Exam 1 Solutions

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California State University, Fullerton *

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650

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Finance

Date

Jan 9, 2024

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pdf

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9

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FIN 600 Seminar in Business Finance Exam 1 Instructor: Aslihan Salih Part I Multiple Choice Please answer the following multiple choice questions 1. Which organizational form has the highest degree of separation between the owners and operators of a business? A. Limited partnerships B. Corporations C. Sole proprietorships Answer: B 2. For a company that is financially sound, thus is repaying interest and principal on debt in full and on time, increasing the company’s rate of growth is most likely to benefit: A. Equity holders, but not debt holders B. Both equity holders, and debt holders C. Debt holders, but not equity holders Answer: A 3. The amount an investor will have in 9 years if $2500 is invested today at an annual interest rate of 6% will be closest to: A. $2110.65 B. $3517.75 C. $4223.70 Answer: C 4. Ferry Corporation preferred stocks are expected to pay a $4 annual dividend forever. If the required rate of return on equivalent investments is 13%, a share of Ferry preferred stock should be worth:
A. $45.45 B. $30.77 C. 38.46 Answer: B 5. An investor has just won the lottery, and will receive $35,000 per year at the end of each of the next 14 years. At an 8% interest rate the present value of the winnings is closet to: A. $288,548.29 B. $322,427.54 C. $342,379.15 Answer: A 6. If $5000 is invested in a fund offering a rate of return of 12% per year, approximately have many years will it take for the investment to reach $15,000? A. 9.69 years B. 13.54 years C. 26.24 years Answer: A 7. If $12,000 is invested today in an account that earns interest at a rate of 9.5%, what is the value of the equal withdrawals that can be taken out of the account at the end of each of the next four years if the investor plans to deplete the account at the end of the time period? A. $2537.66 B. $3052.88 C. $3744.76 Answer: C 8. An investor is looking at a $400,000 home. If 20% must be put down and the balance is financed at a stated annual rate of 7.2% over the next 30 years, what is the monthly mortgage payment? A. $3779.28 B. $4778.67 C. $2172.12 Answer: C
9. What is the effective annual rate (EAR) of the mortgage loan in question 8? A. 7.33% B. 7.44% C. 8.08% Answer: B 10. How much should an investor have in a retirement account on her 65 th birthday if she wishes to withdraw $50,000 on that birthday and each of the following 14 birthdays, assuming her retirement account is expected to earn 12%? A. $331,408.41 B. $340,543.22 C. $381,408.41 Answer: C 11. A T-note has a coupon rate of 4 percent, a face value of $100, and matures in three years. The bond pays semiannual interest payments. Calculate the price of the bond if the yield to maturity is 5 percent. A. $97.25 B. $102.78 C. $100 Answer: A 12. An analyst observes a 20-year, 8% coupon bond with semiannual coupons. The required yield to maturity was 8%, but suddenly it decreased to 7.25%. As a result, the price of this bond: A. decreased. B. increased. C. stayed the same. Answer: B 13. A 2-year bond with a 6 percent coupon rate and $1,000 face value is selling for $972.84. Calculate the yield to maturity on the bond assuming annual interest payments. A. 8.76% B. 6.00% C. 7.51% Answer: C
14. All else equal, which of the following bonds is likely to have the lowest interest rate risk? A. A 5-year 5% semiannual-pay bond. B. A 5-year 10% semiannual-pay bond. C. A 5-year zero-coupon bond. Answer: B 15. A two-year zero coupon bond with a face value of $1000 is trading at $890. Calculate the two year spot rate. A. 6.0%. B. 5.4%. C. 4.9%. Answer: A 16. If a bond's modified duration is 8.2 and its yield to maturity increases by 0.2%, then the price of the bond will A. Increase by 1.64 percent. B. Decrease by 1.64 percent. C. Decrease by 0.82 percent. Answer: B 17. As CFO of your corporation, you would prefer (all else equal) to see the price of your corporation's bonds: A. decrease, indicating that bond investors view your firm as less risky, thus your cost of capital is decreasing B. increase, indicating that bond investors view your firm as more willing to take risks, with no change on your cost of capital C. increase, indicating that bond investors view your firm as less risky, thus your cost of capital is decreasing Answer: C 18. A firm has a constant growth rate of 5% and just paid a dividend of $4.25. If the required rate of return is 9%, what will the stock sell for one year from now based on the dividend discount model? A. P 1 = $117.14 B. P 1 = $111.56 C. P 1 = $106.25 Answer: A
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