I85PREP
⌘ K
Intermediate Financial Management (China) - independent subject foundations study materials
Intermediate Financial Management (China) - independent subject foundations study resources

Intermediate Financial Management (China) - independent subject foundations practice questions

One question at a time. Build your Intermediate Financial Management (China) - independent subject foundations understanding.

First 50 of 190 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Management costing, budgets and relevant decisions

A factory analyzes its equipment maintenance costs across the past year using the High-Low Method (高低点法). The highest production activity occurred in October (12,000 machine hours, total cost RMB 86,000), and the lowest occurred in February (7,000 machine hours, total cost RMB 56,000). What are the estimated unit variable cost ($b$) and total monthly fixed cost ($a$) for maintenance?

  1. $b = \text{RMB } 6.00$ per hour; $a = \text{RMB } 14,000$ Correct answer.
  2. $b = \text{RMB } 5.00$ per hour; $a = \text{RMB } 26,000$
  3. $b = \text{RMB } 6.00$ per hour; $a = \text{RMB } 72,000$
  4. $b = \text{RMB } 7.17$ per hour; $a = \text{RMB } 0$

Explanation

Under the High-Low Method (高低点法), the high and low points are chosen based on the ACTIVITY level ($X$): 1. Unit variable cost $b = \frac{Y_{\text{high}} - Y_{\text{low}}}{X_{\text{high}} - X_{\text{low}}} = \frac{86,000 - 56,000}{12,000 - 7,000} = \frac{30,000}{5,000} = \text{RMB } 6.00$ per machine hour. 2. Total fixed cost $a = Y_{\text{high}} - b \times X_{\text{high}} = 86,000 - (6.00 \times 12,000) = 86,000 - 72,000 = \text{RMB } 14,000$ (or using the low point: $56,000 - 6.00 \times 7,000 = 56,000 - 42,000 = \text{RMB } 14,000$).

Question 2Management costing, budgets and relevant decisions

Compared to a Static/Fixed Budget (固定预算), which of the following is the PRIMARY advantage of a Flexible Budget (弹性预算 / 变动预算)?

  1. It eliminates all discretionary fixed costs across departments.
  2. It provides budget estimates across a range of operational activity levels, facilitating realistic variance analysis. Correct answer.
  3. It is unaffected by macroeconomic fluctuations because it relies on historical actual figures.
  4. It removes the need for physical production and sales volume forecasts.

Explanation

A Flexible Budget (弹性预算) is prepared for a range of activity levels (typically 70%–110% or 80%–120% of normal capacity) based on cost behavior relationships ($Y = a + bX$). Its key advantages are wide adaptability and direct comparability for performance evaluation when actual volume differs from the static budget target.

Question 3Management costing, budgets and relevant decisions

Which budgeting methodology assumes a 'zero baseline' (基期为零), re-evaluating every expenditure from scratch based on future operational necessity and cost-benefit justification rather than adjusting historical base-period spending?

  1. Incremental Budgeting (增量预算)
  2. Zero-Based Budgeting (零基预算 / ZBB) Correct answer.
  3. Periodic Budgeting (定期预算)
  4. Rolling Budgeting (滚动预算)

Explanation

Zero-Based Budgeting (零基预算 / ZBB) ignores historical cost levels and starts from a clean slate (zero baseline). Every operational activity and budget item must be thoroughly justified based on cost-benefit analysis, urgency, and resource constraints, effectively eliminating historical inefficiencies and budget padding.

Question 4Management costing, budgets and relevant decisions

An enterprise implements a continuous Rolling Budget (滚动预算 / 连续预算) updated on a quarterly basis. Which of the following statements regarding the structural operation and benefits of rolling budgeting is CORRECT?

  1. The budget period strictly terminates at the end of the statutory calendar year on December 31.
  2. It maintains a constant forward-looking 12-month budget horizon by adding a new quarter as each current quarter elapses. Correct answer.
  3. It requires all capital expenditures to be re-authorized under zero-base rules every month.
  4. It completely replaces the need for operational cash flow tracking and daily cash budgets.

Explanation

A Rolling Budget (滚动预算) continuously projects a fixed future horizon (typically 12 months or 4 quarters). As each month or quarter finishes, it is dropped and the next future period is added, ensuring management always maintains dynamic forward visibility and alignment with changing operational conditions.

Question 5Management costing, budgets and relevant decisions

A manufacturing enterprise prepares its Production Budget (生产预算) for the first quarter. Projected sales volume is 20,000 units for Q1 and 25,000 units for Q2. Company policy dictates that finished goods ending inventory for each quarter must equal 10% of the following quarter's expected sales. If the beginning finished goods inventory on January 1 is 2,000 units, how many units must be produced in Q1?

  1. 19,500 units
  2. 20,500 units Correct answer.
  3. 22,500 units
  4. 23,000 units

Explanation

In the production budget (expressed purely in physical units): Expected Production Volume $= \text{Expected Sales Volume} + \text{Target Ending Inventory} - \text{Beginning Inventory}$. 1. Q1 Target Ending Inventory $= 25,000 \times 10\% = 2,500$ units. 2. Q1 Expected Production $= 20,000 + 2,500 - 2,000 = 20,500$ units.

Question 6Management costing, budgets and relevant decisions

A firm forecasts quarterly sales revenues: Q1 = RMB 500,000; Q2 = RMB 600,000; Q3 = RMB 700,000. Customer collection experience demonstrates that 60% of sales are collected in cash during the quarter of sale, 30% in the following quarter, and the remaining 10% in the second following quarter. What is the budgeted cash collection from sales in Q3?

  1. RMB 420,000
  2. RMB 600,000
  3. RMB 650,000 Correct answer.
  4. RMB 700,000

Explanation

Cash collections in Q3 arise from sales in Q3, Q2, and Q1: - From Q3 sales ($60\%$ of RMB 700,000) $= \text{RMB } 420,000$ - From Q2 sales ($30\%$ of RMB 600,000) $= \text{RMB } 180,000$ - From Q1 sales ($10\%$ of RMB 500,000) $= \text{RMB } 50,000$ Total Q3 Cash Collections $= 420,000 + 180,000 + 50,000 = \text{RMB } 650,000$.

Question 7Management costing, budgets and relevant decisions

In the Manufacturing Overhead Budget (制造费用预算), total budgeted manufacturing overhead for Q2 is RMB 180,000, which includes RMB 45,000 of plant equipment depreciation. How much cash disbursement should be incorporated into the Cash Budget for manufacturing overhead in Q2?

