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Name Section ID # Professor Sam Alagurajah’s Section A (Tues 2-5 pm) Professor Sam Alagurajah’s Section D (Wed 7-10 pm) Professor Lois King’s Section C (Wed 4-7 pm) AK/ADMS 3530.03 Finance Midterm Exam Summer 2007 June 16, 2007 Type A Exam 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 the interest rate in Question 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 semi-annual 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 # 1- 20 (4 points each) How much will be in an account after years if the initial deposit was $10, and which earned an APR of 10% compounded quarterly for the years? A) $10.77 B) $13.31 C) $13.45 D) $31.38 If I promise to pay you $1,800 nine years from now in return for a loan of $1,000 today, what is the effective annual interest rate for this agreement? A) 5.26% B) 6.75% C) 9.00% D) 10.00% Page of In June 2007, the posted mortgage rate at CIBC was 6% for a 6-year term What is the monthly interest rate? Use decimal places in your calculations (Remember that mortgages are compounded semi-annually) A) 0.4939% B) 0.5000% C) 0.5061% D) 6.0900% How much can be accumulated for retirement if $1500 is deposited annually, beginning today, and the account earns 9% interest compounded annually for 40 years? A) $ 17,558 B) $506,824 C) $552,438 D) $802,876 What is the effective annual rate on a deposit of $5,000 made ten years ago if the deposit is worth $9,948.94 today? The deposit pays interest semi-annually A) 3.50% B) 6.76% C) 7.00% D) 7.12% Assume your uncle recorded his salary history during a 40-year career and found that it had increased ten-fold (i.e., his salary at the end of his career was 10 times his salary at the beginning) If inflation averaged 5% annually during the period, how would you describe his purchasing power, on average? A) His purchasing power remained on par with inflation B) He “beat” inflation by nearly 1% annually C) He “beat” inflation by slightly over 2% annually D) He “beat” inflation by 5% annually How much interest will be earned during the third year if $1,000 is deposited that earns 8% interest compounded annually? A) $ 70.00 B) $ 93.31 C) $105.62 D) $140.00 Page of A credit card account that charges interest at the rate of 1.25% per month would have an annually compounded rate of _ and an APR of _ A) 16.08%; 15.00% B) 14.55%; 16.08% C) 12.68%; 15.00% D) 15.00%; 14.55% You decide to sell your car and someone has offered you four equal annual payments of $3,100, beginning two years from today Your alternative is to sell your car today for $9,000 cash Assuming everything else is equal, should you accept the offer of the four equal payments (the prevailing rate of interest is 10%)? A) Yes; present value is $9,827 B) Yes; present value is $11,372 C) No; present value is $8,933 D) No; present value is $8,121 10 How much more is an annual perpetuity of $1,000 worth than an annual annuity of the same amount for 20 years? Assume a 9% interest rate and cash flows are at end of each year A) $297 B) $1,486 C) $1,983 D) $2,000 11 Two years ago bonds were issued with 10 years until maturity, selling at par, and a 7% coupon Interest is paid semi-annually If market interest rates for that grade of bond are currently 8.25%, what will be the price of these bonds? A) $700.00 B) $916.00 C) $927.84 D) $987.50 12 What is the yield to maturity of a bond with the following characteristics? Coupon rate is 8% with semi-annual payments, current price is $960, three years until maturity A) 2.39% B) 4.78% C) 9.57% D) 12.17% Page of 13 What is the current yield of the following bond: it has 10 years until maturity, sells for $1033, and has a face value of $1000 and a 6% coupon rate (paid semi-annually) A) 2.39% B) 4.78% C) 9.57% D) 12.17% 14 BCE was recently been bought out by a U.S private equity firm who levered the company and now BCE is having cash flow problems Its existing bonds have the following terms: 6% coupon, $1000 face value and they mature in 10 years Bonds of equivalent risk yield 12% BCE is asking the bondholders to swap their existing bonds into year zero-coupon bonds with a face value of $1000 Assuming BCE will not be in default during the next 10 years, should existing bondholders accept the deal? A) No, because the existing bonds are worth more B) Yes, because, the zero coupon bonds are worth more C) Yes, because the zero coupon bonds have a shorter year maturity D) No, because zero coupon bonds not pay interest 15 You bought a bond with a 7% annual coupon rate four years ago when market interest rates for similar bonds was 6% The bond had an original maturity of 10 years and a par value of $1000 Today, the yield to maturity of the bond has increased to 8% annually If you sell the bond today, what would be your annual rate of return over the past years? The bond pays coupons semi-annually Assume coupons are not reinvested A) 3.50% B) 3.69% C) 7.33% D) 