Topic: Basics of Business Finance and Financial Markets

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BMF – Nov 2020 – L1 – SB – Q6 – Basics of Business Finance and Financial Markets

Explanation of loan covenants, reasons and benefits for share repurchase, and features of a finance lease arrangement.

Question

(a) For many loan agreements, the borrower is required to provide undertakings or guarantees of some kind.
Distinguish between covenants and guarantees. (5 Marks)

(b) State THREE reasons why a company will repurchase its shares and THREE benefits that will accrue to the company for doing so. (6 Marks)

(c) Companies can acquire assets with finance lease instead of buying assets with equity or debt capital.
State SIX main features of a finance lease arrangement. (9 Marks)

(Total 20 Marks)

Answer

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Tags: Corporate finance, Finance lease, Guarantees, Loan Covenants, Share repurchase
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: NOV 2020

BMF – Nov 2020 – L1 – SA – Q16 – Basics of Business Finance and Financial Markets

Calculate the present value of N12,000 received in one year at a 5% time preference rate.

Question

Assuming a 5% time preference rate, what is the present value of N12,000 received one year from now?
A. N11,428.80
B. N11,539.90
C. N12,428.80
D. N12,539.90
E. N13,528.80

Answer

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Tags: Financial Calculations, Present Value, Time Preference Rate
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: NOV 2020

BMF – Nov 2020 – L1 – SA – Q15 – Basics of Business Finance and Financial Markets

Identify why banks are considered important financial intermediaries.

Question

Banks are important financial intermediaries because they:
A. Create new debt
B. Are the only source of debt finance
C. Are the only source of long-term finance
D. Operate between investors and borrowers
E. Take deposits from all their customers

Answer

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Tags: Banking, Financial Intermediaries, Investment
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: NOV 2020

BMF – Nov 2020 – L1 – SA – Q12 – Basics of Business Finance and Financial Markets

Identify the term for strategies maximizing profits through innovative financial methods.

Question

Strategies adopted by companies to maximize profits using innovative methods to compute the fair value of financial instruments is best described as:
A. Financial accounting
B. Financial engineering
C. Strategic financial management
D. Strategic management accounting
E. Strategic financial accounting

Answer

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Tags: Financial Engineering, Financial instruments, Profit Maximization
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: NOV 2020

BMF – Nov 2020 – L1 – SA – Q10 – Basics of Business Finance and Financial Markets

Calculate the amount to set aside annually to accumulate a sum for a car replacement in 5 years.

Question

How much should Mr. Eaglet set aside at the end of each year to replace his motor car in 5 years’ time if the cost of a new car remains at ₦5 million and the rate of interest stays at 7% per annum?
A. N669,349.23
B. N779,349.23
C. N869,349.23
D. N979,349.23
E. N989,349.23

Answer

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Tags: Annuities, Financial planning, Future Value, Savings
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: NOV 2020

BMF – Nov 2020 – L1 – SA – Q9 – Basics of Business Finance and Financial Markets

Calculate the present value needed to reach a lump sum in 5 years with compound interest.

Question

Lokoson must pay a lump sum of N960,000 in 5 years. What amount deposited today at 5.8% compounded annually will make up the sum of money?
A. N724,200.36
B. N724,300.37
C. N725,200.36
D. N725,300.37
E. N725,300.37

Answer

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Tags: Compound Interest, Lump Sum, Present Value, Time value of money
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: NOV 2020

BMF – Nov 2020 – L1 – SA – Q8 – Basics of Business Finance and Financial Markets

Calculate the compound interest earned on a deposit over 11 years at 6.50%, compounded quarterly.

Question

What is the amount of interest earned by a deposit of N414,000 for 11 years at 6.50% compounded quarterly?
A. N427,455
B. N427,467
C. N437,455
D. N437,467
E. N447,467

Answer

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Tags: Compound Interest, Financial Mathematics, Investment
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: NOV 2020

BMF – Nov 2020 – L1 – SA – Q7 – Basics of Business Finance and Financial Markets

Calculate the simple interest rate for a 3-month loan.

Question

Ronny wants to borrow N160,000 from his friend. He is willing to pay back N174,400 in 3 months. What simple interest rate will be applicable?
A. 34%
B. 35.5%
C. 36%
D. 36.5%
E. 37%

Answer

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Tags: Interest Rate, Loan Repayment, Simple Interest
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: NOV 2020

BMF – MAY 2016 – L1 – SA – Q12 – Basics of Business Finance and Financial Markets

Multiple choice question on the functions of a stock exchange.

Question

Which of the following is NOT a function of a stock exchange?

A. Provide a system in which shares can be traded in a regulated manner
B. Enforce rules of business conduct on market participants
C. Ensure availability of shares and bonds to be traded by investors
D. Ensure that there is an efficient system for providing new financial information about companies to investors in the market
E. Provide a system for recording information about the prices at which shares are bought and sold and making them available to participants

Answer

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Tags: Financial Markets, Securities Trading, Stock Exchange
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: MAY 2016

BMF – MAY 2016 – L1 – SA – Q12 – Basics of Business Finance and Financial Markets

Multiple choice question on the functions of a stock exchange.

Question

Which of the following is NOT a function of a stock exchange?

Answer

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Tags: Financial Markets, Securities Trading, Stock Exchange
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: MAY 2016

BMF – May 2017 – L1 – SA – Q16 – Basics of Business Finance and Financial Markets

Multiple-choice question on identifying a source that is not typical for long-term capital.

Question

Which of the following is NOT a main source of long-term capital?