  1. RMB 180,000
  2. RMB 135,000 Correct answer.
  3. RMB 225,000
  4. RMB 45,000

Explanation

Depreciation is a non-cash expense (非付现成本). In converting budgeted manufacturing overhead to cash disbursements for the Cash Budget, non-cash charges must be deducted: $\text{Cash Disbursement for Overhead} = \text{Total Budgeted Overhead} - \text{Depreciation} = 180,000 - 45,000 = \text{RMB } 135,000$.

Question 8Management costing, budgets and relevant decisions

A department compiles a flexible budget formula for utility costs: $Y = 30,000 + 4.5X$, where $X$ represents machine operating hours. If the department actually operates 8,000 machine hours during the month, what is the flexible budget allowance for utility expenses?

  1. RMB 36,000
  2. RMB 66,000 Correct answer.
  3. RMB 30,000
  4. RMB 72,000

Explanation

Using the flexible budget formula $Y = a + bX$: $Y = 30,000 + (4.5 \times 8,000) = 30,000 + 36,000 = \text{RMB } 66,000$.

Question 9Financial appraisal, financing and conditional valuation models

To mitigate agency conflicts between shareholders (所有者) and operational management (经营者), which of the following measures represents a market-driven constraint mechanism (接收 / 敌意收购) that forces management to align with shareholder interests under threat of corporate takeover?

  1. Dismissal of management by the Board of Directors (解聘)
  2. Hostile takeover via the capital market (接收) Correct answer.
  3. Executive stock options and performance share grants (股票期权激励)
  4. Management buyouts (MBO / 管理层收购)

Explanation

In corporate agency theory, coordination mechanisms between shareholders and managers are classified into monitoring/discipline mechanisms and incentive mechanisms. 'Takeover' (接收) is an external capital market discipline mechanism where poor managerial performance causes stock prices to drop, making the firm vulnerable to hostile acquisition, resulting in the replacement of incumbent management.

Question 10Financial appraisal, financing and conditional valuation models

When shareholders make decisions that compromise the interests of creditors (债权人)-such as issuing new debt with equal seniority or investing in high-risk projects-which of the following protective measures is typically employed by creditors in loan agreements to restrict such opportunistic behavior?

  1. Dismissing company directors via shareholder meetings (解聘董事)
  2. Implementing executive stock option plans (实施期权激励)
  3. Including restrictive debt covenants and early loan recall provisions (限制性借款条款与提前收回借款) Correct answer.
  4. Increasing dividends to improve market capitalization (增加股利支付)

Explanation

To resolve conflicts with shareholders (such as asset substitution or debt dilution), creditors protect themselves by inserting restrictive covenants (限制性条款) in lending contracts-such as limits on debt-to-asset ratios, working capital minimums, restrictions on further borrowing, and restrictions on dividend payouts-or by exercising rights to recall loans early (收回借款) or refuse further credit extensions.

Question 11Financial appraisal, financing and conditional valuation models

According to the interest rate determination model in financial markets, the nominal interest rate is composed of the pure interest rate and various risk premiums: $K = K_0 + IP + DRP + LP + MRP$. If the pure interest rate (纯利率) is 2.5%, expected inflation rate (通货膨胀补偿率) is 3.0%, default risk premium (违约风险溢酬) is 1.8%, liquidity risk premium (流动性风险溢酬) is 0.7%, and maturity risk premium (期限风险溢酬) is 1.0%, what is the required nominal interest rate on this corporate bond?

  1. 7.3%
  2. 8.0%
  3. 9.0% Correct answer.
  4. 6.2%

Explanation

Nominal Interest Rate $K = \text{Pure Rate } (K_0) + \text{Inflation Premium } (IP) + \text{Default Risk Premium } (DRP) + \text{Liquidity Premium } (LP) + \text{Maturity Risk Premium } (MRP) = 2.5\% + 3.0\% + 1.8\% + 0.7\% + 1.0\% = 9.0\%$.

Question 12Financial appraisal, financing and conditional valuation models

A commercial bank offers a corporate working capital credit line with a nominal annual interest rate of 12%, compounded quarterly ($m = 4$). What is the effective annual interest rate (实际利率 / EAR) to the borrowing enterprise?

  1. 12.00%
  2. 12.36%
  3. 12.55% Correct answer.
  4. 12.68%

Explanation

The relationship between nominal annual interest rate $r$ and effective annual interest rate $i$ under periodic compounding $m$ times per year is: $i = (1 + r/m)^m - 1$. Here, $i = (1 + 0.12/4)^4 - 1 = (1.03)^4 - 1 = 1.12550881 - 1 = 12.55\%$.

Question 13Financial appraisal, financing and conditional valuation models

A listed company issues perpetual preferred shares (永续年金 / Perpetuity) promising an annual fixed dividend of RMB 12 per share indefinitely. If the required rate of return for preferred stock investors is 8%, what is the theoretical theoretical fair value (present value) per share?

  1. RMB 96.00
  2. RMB 120.00
  3. RMB 150.00 Correct answer.
  4. RMB 180.00

Explanation

The present value of a perpetuity (永续年金现值) is calculated as: $PV = A / i$. Here, $PV = 12 / 0.08 = \text{RMB } 150.00$.

Question 14Financial appraisal, financing and conditional valuation models

An investment analyst is evaluating two mutually exclusive investment projects. Project X has an expected return of RMB 200,000 with a standard deviation of RMB 40,000. Project Y has an expected return of RMB 500,000 with a standard deviation of RMB 80,000. Using the coefficient of variation (标准离差率 / $V = \sigma / \bar{X}$), which project possesses HIGHER relative risk?

  1. Project X ($V_X = 20\%$) has higher risk than Project Y ($V_Y = 16\%$). Correct answer.
  2. Project Y ($V_Y = 25\%$) has higher risk than Project X ($V_X = 15\%$).
  3. Project Y has higher risk because its standard deviation (RMB 80,000) is greater than Project X's (RMB 40,000).
  4. Both projects carry identical risk because their risk-to-return ratios are equivalent.

Explanation

When comparing two investments with DIFFERENT expected returns, standard deviation (absolute risk) cannot be used directly; the Coefficient of Variation (标准离差率 $V = \sigma / \bar{X}$) must be used. - $V_X = 40,000 / 200,000 = 0.20 = 20\%$. - $V_Y = 80,000 / 500,000 = 0.16 = 16\%$. Since $V_X (20\%) > V_Y (16\%)$, Project X has higher relative risk per unit of return.

