Name Section ID # Professor Alagurajah’s Section A (Fridays, 2.30-5.30 pm), Professor King’s Section G (Internet), Professor Kohen’s Section F (Tuesdays, 2:30-5:30 pm), Professor Li’s Section E (Wednesdays, 2:30-5:30 pm), Professor Okonkwo’s Section B (Tuesdays, 7-10 pm), Professor Patterson’s Section D (Thursdays, 4-7 pm), and Professor Tahani’s Section C (Wednesdays, 7-10 pm) AP/ADMS 3530.03 Finance Midterm Exam Fall 2009 October 25, 2009 Exam – Type A This exam consists of 30 multiple choice questions and carries a total of 100 points Choose the response which best answers each question Circle your answer below, and fill in your answers on the bubble sheet Only the bubble sheet is used to determine your exam score Please not forget to write your name and ID # both at the top of this cover page and on the bubble sheet Also please write the type of your exam (A or B) on the bubble sheet Please note the following points: 1) Read the questions carefully and use your time efficiently 2) Choose the answers that are closest to yours, because of possible rounding 3) Keep at least decimal places in your calculations and final answers, and at least decimal places for interest rates 4) The 20 “Numerical questions” are worth points each 5) The 10 “Conceptual questions” are worth points each 6) Unless otherwise stated, interest rates are annual, and bonds pay semiannual coupons and have a face value (or par value) of $1,000 7) You may use the back of the exam paper as your scrap paper Numerical questions (4 points each) Your cousin just came home from a poker tournament in Las Vegas and is now trying to pay off a gambling debt of $5,000 You have agreed to pay off the debt for him today, and in return he has agreed to pay you $250 per month over the next two years with payments beginning immediately What is the effective annual interest rate you are charging him? A) 19.75% B) 19.86% C) 21.77% D) 22.26% E) 23.45% Your parents are willing to pay for your MBA degree and want to put aside funds today even though you will not be entering MBA school for another years (from today) If they can earn 4.5% annually on the funds and your MBA school will cost $35,000 at the beginning of each year of the two year program, how much money they need to set aside today? A) $57,435 B) $60,020 C) $65,653 D) $67,243 E) $70,186 You have inherited funds from your grandmother’s estate and want to buy a property in Florida which costs $250,000 You have enough funds for a 30% down payment and you can obtain a mortgage for the balance at a five-year, fixed rate of 5.5% (APR compounded semiannually) How much will you still owe at the end of five years assuming a 20-year amortization period? A) $147,172 B) $152,665 C) $195,625 D) $210,246 E) $224,825 You have decided to buy your first house and you have been approved for a $300,000 home mortgage The posted rate is 5.60% (APR, compounded semiannually) and you have decided to make weekly payments If the amortization period is 25 years and rates not change, how much will you pay in interest over the life of the mortgage? (assume 52 weeks in one year) A) $127,895 B) $253,618 C) $387,555 D) $553,618 E) $576,016 An Atkinson student who borrowed $7,560 has agreed to pay back the loan with monthly payments of $150 If the interest rate is stated as 10% APR monthly compounded, how long will it take to pay back the loan? A) 38.19 months B) 45.57 months C) 50.40 months D) 65.64 months E) 67.89 months Which account would be preferred by a depositor: a 7.20% APR with weekly compounding or a 7.25% APR with quarterly compounding? A) 7.20% with weekly compounding B) 7.25% with quarterly compounding C) The depositor would be indifferent D) The time period must be known in order to select the preferred account E) None of the above You decide to sell your car and a friend has offered you $1,000 now and four annual payments of $1,800, with the annual payments starting at the end of the second year Your other option is to sell the car to a dealer today for $6,450 Assuming your friend will not default on the payments and the market annual interest rate is 8%, should you sell your car to your friend? A) B) C) D) E) Yes; present value of the friend’s offer is $6,520 Yes; present value of the friend’s offer is $6,624 No; present value of the friend’s offer is $5,134 No; present value of the friend’s offer is $5,624 Both options offer the same value In order to purchase a laptop at $2,450, you agree to make the following payments: $500 today, $650 in one year, X in two years, and $800 in three years The annual interest rate is 6% What is X? A) $500.00 B) $612.50 C) $665.10 D) $747.30 E) $851.34 How much interest is to be paid in the second year of a 6-year loan of $100,000 with payments occurring at the end of each month, and a 6% annual interest rate compounded monthly? A) $1,389 B) $1,657 C) $4,731 D) $6,000 E) $9,887 10 Today, one year before your retirement, you forecast that your annual withdrawals will decline at a rate of 4% per year for 25 years; with the first withdrawal of $75,000 made one year from now If you earn an annual interest rate of 4%, how much money should you have in your bank account today? A) $773,547 B) $810,759 C) $937,500 D) $1,171,656 E) Undefined 11 Potential investors of XYZ Corp stock are looking for a 20% expected return XYZ currently trades at $15 per share and has just paid an annual dividend of $2 per share Based on the above what is the implied growth rate in dividends for XYZ Corp.? A) 5.00% B) 5.88% C) 6.25% D) 6.67% E) 7.14% 12 In a recent period Joshua Inc reported earnings per share (EPS) of $4 and following its policy just paid a dividend based on a payout ratio of 50% The company’s share price and dividends have grown at an average of 5% per year, and there is no reason to expect that this will change in the future You want to buy Joshua stock and have determined that the market expected return for this type of stocks is 16% If Joshua stock was trading at $18.45 on the market, you would likely A) not buy the stock because the fair value is $ 17.27 B) C) D) E) not buy the stock because the fair value is $18.18 buy the stock because the fair value is $19.09 buy the stock because the fair value is $36.36 buy the stock because the fair