ADM2350_FinalExam_Practice_NoSolutions

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University of Toronto *

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ADM3360

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Finance

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Jan 9, 2024

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pdf

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1. You want to save for retirement by making 20 equal annual contributions of $20,000/year starting next year. Unfortunately, you had to miss your 8 th contribution. To compensate for this, you have decided to increase your contributions for the remaining 12 years (from t=9 till t=20). By how much you will have to increase your future contributions so that you will accumulate the same amount on your retirement account. Assume the annual interest rate (with annual compounding) is 8%. a) $1,666.67 b) $3,480.29 c) $2,037,04 d) $2,653.90 2. You want to save for retirement by making equal annual contributions over the next 40 years and use your retirement savings to make equal withdrawals for 30 years after retirement. Assume you make your first withdrawal exactly 1 year after your last deposit. At t=15 you received a one-time bonus of $30,000 that you add to your retirement account in addition to your regular contributions. Assume you still plan to make 30 equal withdrawals. By how much your annual retirement withdrawals have been increased because of this extra contribution? Assume the annual interest rate (with annual compounding) is 8%. a) $2,664.82 b) $8,453.27 c) $18,249.97 d) Cannot be determined from the available information 3. Find the Present Value of growing perpetuity with the first payment of $1000 at t=6 and a growth rate of 3%. No payments are made in years 1-6. Assume the annual interest rate (with annual compounding) is 8%. a) $12,603.39 b) $13,611.66 c) $14,924.31 d) $15,670.52 4. You just took a 30-year $416,979.04 mortgage with $2,500 monthly payments and APR=6% (compounded monthly). What will be your balance 20 years from now (right after you’ll pay your 240 th payment? a) $138,993 b) $196,318 c) $208,490 d) $225,184

5. By taking advantage of your current saving account and credit line promotions, you were able to borrow $100,000 at 2.5% APR compounded quarterly and deposit this money into a saving account that generates 2.5% APR compounded monthly. How much money will you have in 1 year after you withdraw money from your saving account and repay your debt? a) Less than $10 b) Between $10 and $50 c) Between $50 and $100 d) More than $100 6. How an increase in interest rate affects bond prices? a) It increases the price of premium bonds and decrease the price of discounted bonds b) It decreases the price of premium bonds and increase the price of discounted bonds c) It increases the price of both premium and discounted bonds d) It decreases the price of both premium and discounted bonds 7. What can you say about a bond with YTM>YTC a) Most likely, it is underpriced. b) Most likely, it is overpriced. c) Most likely, it will be called. d) Most likely, it will not be called. 8. What can you say about a bond if its price has increased since last year while its YTM remained the same? a) The bond is risky b) The bond is risk-free c) The bond is selling at a discount d) The bond’s rating has been improved 9. Consider a stock that is expected to pay $2 dividends next year, $3 dividends in 2 years, $4 dividends in 3 years, and, after that, the dividends are expected to grow at a constant rate of 6% per year forever. The stock’s required return is 14%. Find the current stock price. a) $42.54 b) $37.81 c) $47.29 d) $44.16

10. Consider a stock that is expected to pay $2 dividends next year, $3 dividends in 2 years, $4 dividends in 3 years, and, after that, the dividends are expected to grow at a constant rate of 6% per year forever. The stock’s required return is 14%. Find the capital gain yield (rounded to the nearest percent) during the first year. a) 6% b) 8% c) 9% d) 14% 11. Consider a stock that is expected to pay $2 dividends next year, $3 dividends in 2 years, $4 dividends in 3 years, and, after that, the dividends are expected to grow at a constant rate of 6% per year forever. The stock’s required return is 14%. Find the dividend yield during the seventh year. a) 6% b) 8% c) 9% d) 14% 13. The expected return on the stock of SafeComp is equal to 14% and its beta coefficient is equal to 0.8. Find the expected return on the stock of RiskyComp if its beta coefficient is equal to 1.2 and the risk-free interest rate is 5% a) 21% b) 18.5% c) 9.3% d) Cannot be determined from the available information. 14. Find the NPV of the project that requires a $100,000 initial investment, generates $20,000 annual revenue for 10 years starting next year, and requires an additional expense of $10,000 to close the project at the end of the tenth year. Assume the required rate of return is 12% a) $3,004 b) $9,785 c) $13,004 d) $14,157

15. A project requires a $10,000 initial investment and generates $3,000 annual profit for 8 years. Assume the required rate of return is 12%. Find the EAA of this project. a) $987 b) $613 c) $399 d) $0 16. Which of the following investment criteria is best to use to choose projects from a pool of available projects when you have a fixed budget, can implement several projects simultaneously, and projects are not repeating a) NPV criteria b) PI criteria c) EAA criteria d) Discounted Payback Period criteria 17. Find D/E ratio for a firm with 20% cost of equity, 10% pre-tax cost of debt, and 40% corporate tax rate if the firm’s WACC is equal to 14% a) 0.40 b) 0.43 c) 0.57 d) 0.75 18. A firm that is expected to pay $3 dividends next year, the dividends are expected to grow at a constant rate of 3% per year, and the current price of the firm’s shares is $60. Assume the after- tax cost of debt is 2%. Find the cost of equity. a) 7% b) 8% c) 9% d) 10% 19. Consider a firm that has invested in a 5-year project. It faces a 40% corporate tax rate and its investment belongs to the CCA class with a 30% depreciation rate. A new “take care of equipment” program implemented by the firm allowed it to increase the salvage value of the equipment by $20,000. What was the effect of this program on NPV if the project’s discount rate is 12%? a) $6,809 b) $8,106

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