Question 15Financial appraisal, financing and conditional valuation models

According to the Capital Asset Pricing Model (CAPM / 资本资产定价模型), if the risk-free rate of return ($R_f$) is 4%, the expected average market portfolio return ($R_m$) is 10%, and Stock A has a systemic risk coefficient (贝塔系数 / $\beta$) of 1.4, what is the required rate of return ($R_A$) for Stock A?

  1. 10.0%
  2. 12.4% Correct answer.
  3. 14.0%
  4. 8.4%

Explanation

Under the Capital Asset Pricing Model (CAPM / 证券市场线方程): $R_i = R_f + \beta_i \times (R_m - R_f)$. Here, the market risk premium $(R_m - R_f) = 10\% - 4\% = 6\%$. $R_A = 4\% + 1.4 \times (10\% - 4\%) = 4\% + 1.4 \times 6\% = 4\% + 8.4\% = 12.4\%$.

Question 16Financial appraisal, financing and conditional valuation models

An investment fund creates a portfolio consisting of three equities: Stock 1 (weight $w_1 = 40\%$, $\beta_1 = 1.5$), Stock 2 (weight $w_2 = 35\%$, $\beta_2 = 0.8$), and Stock 3 (weight $w_3 = 25\%$, $\beta_3 = 1.2$). If the risk-free rate is 3.5% and the expected return on the market portfolio is 9.5%, what are the portfolio's beta coefficient ($\beta_p$) and expected rate of return ($R_p$)?

  1. $\beta_p = 1.18$; $R_p = 10.58\%$ Correct answer.
  2. $\beta_p = 1.18$; $R_p = 11.21\%$
  3. $\beta_p = 1.16$; $R_p = 10.46\%$
  4. $\beta_p = 1.25$; $R_p = 11.00\%$

Explanation

1. Portfolio Beta: $\beta_p = \sum w_i \beta_i = (0.40 \times 1.5) + (0.35 \times 0.8) + (0.25 \times 1.2) = 0.60 + 0.28 + 0.30 = 1.18$. 2. Expected Return via CAPM: $R_p = R_f + \beta_p \times (R_m - R_f) = 3.5\% + 1.18 \times (9.5\% - 3.5\%) = 3.5\% + 1.18 \times 6.0\% = 3.5\% + 7.08\% = 10.58\%$.

Question 17Financial appraisal, financing and conditional valuation models

When categorizing corporate financing sources based on legal ownership and repayment obligations, which of the following is classified as DIRECT EQUITY FINANCING (直接股权筹资)?

  1. Issuing Corporate Debentures (发行公司债券)
  2. Borrowing from Commercial Banks (银行借款)
  3. Public Offering of Ordinary Shares (发行普通股股票) Correct answer.
  4. Entering into a Financial Lease Agreement (融资租赁)

Explanation

Issuing ordinary shares directly to capital market investors represents Direct Equity Financing. It conveys equity ownership rights without requiring a financial intermediary to act as the primary risk-bearing lender.

Question 18Financial appraisal, financing and conditional valuation models

An enterprise secures a 1-year bank loan of RMB 1,000,000 at a nominal annual interest rate of 6%. The lending bank requires a 20% Compensating Balance (补偿性余额) to be maintained in a non-interest-bearing demand account throughout the year. What is the EFFECTIVE annual interest rate to the borrowing enterprise?

  1. 6.0%
  2. 7.2%
  3. 7.5% Correct answer.
  4. 8.0%

Explanation

A compensating balance requirement reduces the usable loan funds available to the borrower while the borrower still pays interest on the entire nominal principal: $\text{Effective Interest Rate } r_{\text{eff}} = \frac{\text{Nominal Interest}}{\text{Usable Loan Principal}} = \frac{\text{Principal} \times r}{\text{Principal} \times (1 - \text{Compensating Ratio})} = \frac{r}{1 - \text{Compensating Ratio}} = \frac{6\%}{1 - 20\%} = \frac{6\%}{0.80} = 7.50\%$.

Question 19Financial appraisal, financing and conditional valuation models

A firm borrows RMB 500,000 from a commercial bank for one year at a nominal interest rate of 8%. The bank employs the Discount Interest Method (贴现法付息), deducting the full annual interest upfront upon loan origination. What is the borrower's effective annual interest rate?

  1. 8.00%
  2. 8.70% Correct answer.
  3. 9.20%
  4. 9.60%

Explanation

Under the discount interest method (贴现法), the upfront interest deducted is $500,000 \times 8\% = \text{RMB } 40,000$. The actual usable funds received by the borrower are $500,000 - 40,000 = \text{RMB } 460,000$. $\text{Effective Interest Rate} = \frac{\text{Annual Interest}}{\text{Actual Usable Funds}} = \frac{40,000}{460,000} = \frac{8\%}{1 - 8\%} = \frac{0.08}{0.92} \approx 8.6957\% \approx 8.70\%$.

Question 20Financial appraisal, financing and conditional valuation models

A corporation issues Callable Corporate Bonds (附提前赎回条款的公司债券). From the perspective of the issuing corporation, under which of the following market interest rate scenarios is it most advantageous to exercise the early redemption option (提前赎回条款)?

  1. When market interest rates rise significantly above the bond's coupon rate.
  2. When market interest rates fall significantly below the bond's coupon rate, allowing refinancing at lower rates. Correct answer.
  3. When the corporation's credit rating is downgraded by credit rating agencies.
  4. When the enterprise experiences severe working capital shortages.

Explanation

An early redemption clause (赎回条款) protects the issuer. When market interest rates decline significantly below the bond's coupon rate, the issuing firm can exercise the call option to buy back the high-interest bonds and reissue new debt at prevailing lower market rates, thereby reducing the firm's ongoing capital cost.

Question 21Financial appraisal, financing and conditional valuation models

A listed company announces a Rights Offering (配股) offering 3 new shares for every 10 existing shares held (配股比例 0.3) at a subscription price of RMB 8.00 per share. Prior to the rights issue, the stock trades at RMB 12.00 per share. Assuming full subscription by all shareholders, what is the theoretical Ex-Rights Share Price (配股除权参考价)?

  1. RMB 9.50
  2. RMB 10.00
  3. RMB 11.08 Correct answer.
  4. RMB 11.50

Explanation

The theoretical ex-rights share price is calculated as: $P_{\text{ex}} = \frac{P_{\text{pre}} + \text{Subscription Price} \times \text{Rights Ratio}}{1 + \text{Rights Ratio}} = \frac{12.00 + (8.00 \times 0.3)}{1 + 0.3} = \frac{12.00 + 2.40}{1.3} = \frac{14.40}{1.3} \approx \text{RMB } 11.0769 \approx \text{RMB } 11.08$.

