EFN2D11 CGA-Canada,2011 Page 2 of 6 e.The merger between a lawnmower-maker and a gasoline-powered engine maker is an example of which type of merger?1)Congeneric merger 2)Conglomerate merger 3)Horizontal merger 4)Vertical merger f.Which of the following models of valuation is the best for valuing a non-going concern?1)Discounted cash flow methods 2)Dividend growth models 3)Book value plus adjustments 4)Price multiples 18 Question 2 Note:3 marks each a.What is the payback period of a project that costs$85,000 and generates cash flows of$20,000 in the first year,$35,000 in the second year,$25,000 in the third year,and$15,000 per year for the following 5 years?1)2.667 years 2)3.000 years 3)3.333 years 4)3.667 years b.JKL Corp.has 2 million voting shares outstanding and has to elect 9 directors.A minority group of shareholders wants to elect 4 particular directors.JKL uses cumulative voting in its elections for the board of directors.How many votes are required per director(at a minimum)for the minority group to ensure it will elect 4 directors?1)800,001 votes 2)1,800,002 votes 3)2,000,000 votes 4)7,200,009 votes c.MNO Corp.just announced a rights offering to raise$22.5 million in new equity.There are 5 million shares outstanding with a market price of$20.Each outstanding share will receive 1 right,which entitles the holder to buy MNO shares at$18 cash plus a certain number of rights.What is the theoretical value of the shares during the ex-rights period?1)$17.60 2)$18.00 3)$19.00 4)$19.60 d.PQR Inc.has a current sales level of$30 million with fixed costs of$10 million.PQR breaks even at a sales level of$20 million.What is its current degree of operating leverage(DOL)?1)1.50 2)2.00 3)3.00 4)3.67 Continued.EFN2D11 CGA-Canada,2011 Page 3 of 6 e.STU Corp.,an all-equity financed firm,has decided in favour of a capital restructuring.It is planning to borrow$10 million at an interest rate of 10%to repurchase some of its shares.Currently,it has 2,000,000 shares outstanding,traded at$25 per share on the market.What is STUs leverage-indifference EPS if it has a tax rate of 50%?1)$1.00 2)$1.25 3)$2.50 4)$3.25 f.WW Inc.is an investment company managing mutual funds.One of its stock portfolios has a current market value of$500 million and a price change standard deviation of 20%per year.Assuming that the price change follows a normal distribution,at a 95%confidence level,what is the mi