Mid-term exam for Fin 819
1.The goal of financial managers is to:
A)Maximize sales
B)Maximize profits
C)Maximize shareholders’ wealth
D)Maximize the value of equity and bond holders
E) None of the above
Answer: C
2. A firm's cash stream is shared by which of the following groups:
A)Shareholders
B)Bondholders
C)Government
D) All the above
E)None of the above
Answer: D
3. Which of the following would be considered a capital budgeting decision?
A)Planning to issue common stock rather than issuing preferred stock
B)Issuing debt in the form of short-term bonds
C)Repurchasing shares of common stock
D)Issuing debt in the form of long-term bonds
E) None of the above
E)
4. What is the present value at year two for the $1 you will receive three years from now at a discount rate of 10% per year ?
A)1.1
B)1.0
C)0.909
D) 0.826
E)None of the above
Answer: C
Response: PV2 = 1/1.1 = 0.909
5. Which of the following statements regarding the rate of return for a one-period project with an initial positive investment cost is true:
A) rate of return = (C1-C0)/C0
B)rate of return = -(C1+C0)/C0
C)rate of return =(C1-C0)/(-C0)
D)rate of return = -(C1+C0)/(-C0)
E) None of the above
Answer: B
6. The opportunity cost of capital for taking a risky project is
A)The expected rate of return on a government security having the same maturity as the project
B)The expected rate of return on a well diversified portfolio of common stocks
C)The expected rate of return on a project in the financial marketwith the same risk.
D) The expected rate of return on a portfolio of projects in the real asset market with the same risk.
E)None of the above
Answer: C
7.Mr. Dell has $125 income this year and zero income next year. The financial market interest rate is 20% per year. In addition to the investment opportunity in the financial market, Mr. Dell also has another investment opportunity to take a project in the real asset market in which he has to invest $50 this year and receive $75 next year. Suppose Mr. Dell consumes $50 this year and invests the remaining. What is the maximum profit Mr. Dell can have next year ?
A)$65
B)$25
C)$15
D) $30
E)None of the above.
Answer: D
.
8.Firms that do not issue financial securities such as stock or debt obligations:
A)will not be able to increase sales.
B)cannot be profitable.
C)have no funds to take NPV-positive projects .
D)canuse internal cash flows to finance good projects.
E) None of the above
D)
9.What is the present value at year one for the following cash flows at a 10% discount rate?
Year (-1) Year 0 Year 1
$100 $150 -$100
A)the same as $150
B)larger than $150
C)smaller than $150
D) there is no enough information
E)None of the above
Answer: E
Response: PV 1= 100*1.1^2 + 150*1.1-100=$186
10.You would like to have enough money saved to receive a growing annuity of 40 years, growing at a rate of 4% per year, the first payment being $60,000, after retirement so that you can lead a good life. How much would you need to save in your retirement fund to achieve this goal (assume that the growing annuity payments start at the year of your retirement. The interest rate is 8%)?
A)$1,261,987
B)$1,168,507
C)$1,081,951
D)$1,001,806
E) None of the above
Answer: A
Response: PV = 60000+ (60,000*1.04/(0.08-0.04))*(1-1.0439/1.0839) =$1,261,987
11. If the present value of $1.00 received n years from today at an interest rate of r is 0.621, then what is the future value of $1.00 invested today at an interest rate of r for 2n years?
A)$ 2.59
B)$1.61
C)$2.70
D)Not enough information to solve the problem
Answer: A
Response: FV = 1/(0.621*0.621) = $2.59
12.Which of the following statements is true?
A)Present value of an annuity due is always less than the present value of an equivalent annuity for a given interest rate ( an annuity due means immediate cash flows now)
B)The present value of an annuity approaches the present value of a perpetuity as n goes to infinity for a given interest rate
C)Both A and B are true
D)Both A and B are false
Answer: B
13. Given the following cash flows for project A: C0 = -2000, C1 = +500 , C2 = +1400 and C3 = 100, C4=$200,000, which of the following is true for the payback period?