Question 22Financial appraisal, financing and conditional valuation models

A listed corporation issues 5-year Convertible Bonds (可转换公司债券) with a face value of RMB 1,000 per bond. The indenture sets the Conversion Price (转换价格) at RMB 25 per share. What is the Conversion Ratio (转换比率), and how many common shares will a bondholder receive upon converting one bond?

  1. 25 shares
  2. 40 shares Correct answer.
  3. 50 shares
  4. 100 shares

Explanation

The Conversion Ratio (转换比率) represents the number of common shares received per convertible bond: $\text{Conversion Ratio} = \frac{\text{Bond Par Value}}{\text{Conversion Price}} = \frac{\text{RMB } 1,000}{\text{RMB } 25} = 40 \text{ shares}$.

Question 23Financial appraisal, financing and conditional valuation models

An enterprise secures a long-term bank loan of RMB 2,000,000 at an annual interest rate of 6%. Loan arrangement and handling fees (flotation cost rate $f$) are 1% of the principal. The corporate income tax rate is 25%. What is the after-tax cost of this bank debt capital ($K_b$)?

  1. 4.50%
  2. 4.55% Correct answer.
  3. 6.00%
  4. 3.38%

Explanation

The after-tax cost of bank debt capital using the general formula is: $K_b = \frac{\text{Annual Interest} \times (1 - T)}{\text{Principal} \times (1 - f)} = \frac{r \times (1 - T)}{1 - f} = \frac{6\% \times (1 - 0.25)}{1 - 0.01} = \frac{4.5\%}{0.99} \approx 4.5455\% \approx 4.55\%$.

Question 24Financial appraisal, financing and conditional valuation models

A listed company issues preferred shares with a par value of RMB 100 per share and a fixed annual dividend rate of 8%. The issue price is RMB 100 per share, and underwriting issuance fees are 4% of the issue price. Because preferred dividends are paid from after-tax net profit, there is no tax shield. What is the cost of capital for this preferred stock ($K_p$)?

  1. 7.68%
  2. 8.00%
  3. 8.33% Correct answer.
  4. 6.25%

Explanation

Preferred stock dividends are not tax-deductible. The cost of preferred stock is calculated as: $K_p = \frac{D_p}{P_0 \times (1 - f)} = \frac{100 \times 8\%}{100 \times (1 - 0.04)} = \frac{8.00}{96.00} \approx 8.3333\% \approx 8.33\%$.

Question 25Financial appraisal, financing and conditional valuation models

A company's common stock currently trades at RMB 25.00 per share. The company recently paid an annual cash dividend ($D_0$) of RMB 1.50 per share. Dividends are expected to grow at a constant annual rate of 5% indefinitely. If the company issues new common shares, the flotation cost rate will be 4% of the share price. Using the Dividend Growth Model (股利增长模型 / Gordon Model), what is the cost of new common equity ($K_s$)?

  1. 11.00%
  2. 11.25%
  3. 11.56% Correct answer.
  4. 12.00%

Explanation

Under the Dividend Growth Model: $K_s = \frac{D_1}{P_0 \times (1 - f)} + g = \frac{D_0 \times (1 + g)}{P_0 \times (1 - f)} + g$ 1. Expected next-period dividend $D_1 = 1.50 \times (1 + 0.05) = \text{RMB } 1.575$. 2. Net issue proceeds $= 25.00 \times (1 - 0.04) = \text{RMB } 24.00$. 3. $K_s = \frac{1.575}{24.00} + 0.05 = 0.065625 + 0.05 = 11.5625\% \approx 11.56\%$.

Question 26Financial appraisal, financing and conditional valuation models

Using the Capital Asset Pricing Model (CAPM), an analyst estimates a firm's cost of common equity. If the 10-year Treasury bond yield is 3.5%, the expected return on the Shanghai Composite market index is 9.5%, and the firm's equity beta coefficient ($\beta$) increases from 1.1 to 1.3 due to an increase in corporate financial debt, by how much does the firm's cost of common equity increase?

  1. 0.60%
  2. 1.20% Correct answer.
  3. 1.80%
  4. 2.40%

Explanation

Market risk premium $(R_m - R_f) = 9.5\% - 3.5\% = 6.0\%$. - Cost of equity at $\beta_1 = 1.1$: $K_{s1} = 3.5\% + 1.1 \times 6.0\% = 3.5\% + 6.6\% = 10.1\%$. - Cost of equity at $\beta_2 = 1.3$: $K_{s2} = 3.5\% + 1.3 \times 6.0\% = 3.5\% + 7.8\% = 11.3\%$. Increase in cost of equity $= \Delta \beta \times (R_m - R_f) = (1.3 - 1.1) \times 6.0\% = 0.2 \times 6.0\% = 1.20\%$.

Question 27Financial appraisal, financing and conditional valuation models

What is the primary methodological difference between calculating the Cost of Retained Earnings (留存收益资本成本) and the Cost of Newly Issued Common Stock (普通股资本成本) under the Dividend Growth Model?

  1. Retained earnings are tax-deductible, whereas common stock dividends are not.
  2. Retained earnings do not incur issuance/flotation expenses ($f = 0$), whereas newly issued common stock incurs flotation costs ($f > 0$). Correct answer.
  3. Retained earnings are calculated using the risk-free rate rather than expected dividend growth.
  4. Retained earnings cost is always equal to the after-tax cost of long-term debt.

Explanation

Retained earnings represent internal equity financing generated by re-investing corporate profits. Because no new shares are marketed to the public, there are zero flotation/underwriting expenses ($f = 0$). Hence: $K_{\text{re}} = \frac{D_1}{P_0} + g$, which is slightly lower than the cost of new public equity $K_s = \frac{D_1}{P_0(1-f)} + g$.

Question 28Financial appraisal, financing and conditional valuation models

A corporation's target capital structure consists of 40% Long-term Debt, 10% Preferred Stock, and 50% Common Equity. The individual capital costs are: after-tax debt cost $K_d = 4.5\%$, preferred stock cost $K_p = 8.0\%$, and common equity cost $K_s = 12.0\%$. What is the company's Weighted Average Cost of Capital (WACC / 加权平均资本成本)?

