QUESTION: 73

The managers of a company are agents for the shareholders tasked with increasing shareholders'

wealth.
Which of the following will usually increase shareholders' wealth?

Investing in projects with the shortest payback period.
Investing in projects with positive net present value.
Investing in projects with the greatest level of risk.
Not paying a dividend for several years in order to invest in new projects.

Answer(s): B

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YGH has recently completed a post completion audit on a five year contract that has only recently come to a conclusion. The main finding was that the project delivered most of the expected benefits, but that it cost significantly more to implement than had been anticipated at the project appraisal stage. YGH would not have proceeded if the true cost had been known at that stage. The project was the responsibility of the production department, which is presently managed by G.
When the project was proposed, the production department was managed by H. H is now YGH's Director of Operations.
How should the finding from this post completion audit be interpreted?

YGH should consider introducing more detailed checking of the assumptions underlying the costs of future projects.
The production department should not be granted funding for future projects unless there are compelling reasons to proceed.
G should be held accountable for the overspend on the project.
H should be held accountable for the overspend on the project.

Answer(s): A

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QUESTION: 75

A UK based company is considering an investment of GB£1,000,000 in a project in the US

It is anticipated that the following cash flows will arise from this project.
The cash flows will be either US$400,000 with a probability of 40% or US$700,000 with a probability of 60% for each of the next three years; remitted to the UK at the end of each year.
Currently GB£1.00 is worth US$1.30.
The expected inflation rates in the two countries over the next four years are 2% in the UK and 4% in the US.
Applying the Purchasing Power Parity Theory, which of the following represents the expected net present value of the project in GP£ (to the nearest whole pound)?
GB£287,639
GB£391,640
GB£(111,973)
GB£554,047

Answer(s): A

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QUESTION: 76

VBN's home currency is the V$. On 1 January, VBN must make a payment of C$2 million on 31 March of that same year.
On 1 January the spot exchange rate was V$1 = C$0.4.
On 1 January VBN paid $180,000 for a call option to buy C$2 million for V$5.5 million on 31 March.
VBN's cost of borrowing was 8% per year.
On 31 March the spot rate was V$1 = C$0.45.
What was the total cost, including the cost of the option, of settling the payable?

V$4.628 million
V$5.684 million
V$4.444 million
V$5.5 million

Answer(s): A

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QUESTION: 73

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QUESTION: 75

QUESTION: 76