A)The payback period is one year
B)The payback period is 2 years
C)The payback period is 3 years
D) The payback period is larger than 3 years
E) none of the above
Answer: C
14.The IRR is defined as:
A)The single discount rate that makes the initial investment cost equal to the sum of future cash flows
B)The difference between the cost of capital and the present value of the cash flows
C)The single discount rate that makes the initial investment cost equal to the sum of the present values of future cash flows .
D)The single discount rate used in the discounted payback period method
E) None of the above
Answer: C
15.Project A has the following cash flows: C0 = 100, C1 = -120. The cost of capital is 15%, you would:
A)Reject the project since the IRR is smaller than the cost of capital.
B)Take the project, since the IRR is larger than the cost of capital.
C) No enough information for making decision.
D) None of the above
Answer: D
16.You have a car loan of $30,000 (which is called the principal) with the interest rate of 10%. You decide to pay off this loan in next four years with equal payment each year, how much do you pay for the interest in your second payment?
A)$9,464
B) $8,604
C) $2,354
D) $7,111
E) None of the above
Answer
C)
17. Company Imagine has a cost of capital at 12% and $10 million to take some projects from the following available projects (units in million US dollars) to maximize the profits:
Project C0 NPV at 12%
A -7 14
B -8 16
C -2 8
D -3 6
Which set of projects should company Imagine take?
A)A
B)B
C)B and C
D)A and D
E) none of the above
Answer: C
18 . Capital equipment costing $200,000 today has a remaining book value of $50,000 at the end of year 5. In addition, (net) working capital of $10,000 is built up today. If the straight line depreciation method is used and the capital equipment is sold at the end of year 2 for a market price of $150,000, what is the cash flow at year 2 related to this capital sale or disposal if the tax rate is 50% ?
A)$150,000
B)$140,000
C)$130,000
D)$145,000
E) none of the above
Answer: D
Response:
Annual depreciation = (200,000 -50,000)/5 = 30,000
Book value at the end of year 2 = 200,000 -60,000 = 140,000
Tax=50%*(150000-140000)=$5,000
Cash flows related to capital disposal =150000-5000=$145,000
19. You have been asked to evaluate a project with a life of 20 years. Sales and costs are expected to be $624 and $104 respectively starting next year. There is no depreciation and the tax rate is 30%. The real required rate of return is 10%. The inflation rate is 4% and is expected to be 4% in the next 20 years. Sales and costs are expected to increase at the rate of 6% every year in the next 20 years. If the project costs $2,000 now, what is the NPV?
A)$980
B)$1,110
C)$1,280
D) $1,390
E)None of the above
Answer: D
Response: ((600-100)*0.7/(0.1-0.0192))* (1-1.0192^20/1.1^20) - 2000 = $1,389.8
20. Super Computer Company's stock is selling for $100 per share today. It is expected that this stock will pay a dividend of 10 dollars per share next year, and then be sold for $110 per share next year. Calculate the expected rate of return if you buy the stock now and sell it next year.
A)20%
B)25%
C)10%
D)15%
E) None of the above
Answer: A
Response: r = (110+10-100)/100 = 20%
Please use the following information to answer questions 21-28 to understand the hidden details behind the simple dividend growth model.
Firm B has a market capitalization rate of 15%. The earnings are expected to be $8.33 per share next year. The plowback ratio is 0.4 and ROE is 25%. Every investment in year i (>0) is to yield a simple perpetuity starting in year (i+1) with each cash flow equal to total investment times ROE. All the investments have the same capitalization rate. You are at year zero.