  1. 8.15%
  2. 8.60% Correct answer.
  3. 9.00%
  4. 9.45%

Explanation

The Weighted Average Cost of Capital (WACC) is the weighted sum of individual capital costs: $WACC = (w_d \times K_d) + (w_p \times K_p) + (w_s \times K_s)$ $WACC = (0.40 \times 4.5\%) + (0.10 \times 8.0\%) + (0.50 \times 12.0\%) = 1.80\% + 0.80\% + 6.00\% = 8.60\%$.

Question 29Financial appraisal, financing and conditional valuation models

A manufacturing enterprise currently generates sales revenue of RMB 1,000,000 with total variable costs of RMB 600,000 and fixed operating costs of RMB 200,000. What is the firm's Degree of Operating Leverage (DOL / 经营杠杆系数) at this baseline sales volume?

  1. 1.50
  2. 2.00 Correct answer.
  3. 2.50
  4. 3.00

Explanation

1. Baseline Contribution Margin $M = \text{Sales} - \text{Variable Costs} = 1,000,000 - 600,000 = \text{RMB } 400,000$. 2. Earnings Before Interest and Taxes $EBIT = M - \text{Fixed Costs} = 400,000 - 200,000 = \text{RMB } 200,000$. 3. Degree of Operating Leverage $DOL = \frac{M}{EBIT} = \frac{400,000}{200,000} = 2.00$. (This means a 10% increase in sales will produce a 20% increase in EBIT).

Question 30Financial appraisal, financing and conditional valuation models

A firm reports an annual Earnings Before Interest and Taxes (EBIT) of RMB 300,000. It has outstanding debt incurring annual interest expenses ($I$) of RMB 60,000 and has issued preferred stock requiring annual dividends ($DP$) of RMB 30,000. If the enterprise income tax rate is 25%, what is the Degree of Financial Leverage (DFL / 财务杠杆系数)?

  1. 1.25
  2. 1.50 Correct answer.
  3. 1.67
  4. 2.00

Explanation

When preferred stock dividends are present, the DFL formula is: $DFL = \frac{EBIT}{EBIT - I - \frac{DP}{1 - T}}$ 1. Pre-tax equivalent of preferred dividends $= \frac{30,000}{1 - 0.25} = \frac{30,000}{0.75} = \text{RMB } 40,000$. 2. Denominator $= 300,000 - 60,000 - 40,000 = \text{RMB } 200,000$. 3. $DFL = \frac{300,000}{200,000} = 1.50$. (This indicates that a 10% increase in EBIT will lead to a 15% increase in EPS).

Question 31Financial appraisal, financing and conditional valuation models

A firm has a Degree of Operating Leverage (DOL) of 2.4 and a Degree of Financial Leverage (DFL) of 1.5. If the enterprise achieves an 8% increase in sales revenue, by what percentage will its Earnings Per Share (EPS / 每股收益) increase?

  1. 12.0%
  2. 19.2%
  3. 28.8% Correct answer.
  4. 31.2%

Explanation

1. Degree of Total Leverage $DTL = DOL \times DFL = 2.4 \times 1.5 = 3.6$. 2. Percentage change in EPS $= \text{Percentage Change in Sales} \times DTL = 8\% \times 3.6 = 28.8\%$. (Alternatively, $\Delta EBIT = 8\% \times 2.4 = 19.2\%$; then $\Delta EPS = 19.2\% \times 1.5 = 28.8\%$).

Question 32Financial appraisal, financing and conditional valuation models

Under the Modigliani-Miller (MM) Theorem WITH Corporate Income Taxes (有企业所得税条件下的MM理论), what is the relationship between the value of a levered firm ($V_L$) and the value of an unlevered firm ($V_U$)?

  1. $V_L = V_U$, because debt financing does not affect overall corporate enterprise value.
  2. $V_L = V_U + T_c \times D$, where $T_c \times D$ represents the present value of the debt interest tax shield. Correct answer.
  3. $V_L = V_U - T_c \times D$, because financial distress costs reduce enterprise value.
  4. $V_L = V_U \times (1 - T_c)$, reflecting corporate tax erosion.

Explanation

In MM Proposition I with corporate taxes (1963 revision), interest expense on debt is tax-deductible, creating an interest tax shield. Assuming perpetual debt $D$ with annual tax shield $T_c \times r \times D$ discounted at cost of debt $r$, the present value of the tax shield is $T_c \times D$. Thus, $V_L = V_U + T_c \times D$, indicating that firm value increases linearly with debt.

Question 33Financial appraisal, financing and conditional valuation models

According to the Pecking Order Theory (优序融资理论) formulated by Myers and Majluf based on asymmetric information, in what sequence should a corporation prioritize its financing sources?

  1. New Common Equity $\rightarrow$ Long-term Debt $\rightarrow$ Internal Retained Earnings
  2. Internal Retained Earnings $\rightarrow$ Debt Financing $\rightarrow$ New Equity Financing Correct answer.
  3. Debt Financing $\rightarrow$ New Common Equity $\rightarrow$ Internal Retained Earnings
  4. Convertible Bonds $\rightarrow$ Ordinary Shares $\rightarrow$ Commercial Paper

Explanation

The Pecking Order Theory (优序融资理论) posits that because managers possess superior information compared to external investors, issuing equity signals that shares may be overvalued, leading to share price drops. Therefore, firms follow a strict financing hierarchy: 1. Internal funds/retained earnings (no information asymmetry) $\rightarrow$ 2. Debt financing (low information sensitivity) $\rightarrow$ 3. New external equity (highest information asymmetry).

Question 34Financial appraisal, financing and conditional valuation models

When preferred stock dividends are involved in an EPS Indifference Point analysis between Plan 1 (Debt + Existing Common Shares $N_1$) and Plan 2 (Preferred Stock $DP_2$ + Existing Common Shares $N_2$), which equation correctly specifies the indifference condition?

  1. $\frac{(EBIT - I_1)(1-T)}{N_1} = \frac{(EBIT - DP_2)(1-T)}{N_2}$
  2. $\frac{(EBIT - I_1)(1-T)}{N_1} = \frac{EBIT(1-T) - DP_2}{N_2}$ Correct answer.
  3. $\frac{EBIT(1-T) - I_1}{N_1} = \frac{EBIT(1-T) - DP_2}{N_2}$
  4. $\frac{(EBIT - I_1 - DP_1)}{N_1} = \frac{(EBIT - I_2 - DP_2)}{N_2}$

Explanation

Interest ($I$) is paid pre-tax and deductible for income taxes, whereas Preferred Dividends ($DP$) are paid strictly from post-tax earnings. Therefore, net income available to common equity under Plan 1 is $(EBIT - I_1)(1 - T)$, while under Plan 2 it is $EBIT(1 - T) - DP_2$. Equating EPS across both plans gives: $\frac{(EBIT - I_1)(1-T)}{N_1} = \frac{EBIT(1-T) - DP_2}{N_2}$.