14.77% 16 How much of a stock’s $25 price is reflected in the PVGO if it expects to earn $3 of earnings per share next year, and has a required rate of return of 14%? A) $3.57 B) $5.00 C) $21.43 D) $22.00 17 TD Bank’s earnings and dividends are expected to grow at a rate of 10% during the next years, at 8% in the third year, and at a constant rate of 6% thereafter If last dividend paid was $1 and the required rate of return on its common stock is 12% How much should you pay today for one share of TD Bank? A) $19.31 B) $24.66 C) $25.97 D) $28.02 Page of 18 How much should you pay today for a stock per share that offers a constant growth rate of 9% for dividends, requires a 12% rate of return, and is expected to sell for $40 one year from now? A) $35.71 B) $38.83 C) $41.20 D) $44.80 19 What should be the annual dividend yield for Year of a stock if a $4 dividend per share was just paid, the stock has an annual required rate of return of 18%, and a constant dividend growth rate of 6%? A) 6.35% B) 7.57% C) 12.00% D) 13.48% 20 What is the implied constant growth rate of dividends for a stock currently priced at $25, that just paid a dividend $2 per share, and has a yearly expected rate of return of 18%? A) 3.41% B) 9.26% C) 10.0% D) 13.5% Conceptual questions # 21 - 30 (2 points each) 21 A stream of equal cash payments lasting forever is termed: A) An annuity B) An annuity due C) An installment plan D) A perpetuity 22 Given a set future value (greater than zero), which of the following will contribute to a lower present value? A) Higher discount rate B) Fewer time periods C) Less frequent discounting D) Lower discount factor Page of 23 If we assume that in the market place the nominal rate of interest is greater than that real rate of interest we can normally assume that A) there is deflation in the economy B) the CPI is increasing C) Price of the average home is going down D) No one wants to borrow money as the rates are too high 24 Which of the following theories is generally supported by the principles of compound interest, assuming we invest in interest bearing securities? A) The longer you invest the more likely your investment will grow B) Whether you invest for your retirement early or late in life are irrelevant C) The rate at which your retirement investment grows is irrelevant D) The later in life you invest the better off you will be 25 Which of the following is correct for a CCC-rated bond, compared to a BBB-rated bond? A) The CCC bond must have protective covenants B) The CCC bond must have a sinking fund provision C) The CCC bond must offer a higher coupon rate D) The CCC bond must offer a higher yield to maturity 26 Which of the following bond features would be attractive to the bond investor and allow him/her to lend funds at a lower rate? A) A call provision B) A sinking fund provision C) A subordination provision D) A zero coupon feature 27 Which of the following is correct for a bond currently selling at a premium? A) Its current yield is higher than its coupon rate B) Its current yield is lower than its coupon rate C) Its yield to maturity is higher than its coupon rate D) Its default risk is extremely low 28 The maximum number of shares that a company is permitted to issue, as specified in the firm’s articles of incorporation is called: A) authorized share capital B) issued share capital C) issued and outstanding share capital D) additional paid-in capital Page of 29 Bank of Montreal had fallen upon hard times due to a rogue trader and dividends on their non-cumulative, preferred stock were not paid for three years They are now able to resume the dividend payments Which of the following is true? A) Common shareholders must now receive three years' worth of dividends B) Preferred shareholders must now receive three years' worth of dividends C) The corporation must close if preferred shareholders are not paid D) Common shareholders have not received dividends for three years 30 The form of market efficiency that best describes the inability of professional portfolio managers to outperform the market is: A) strong-form efficiency B) semi-strong form efficiency C) weak-form efficiency D) None of the above All professional portfolio managers outperform the market ********* end of exam *********** Page of ... form of market efficiency that best describes the inability of professional portfolio managers to outperform the market is: A) strong-form efficiency B) semi-strong form efficiency C) weak-form... original maturity of 10 years and a par value of $1000 Today, the yield to maturity of the bond has increased to 8% annually If you sell the bond today, what would be your annual rate of return over... $24.66 C) $25.97 D) $28.02 Page of 18 How much should you pay today for a stock per share that offers a constant growth rate of 9% for dividends, requires a 12% rate of return, and is expected to
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