A. Venture capital
B. Equity finance
C. Debt factoring
D. Lease finance
E. Debt finance

Answer

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Tags: Capital structure, Financing, Long-term Capital
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: MAY 2017

BMF – May 2017 – L1 – SA – Q14 – Basics of Business Finance and Financial Markets

Multiple-choice question on calculating the future value of an investment using compound interest.

Question

You recently won ₦50 million from the popular NTA show “Who wants to be a billionaire?” A financial expert counselled that you invest the money in a bank at 6% interest rate per annum. How much will you have at the end of ten years?

A. N88,550,000
B. N89,550,000
C. N90,550,000
D. N91,550,000
E. N92,550,000

Answer

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Tags: Compound Interest, Financial Mathematics, Investment
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: MAY 2017

BMF – May 2017 – L1 – SA – Q10 – Basics of Business Finance and Financial Markets

Multiple-choice question on identifying an unusual source of short-term finance.

Question

Which of the following is NOT a usual source of short-term finance?
A. Short-term bank loans
B. Commercial paper
C. Trade payables
D. Bank overdraft
E. Lease finance

Answer

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Tags: Business Finance, Financial Sources, Short-term Finance
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: MAY 2017

BMF – Mar July 2020 – L1 – SB – Q6 -Basics of Business Finance and Financial Markets

Evaluating two projects based on discounted payback period and advising management.

Question

Perfumes Nigeria Limited is considering the purchase of a new machine and has two alternatives. The company uses discounted payback period as a criterion for project selection and has a policy of not investing in any project unless the discounted payback period is less than 4 years. The expected cash flow profiles of the two projects are as shown below:

Year	Machine Perf. (₦)	Machine Fumes (₦)
2020	(2,000,000)	(2,000,000)
2021	200,000	1,000,000
2022	400,000	1,000,000
2023	1,200,000	200,000
2024	1,400,000	100,000
2025	1,600,000	100,000

The company’s cost of capital is 10%.

Required:
Evaluate the two projects and offer your advice to support the investment decision of the management of the company. Assume 360 days make a year and express discounted payback period in years plus days. Show all workings. (20 marks)

Answer

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Tags: Decision Making, Discounted payback period, Investment Appraisal
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: MAR/JULY 2020

BMF – Mar July 2020 – L1 – SB – Q5 – Basics of Business Finance and Financial Markets

Calculating NPV and present value of cash flows for Favour Limited.

Question

(a) Favour Limited is considering a project which will cost N2,000,000 now and generate the following cash flows:

Years	Cash Flow (₦)
1-4	500,000 each year
5-8	300,000 each year
9-15	200,000 each year

The company’s cost of capital is 20%.

Required:
What is the NPV of the project?

(b) What is the present value of constant annual cash flows of ₦120,000 at 15% if the cash flow starts:

i. In year 1?
ii. In year 6?
iii. Immediately? (9 marks)

Answer

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Tags: Cash Flow Analysis, Investment Appraisal, Net Present Value
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: MAR/JULY 2020

BMF – Mar July 2020 – L1 – SA – Q16 – Basics of Business Finance and Financial Markets

Identifying a non-source of new finance for public companies.

Question

Which of the following is NOT a source of new finance for public limited liability companies?
A. Placing
B. Rights issue
C. Initial public offer
D. Stock exchange introduction
E. Offer for sale by tender

Answer

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Tags: Capital Markets, Corporate finance, Public Finance
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: MAR/JULY 2020

BMF – Mar July 2020 – L1 – SA – Q14 – Basics of Business Finance and Financial Markets

Identifying the developers of Agency Theory.

Question

Agency Theory was developed in 1976 by
A. Fayol and Mayo
B. Kanter and Urwick
C. Jensen and Meckling
D. Mintzberg and Ouchi
E. Frank and Lillian Gilbreth

Answer

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Tags: Agency theory, Corporate Governance, Management Theories
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: MAR/JULY 2020

BMF – Mar July 2020 – L1 – SA – Q13 – Basics of Business Finance and Financial Markets

Identifying the field not utilized in financial engineering.

Question

Financial engineering draws tools and knowledge to develop new and innovative financial products from the following fields, EXCEPT
A. Statistics
B. Management
C. Computer science
D. Economics
E. Applied mathematics

Answer

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Tags: Financial Engineering, Financial Products, Innovation
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: MAR/JULY 2020

BMF – Mar July 2020 – L1 – SA – Q12 – Basics of Business Finance and Financial Markets

Identifying a financial decision that can hinder organizational objectives.

Question

Which of the following financial decisions can impede the achievement of organizational objectives?
A. Investing short term cash surpluses
B. Rewarding equity holders appropriately
C. Protecting the organization against financial risks
D. Financing long-term expenditure with short-term sources of funds
E. Maintaining a balance between long-term and short-term finance

Answer

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Tags: Finance Management, Financial Decisions, Organizational Objectives
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: MAR/JULY 2020

BMF – Mar July 2020 – L1 – SA – Q11 – Basics of Business Finance and Financial Markets

Calculating the future value of annual savings of ₦300,000 invested at 6.5% over 9 years.

Question

A savings scheme involves investing ₦300,000 per annum on the last day of the year. If the interest rate is 6.5%, what is the sum to be received at the end of 9 years?
A. ₦3,419,591.31
B. ₦3,519,692.31
C. ₦3,619,793.31
D. ₦3,659,894.31
E. ₦3,719,894.31

Answer

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Tags: Compound Interest, Future Value, Savings
Level: Level 1