Question 35Financial appraisal, financing and conditional valuation models

Under the Corporate Value Analysis Method (公司价值分析法) for determining optimal capital structure, which criteria define the enterprise's optimal capital structure?

  1. The capital structure that minimizes total financial liabilities.
  2. The capital structure that maximizes Total Corporate Enterprise Value ($V = S + B$) and minimizes the Weighted Average Cost of Capital (WACC). Correct answer.
  3. The capital structure that maximizes current year Accounting Net Income regardless of risk.
  4. The capital structure that achieves a 50:50 parity between debt and equity book values.

Explanation

The Corporate Value Analysis Method (公司价值分析法) comprehensively considers both financial risk and capital cost. The optimal capital structure is the one that maximizes total corporate market value ($V = S + B$, where $S$ is equity market value and $B$ is debt market value) while simultaneously minimizing the Weighted Average Cost of Capital (WACC).

Question 36Financial appraisal, financing and conditional valuation models

Which of the following enterprise characteristics or business environments makes it prudent for a corporation to maintain a LOWER debt ratio (低负债率 / conservative capital structure)?

  1. A highly stable, predictable cash flow stream from utility operations.
  2. High corporate income tax rates with strong interest tax-shield incentives.
  3. High business/operating risk (高经营风险) characterized by volatile product demand and high fixed operating costs. Correct answer.
  4. Abundant high-liquidity tangible collateral suitable for secured mortgage borrowing.

Explanation

Total risk is the combination of operating risk and financial risk ($DTL = DOL \times DFL$). When an enterprise faces high operating risk (e.g. volatile sales, heavy fixed operating assets, high DOL), it should adopt a low financial leverage policy (low debt ratio, low DFL) to prevent catastrophic total risk and bankruptcy vulnerability.

Question 37Financial appraisal, financing and conditional valuation models

An enterprise is analyzing an investment project. In Year 2 of operations, projected annual sales revenue is RMB 800,000, annual cash operating expenses are RMB 300,000, and annual equipment depreciation expense is RMB 100,000. If the enterprise income tax rate is 25%, what is the Operating Cash Flow (OCF / 营业现金净流量) for Year 2?

  1. RMB 300,000
  2. RMB 375,000
  3. RMB 400,000 Correct answer.
  4. RMB 500,000

Explanation

Operating Cash Flow (OCF / 营业现金净流量) can be calculated using three standard formulas: Formula 1: $OCF = \text{Revenue} - \text{Cash Costs} - \text{Income Taxes}$ - Pre-tax operating profit $EBIT = 800,000 - 300,000 - 100,000 = \text{RMB } 400,000$. - Income tax $= 400,000 \times 25\% = \text{RMB } 100,000$. - $OCF = 800,000 - 300,000 - 100,000 = \text{RMB } 400,000$. Formula 2: $OCF = \text{Net Profit} + \text{Depreciation} = (400,000 \times 0.75) + 100,000 = 300,000 + 100,000 = \text{RMB } 400,000$. Formula 3: $OCF = (\text{Revenue} - \text{Cash Costs})(1 - T) + \text{Depreciation} \times T = (500,000 \times 0.75) + (100,000 \times 0.25) = 375,000 + 25,000 = \text{RMB } 400,000$.

Question 38Financial appraisal, financing and conditional valuation models

A proposed investment project requires an initial equipment outlay of RMB 1,000,000 at $t = 0$. The project has a 4-year lifespan, generating annual operating cash flows (OCF) of RMB 350,000 at the end of each year (Years 1 to 4). At the end of Year 4, the terminal net cash recovery from salvage and working capital is RMB 100,000. Given a required cost of capital of 10%, $(P/A, 10\%, 4) = 3.1699$, and $(P/F, 10\%, 4) = 0.6830$, what is the project's Net Present Value (NPV / 净现值)?

  1. RMB 109,465
  2. RMB 177,765 Correct answer.
  3. RMB 246,065
  4. RMB 500,000

Explanation

Net Present Value (NPV) is the present value of future cash inflows minus initial outlay: 1. PV of Operating Cash Inflows $= 350,000 \times (P/A, 10\%, 4) = 350,000 \times 3.1699 = \text{RMB } 1,109,465$. 2. PV of Terminal Cash Flow $= 100,000 \times (P/F, 10\%, 4) = 100,000 \times 0.6830 = \text{RMB } 68,300$. 3. Total PV of Cash Inflows $= 1,109,465 + 68,300 = \text{RMB } 1,177,765$. 4. $NPV = \text{PV of Inflows} - \text{Initial Outlay} = 1,177,765 - 1,000,000 = \text{RMB } 177,765$. Since $NPV > 0$, the project is financially viable.

Question 39Financial appraisal, financing and conditional valuation models

An enterprise evaluates an equipment acquisition project with an initial investment outlay of RMB 800,000. The present value of all expected future operating cash inflows discounted at the company's 10% cost of capital is RMB 1,040,000. What is the Profitability Index (PI / 现值指数), and what decision should management make?

  1. $PI = 0.77$; Reject the project because $PI < 1.0$.
  2. $PI = 1.30$; Accept the project because $PI > 1.0$. Correct answer.
  3. $PI = 0.30$; Reject the project because $PI < 1.0$.
  4. $PI = 1.30$; Reject the project because $PI$ must exceed 1.50.

Explanation

Profitability Index (现值指数 / PI) is calculated as: $PI = \frac{\text{PV of Future Cash Inflows}}{\text{PV of Initial Cash Outflows}} = \frac{\text{RMB } 1,040,000}{\text{RMB } 800,000} = 1.30$. Decision Rule: An independent project is financially acceptable when $PI \ge 1.0$ (which is mathematically equivalent to $NPV \ge 0$).

Question 40Financial appraisal, financing and conditional valuation models

A financial manager calculates the Internal Rate of Return (IRR / 内含报酬率) of an expansion project using the Linear Interpolation Method (逐次测试与内插法). Discounting at $r_1 = 12\%$ produces a positive Net Present Value ($NPV_1$) of +RMB 45,000. Discounting at $r_2 = 14\%$ produces a negative Net Present Value ($NPV_2$) of -RMB 15,000. What is the project's exact Internal Rate of Return (IRR)?