value is $66.67 13 ABC Corp expects its earnings and dividends to grow at 18% over the next years and 15% in the 3rd year and then at a constant rate of 6% thereafter ABC’s last dividend was $1.15 and the required rate of return on similar equity is 12% Based on the above what should be the share price of ABC today? A) B) C) D) E) $22.62 $26.95 $29.63 $32.53 $50.78 14 How much would you pay today for a stock that offers a constant growth rate of 8% for dividends and has an expected rate of return of 12%? You also know that the stock should be valued at $40 one year from now? A) $35.71 B) $37.04 C) $43.20 D) $44.80 E) $45.96 15 Julia Inc stock currently sells for $84 per share The market requires a 13% return on the firm’s stock If the company maintains a 6% growth rate in dividends, what was the most recent annual dividend? A) $5.04 B) $5.55 C) $5.88 D) $6.76 E) $10.92 16 How much should you pay for a $1,000-face value bond with 6% coupon, semi-annual payments, and years to maturity if the annual interest rate applicable to bonds of same quality and maturity is 4%? A) $887 B) $888 C) $1,000 D) $1,120 E) $1,121 17 BH Corp has bonds on the market with $1,000 par value, 14.5 years to maturity, a YTM of 9%, and a current price of $850 The bonds make semi-annual coupon payments What is the coupon rate on BH Corp Bonds? A) 3.56% B) 4.50% C) 5.50% D) 7.13% E) 9.00% 18 BDJ Inc wants to issue new 10-year bonds The company currently has 8% coupon, $1,000 face value bonds on the market that sell for $1,095, make semi-annual coupon payments and mature in 10 years What coupon rate should the company set on its new bonds if it wants to sell them at par today? A) 2.89% B) 3.34% C) 5.78% D) 6.68% E) 6.79% 19 KLY Inc existing bonds have the following terms: 8% coupon, $1,000 face value and they mature in 12 years The discount rate reflective of the default risk and maturity is 14% KLY Inc is offering the bondholders the option to swap their existing bonds into 3year zero-coupon bonds with a face value of $1,000 Assuming KLY Inc will not default during the next 12 years, should existing bondholders accept the option? A) Yes, because the zero coupon bonds have a shorter year maturity B) Yes, because, the zero coupon bonds are worth more C) Yes, because the zero coupon bonds are less sensitive to interest rate risk D) No, because the existing bonds are worth more E) No, because zero coupon bonds not pay interest 20 LMN Co has 12% coupon $1,000 par value bonds making annual coupon payments with a YTM of 9% The current yield on these bonds is 9.80% How many years these bonds have left until they mature? A) years B) 10 years C) 13 years D) 14 years E) 15 years Conceptual questions (2 points each) 21 Which of the following is incorrect about partnerships: A) B) C) D) E) Partners have unlimited liability for themselves and their partners Partnerships are easy to start Partners are subject to double taxation Partnerships are flow-through entities All of the above statements are correct 22 The person most directly responsible for looking after the firm’s cash, raising new capital and maintaining relationships with banks and other investors who hold the firm’s securities is the: A) Controller B) Chief Financial Officer C) Treasurer D) Chief Executive Officer E) Accounts Payable Clerk 23 Given a future value (greater than zero), which of the following will contribute to a lower present value? A) B) C) D) E) More frequent discounting Lower discount rate Less time periods Both B and C are correct None of the above statements are correct 24 An infinite stream of cash flows growing at a constant rate is called a: A) B) C) D) E) Perpetuity Growing perpetuity Annuity Growing annuity None of the above 25 Which of the following statements about time value of money are true? A) Nominal and effective rates are the same for annual compounding only B) All else being the same: converting an annuity to an annuity due decreases the present value C) For a given dollar amount, the higher the discount rate, the higher the present value D) All of the above statements are correct E) None of the above statements are correct 26 An investor who purchases stock in a firm cannot realize a positive return on that investment if the firm pays no dividends This statement is: A) False: The investor will still receive interest payments from the investment B) True: The investor does not receive any cash flows therefore, the investment return is zero C) False: The investor may realize a capital gain from the appreciation of the stock price D) True: The dividend yield is zero E) None of the above 27 Which of the following terms is typically associated with both preferred stock and common stock? A) Dividend yield B) Voting rights C) Proxy D) Cumulative voting E) All of the above 28 Which of the following is the most correct for an A-rated bond, compared to a BBBrated bond? A) B) C) D) E) The A bond will sell for a lower price The A bond will sell for a higher price The A bond will offer a higher yield to maturity The A bond will offer a lower yield to maturity The A bond has a higher credit spread 29 A callable bond is a bond that: A) Can provide protection against inflation B) Can be converted into shares of stock of the issuing company C) Can be repurchased by the issuer prior to its maturity D) Can be sold at its nominal value E) Can be extended at the maturity date 30 The maximum number of shares that a company is permitted to issue, as specified in the firm’s articles of incorporation is called: A) B) C) D) E) Authorized share capital Issued share capital Issued and outstanding share capital Additional paid-in capital Firm’s capital ... present value of the friend’s offer is $6,520 Yes; present value of the friend’s offer is $6,624 No; present value of the friend’s offer is $5,134 No; present value of the friend’s offer is $5,624... account E) None of the above You decide to sell your car and a friend has offered you $1,000 now and four annual payments of $1,800, with the annual payments starting at the end of the second year... mortgage for the balance at a five-year, fixed rate of 5.5% (APR compounded semiannually) How much will you still owe at the end of five years assuming a 20-year amortization period? A) $147,172