21. What is the earnings per share in year 3?
A)$8.33
B)$9.16
C) $8.98
D)$ 10.08
E) None of the above
Answer D)
22. What is the investment per share in year 1?
A)$3.67
B)$4.03
C) $4.43
D)$3.33
E) None of the above
D
23. What is the NPV at year 1 per share of the project taken at year 1?
A)$2.22
B)$2.44
C) 0
D)$3.25
E) None of the above
A
24. What is the growth rate of earnings from year 1 to year 2?
A)10 %
B)12 %
C) 13%
D)14%
E) None of the above
A
25. What is the present value at year 2 per share of the cash flows produced by taking a project at year 2?
A)$2.12
B)$2.44
C) $2.22
D)$6.11
E) None of the above
D
26. What is the stock price at year 1?
A)$100
B)$110
C)$120
D)$ 130
E) None of the above
B
27 What is NPV at year 2 per share of the project taken at year 2?
A)$2.44
B)$2.55
C) $2.22
D)$2.89
E) None of the above
A
28. What is the present value at time zero of the stock price per share at year 2?
A)$91.5
B)$100.0
C)$ 85.5
D)$ 87.5
E) None of the above
A
29. Woe Co. is expected to pay a dividend of $4.00 per share out of earnings of $7.50 per share next year. If the required rate of return on the stock is 15% and the current stock price per share is $50, calculate the present value of the growth opportunity for the stock (PVGO).
A)$40
B)$30
C)$20
D)$10
E) None of the above
Answer: E
Response: No growth value = 7.5/0.15 = 50; PVGO = 50-50 = 0
30. What is the plowback ratio for a stock with a stock price of $33 per share now, current earnings of $5 per share, a discount rate of 20% , and a rate of return on equity of 25% ?
A)0.4
B)0.3
C)0.2
D) 0.5
E) None of the above
Answer: A
g= 0.4*0.25=10%; P0=Div1/(r-g)=0.6*5*1.1/0.1=$33
31. What would be the price of a stock now when dividends are expected to grow at a 25% rate for the next two years (years 1 and 2), then grow at a constant rate of 5% per year thereafter, if the stock’s required return is 13% and the dividend is $3.2 per share now?
A)$52.65
B)$58.85
C)$56.65
D)$55.65
E) None of the above
Answer: B
Po =
= 3.54 +
= 3.54 + 3.92 + 51.39
= $58.85
32.If the 3-year spot rate is 12% and the 2-year spot rate is 10%, what is the one-year forward rate of interest two years from now?
A)3.7%
B)16.1%
C)9.5%
D)no enough information to calculate
E) None of the above
Answer: B
33. Interest represented by "r2" is:
A)spot rate on a three -year investment(APR)
B)spot rate on a two- year investment(APR)
C)expected spot rate 2 years from today
D)expected spot rate one year from today
E) None of the above
Answer: B
34.The term structure of interest rates can be described as the:
A)Relationship between the spot interest rates and the bond prices
B)Relationship between spot interest rates and stock prices
C)Relationship between spot interest rates and their maturities of investments
D)Any of the above
E) None of the above
Answer: C
35. Which of the following statements is true?
A)The spot interest rate is a complicated weighted average of yields to maturity
B)Yield to maturity is the complicated weighted average of spot interest rates
C)The yield to maturity is always higher than the spot rates
D)All of the above
E) None of the above
Answer: B
36.A forward rate prevailing from period 0 to period 1 can be:
A) observed in the market place
B)Extracted from spot interest rate with 1 and 2 years to maturity
C)Extracted from 2 and 3 year spot interest rates
D)All the above
E) None of the above
Answer: A
37.If the forward rate of interest from year 0 to year 1 is the same as the forward rate from year 1 to year 2, what is the 2-year spot rate?
A)Smaller than the 1-year spot rate
B)Larger than the 1-year spot rate
C)Can't say without knowing the 3-year spot rate
D)The same as the forward rate from year 1 to year 2
E) None of the above
Answer: D
Use the following to answer questions 38-39.
A new project will generate sales of $100 million, costs of $50 million, and depreciation expense of $20 million in the coming year. The firm’s tax rate is 50%.
38. What is the tax payment in the coming year?
A)$15 million
B)$16 million
C) $20 million
D) None of the above
Answer: A
39. What is the cash flow ( or cash flow from operations) in the coming year?
A)$35 million
B)$40 million
C) $16 million
D) None of the above
Answer: A
40.Beta measures:
A)the diversifiable risk of a security return
B)the market risk of a security return
C)the total risk of a security return
D)the firm-level risk of a security return
E) none of the above
Answer: B