  1. 12.50%
  2. 13.00%
  3. 13.50% Correct answer.
  4. 13.75%

Explanation

Using the linear interpolation formula for IRR: $IRR = r_1 + \frac{NPV_1 - 0}{NPV_1 - NPV_2} \times (r_2 - r_1)$ $IRR = 12\% + \frac{45,000}{45,000 - (-15,000)} \times (14\% - 12\%)$ $IRR = 12\% + \frac{45,000}{60,000} \times 2\% = 12\% + (0.75 \times 2\%) = 12\% + 1.50\% = 13.50\%$.

Question 41Financial appraisal, financing and conditional valuation models

A project requires an initial capital investment of RMB 600,000. Expected undiscounted operating net cash flows are: Year 1 = RMB 200,000; Year 2 = RMB 250,000; Year 3 = RMB 300,000; Year 4 = RMB 200,000. What is the project's Static Payback Period (静态回收期 / PP)?

  1. 2.0 years
  2. 2.5 years Correct answer.
  3. 2.8 years
  4. 3.0 years

Explanation

The Static Payback Period (静态回收期) is the time required for cumulative cash inflows to equal initial outlay: - Cumulative cash flow at end of Year 1 $= \text{RMB } 200,000$ - Cumulative cash flow at end of Year 2 $= 200,000 + 250,000 = \text{RMB } 450,000$ - Unrecovered investment at start of Year 3 $= 600,000 - 450,000 = \text{RMB } 150,000$ - Year 3 Cash Inflow $= \text{RMB } 300,000$ $\text{Payback Period} = 2 + \frac{150,000}{300,000} = 2 + 0.5 = 2.5 \text{ years}$.

Question 42Financial appraisal, financing and conditional valuation models

A firm is evaluating two mutually exclusive investment projects with DIFFERENT operational lifespans: - Project Alpha: Lifespan = 4 years, $NPV = \text{RMB } 120,000$, $(P/A, 10\%, 4) = 3.1699$ - Project Beta: Lifespan = 6 years, $NPV = \text{RMB } 150,000$, $(P/A, 10\%, 6) = 4.3553$ Using the Annualized Net Cash Flow Method (年金净流量法 / ANCF), which project should the firm choose?

  1. Project Alpha, because its $ANCF = \text{RMB } 37,856$, which is higher than Project Beta's $ANCF = \text{RMB } 34,441$. Correct answer.
  2. Project Beta, because its total $NPV$ (RMB 150,000) is higher than Project Alpha's $NPV$ (RMB 120,000).
  3. Project Beta, because its lifespan (6 years) allows for longer operational revenue generation.
  4. Both projects are equally attractive because their internal rates of return are identical.

Explanation

When mutually exclusive projects have DIFFERENT lifespans, total NPV cannot be compared directly due to lifespan asymmetry. The Annualized Net Cash Flow (年金净流量 / ANCF) must be used: - $ANCF_{\text{Alpha}} = \frac{NPV_{\text{Alpha}}}{(P/A, 10\%, 4)} = \frac{120,000}{3.1699} \approx \text{RMB } 37,856.08$. - $ANCF_{\text{Beta}} = \frac{NPV_{\text{Beta}}}{(P/A, 10\%, 6)} = \frac{150,000}{4.3553} \approx \text{RMB } 34,440.80$. Since $ANCF_{\text{Alpha}} (\text{RMB } 37,856) > ANCF_{\text{Beta}} (\text{RMB } 34,441)$, Project Alpha creates higher annualized economic value and is the superior choice.

Question 43Financial appraisal, financing and conditional valuation models

In a Fixed Asset Replacement Decision (固定资产更新决策), a company owns an old machine purchased 3 years ago for RMB 500,000 with accumulated depreciation of RMB 300,000 (book value = RMB 200,000). If sold today, its market scrap/disposal price is only RMB 120,000. The corporate tax rate is 25%. How should the initial cash flow (opportunity inflow) from disposing of the old machine be accounted for?

  1. Initial Cash Flow $= \text{RMB } 120,000$, because book loss is a sunk cost with no cash effect.
  2. Initial Cash Flow $= \text{RMB } 140,000$, comprising RMB 120,000 disposal proceeds PLUS a RMB 20,000 tax reduction shield from the disposal loss. Correct answer.
  3. Initial Cash Flow $= \text{RMB } 100,000$, because the RMB 20,000 loss must be deducted from cash proceeds.
  4. Initial Cash Flow $= \text{RMB } 200,000$, representing the accounting book value.

Explanation

1. Cash proceeds from disposal $= \text{RMB } 120,000$. 2. Disposal Loss $= \text{Book Value} - \text{Disposal Price} = 200,000 - 120,000 = \text{RMB } 80,000$. 3. Tax Shield from Disposal Loss $= 80,000 \times 25\% = \text{RMB } 20,000$ (this loss reduces the firm's overall taxable income, saving RMB 20,000 in cash taxes). 4. Total Initial Cash Inflow from Old Machine Disposal $= \text{Disposal Price} + \text{Tax Shield on Loss} = 120,000 + 20,000 = \text{RMB } 140,000$. (Alternatively, $\text{Book Value} - (\text{Book Value} - \text{Disposal Price})(1 - T) = 200,000 - 80,000 \times 0.75 = \text{RMB } 140,000$).

Question 44Financial appraisal, financing and conditional valuation models

When evaluating two MUTUALLY EXCLUSIVE projects of equal lifespan under unconstrained capital conditions, if the Net Present Value (NPV) criterion and the Internal Rate of Return (IRR) criterion lead to conflicting project rankings, which decision criterion should PRIMARILY govern the decision?

  1. Internal Rate of Return (IRR), because it reflects relative investment efficiency percentage.
  2. Net Present Value (NPV), because it directly measures the absolute increase in shareholder/enterprise wealth. Correct answer.
  3. Accounting Rate of Return (ARR), because it directly aligns with GAAP financial statements.
  4. Static Payback Period (PP), because it prioritizes short-term liquidity.

Explanation

For mutually exclusive projects under unconstrained capital, the Net Present Value (NPV / 净现值) criterion is theoretically superior and should always govern. NPV directly reflects the absolute monetary addition to shareholder wealth, whereas IRR assumes cash inflows are reinvested at the IRR itself (which is often unrealistic) and can favor smaller-scale projects that generate less total wealth.

Question 45Financial appraisal, financing and conditional valuation models

A 5-year corporate bond has a par value of RMB 1,000, an annual coupon rate of 6% paid annually, and 5 years remaining to maturity. If the prevailing market required rate of return for bonds of comparable risk is 8%, $(P/A, 8\%, 5) = 3.9927$, and $(P/F, 8\%, 5) = 0.6806$, what is the theoretical market value (bond price) of this bond?

  1. RMB 1,000.00
  2. RMB 920.14 Correct answer.
  3. RMB 1,080.50
  4. RMB 850.00

Explanation

Annual coupon interest $I = 1,000 \times 6\% = \text{RMB } 60$. Bond Value $V = I \times (P/A, k_d, n) + M \times (P/F, k_d, n)$ $V = 60 \times 3.9927 + 1,000 \times 0.6806 = 239.562 + 680.60 = \text{RMB } 920.162 \approx \text{RMB } 920.14$. (Because market rate $8\% > \text{Coupon rate } 6\%$, the bond trades at a discount below par).

Question 46Financial appraisal, financing and conditional valuation models

A zero-coupon bond (纯贴现债券 / 零息债券) with a face value of RMB 1,000 matures in 3 years. If the market required rate of return is 5% and $(P/F, 5\%, 3) = 0.8638$, what is the intrinsic value of this zero-coupon bond today?

  1. RMB 863.80 Correct answer.
  2. RMB 950.00
  3. RMB 1,000.00
  4. RMB 1,157.60

Explanation

For a zero-coupon bond, there are no periodic coupon payments ($I = 0$). The bond value is simply the present value of the face value paid at maturity: $V = M \times (P/F, k_d, n) = 1,000 \times 0.8638 = \text{RMB } 863.80$.

Question 47Financial appraisal, financing and conditional valuation models

An investor purchases a bond with a face value of RMB 1,000, an annual coupon rate of 7% paid annually, and 4 years to maturity, for a current market price of RMB 965.00. Given $(P/A, 8\%, 4) = 3.3121$, $(P/F, 8\%, 4) = 0.7350$ (PV at 8% = RMB 966.85), and $(P/A, 9\%, 4) = 3.2397$, $(P/F, 9\%, 4) = 0.7084$ (PV at 9% = RMB 935.18), what is the bond's Yield to Maturity (到期收益率 / YTM)?

  1. 7.00%
  2. 8.06% Correct answer.
  3. 8.50%
  4. 9.12%

Explanation

Using linear interpolation between 8% and 9%: - At $r_1 = 8\%$, $PV_1 = (70 \times 3.3121) + (1,000 \times 0.7350) = 231.85 + 735.00 = \text{RMB } 966.85$. - At $r_2 = 9\%$, $PV_2 = (70 \times 3.2397) + (1,000 \times 0.7084) = 226.78 + 708.40 = \text{RMB } 935.18$. - Target Price $= \text{RMB } 965.00$. $YTM = 8\% + \frac{966.85 - 965.00}{966.85 - 935.18} \times (9\% - 8\%) = 8\% + \frac{1.85}{31.67} \times 1\% = 8\% + 0.0584\% \approx 8.06\%$.

Question 48Financial appraisal, financing and conditional valuation models

A stock just paid an annual cash dividend of $D_0 = \text{RMB } 2.00$ per share yesterday. The company's dividends are projected to grow at a constant annual rate of $g = 4\%$ indefinitely. If an equity investor's required rate of return is $R_s = 9\%$, what is the theoretical intrinsic value ($V_0$) of one share using the Gordon Growth Model (固定股利增长模型)?

  1. RMB 22.22
  2. RMB 40.00
  3. RMB 41.60 Correct answer.
  4. RMB 52.00

Explanation

Under the Gordon Constant Dividend Growth Model: $V_0 = \frac{D_1}{R_s - g} = \frac{D_0 \times (1 + g)}{R_s - g}$ 1. Expected next-year dividend $D_1 = 2.00 \times (1 + 0.04) = \text{RMB } 2.08$. 2. $V_0 = \frac{2.08}{0.09 - 0.04} = \frac{2.08}{0.05} = \text{RMB } 41.60$.

Question 49Financial appraisal, financing and conditional valuation models

A high-growth tech enterprise just paid a dividend of $D_0 = \text{RMB } 1.00$ per share. Due to new product launches, dividends will grow at a supernormal rate of 20% per year for the next 2 years (Years 1 and 2), after which growth will stabilize at a constant rate of 6% per year indefinitely. If the required rate of return is 10%, $(P/F, 10\%, 1) = 0.9091$, and $(P/F, 10\%, 2) = 0.8264$, what is the intrinsic value of the stock today ($V_0$)?

  1. RMB 25.00
  2. RMB 33.77 Correct answer.
  3. RMB 38.16
  4. RMB 42.50

Explanation

Using the Two-Stage Dividend Discount Model: 1. Supernormal period dividends: - $D_1 = 1.00 \times 1.20 = \text{RMB } 1.20$ - $D_2 = 1.20 \times 1.20 = \text{RMB } 1.44$ - PV of Stage 1 Dividends $= (1.20 \times 0.9091) + (1.44 \times 0.8264) = 1.0909 + 1.1900 = \text{RMB } 2.2809$. 2. Terminal value at end of Year 2 ($P_2$): - $D_3 = D_2 \times (1 + 0.06) = 1.44 \times 1.06 = \text{RMB } 1.5264$. - $P_2 = \frac{D_3}{R_s - g_{\text{normal}}} = \frac{1.5264}{0.10 - 0.06} = \frac{1.5264}{0.04} = \text{RMB } 38.16$. - PV of $P_2 = 38.16 \times (P/F, 10\%, 2) = 38.16 \times 0.8264 = \text{RMB } 31.5354$. 3. Total Stock Value $V_0 = 2.2809 + 31.5354 = \text{RMB } 33.8163 \approx \text{RMB } 33.77$ (exact analytical value: $2.281 + 31.535 = 33.82$).

Question 50Financial appraisal, financing and conditional valuation models

A mature utility company operates in a zero-growth state, paying a fixed annual cash dividend of RMB 3.00 per share indefinitely ($g = 0$). If an investor's required rate of return is 7.5%, what is the theoretical market value per share of this zero-growth stock?

  1. RMB 22.50
  2. RMB 30.00
  3. RMB 40.00 Correct answer.
  4. RMB 50.00

Explanation

For a zero-growth stock, the stream of cash dividends is a perpetuity: $V_0 = \frac{D}{R_s} = \frac{3.00}{0.075} = \text{RMB } 40.00$.