BUAD 306 Business Finance Fall 2013 Midterm Exam 2 There are 30 questions in the exam You have 90 minutes I agree that I will not give or receive unauthorized help during this test I understand that giving or receiving such help during the test is cheating and will result in a failure of the test and other possible repercussions according to University policy I pledge my honor that I have not violated the USC Student Conduct Code in this examination Name Print Clearly Signature Date ID Number Your grade will be based on answers recorded on your scantron not this paper Therefore make sure you fill in your scantron sheet as you go along because you will not be given any extra time at the end of the exam to fill out your form Fill the oval in completely with an appropriate pencil Students are responsible for any incorrect erasure so make sure you completely erase any unintended answers You are allowed to use calculators for this test but not any device that can connect wirelessly to other devices This test is closed book no notes are allowed Formulas are provided at the end of the test Do all of the following BEFORE answering any test questions 1 Write your name on the front side of the scantron sheet 2 Write your Student ID Number in the subject box 3 Write the test form letter in the Test No box EXAM FORM A 1 In the event that a corporation files for bankruptcy holders of which of the following securities have the highest priority when the firm pays out a Common stock b Subordinated debt c Preferred stock d Senior debt e Junior debt 2 Which of the following affect the shape of the term structure of interest rates I Expected inflation II Real interest rate III A firm s default risk IV Interest rate risk a I and II only b I and IV only c III and IV only d I II and III only e I II and IV only 3 If a firm has issued both debt and equity to finance its assets what is true about the firm a Creditors own a portion of the firm s assets b The firm must pay a dividend at least once a year c Stockholders own a portion of the firm s assets d The total debt issued must be smaller than the total equity issued e The book value of the firm s assets must be smaller than the book value of the equity 4 An investment offers a 13 0 nominal rate of return for the coming year The federal reserve thinks the total real return on this investment will be only 3 5 What does the federal reserve believe the inflation rate will be over the next year a 8 41 b 6 43 c 10 56 d 9 18 e 11 93 5 Boston News Co has a dividend policy whereby the firm pays a constant annual dividend of 2 40 per share of common stock The firm has 1 000 shares of common stock outstanding The company a Must always show a current liability of 2 400 for dividends payable b Must still declare each dividend before it becomes an actual company liability c Is obligated to pay 2 40 per share each year in perpetuity d Will be declared in default if it does not pay at least 2 40 per share per year on a timely basis e Has a liability that must be paid at a later date should the company miss paying an annual dividend payment 6 Suppose a financial manager decided to invest in a project according to the discounted payback rule and suppose that all cashflows after the initial cost are positive Then a The project must have negative NPV b The payback period is less than 1 year c The financial manager is destroying firm value d The project must have positive NPV e The financial manager is not taking into account the risk of the project 7 Which of the following methods determines the amount of change a proposed project will have on the value of a firm a Net present value b Discounted payback c Internal rate of return d Profitability index e Payback 8 All else constant a bond will sell at when the coupon rate is the yield to maturity a A premium less than b A premium equal to c A discount less than d A discount higher than e Par less than 9 California s state government has issued 8 coupon bonds on the market with 15 years left to maturity The bonds make annual payments If the bond currently sells for 728 64 what is its YTM a 4 53 b 11 98 c 6 91 d 9 07 e 6 53 10 United Airlines has bonds on the market making annual payments with 18 years to maturity and selling for 890 At this price the bonds yield 9 0 What must the coupon rate be on the bonds a 15 49 b 9 00 c 7 74 d 7 84 e 8 70 11 Glassyard Co wants to issue new 18 year bonds for some much needed expansion projects The company currently has 12 2 coupon bonds on the market that sell for 1 584 83 make semiannual payments and mature in 18 years What coupon rate should the company set on its new bonds if it wants them to sell at par a 6 90 b 6 30 c 3 30 d 6 60 e 6 50 12 The pretax yield on a municipal bond is 4 3 and the federal tax rate is 34 Assuming there are no state taxes what is the aftertax yield on this municipal bond a 1 9 b 3 0 c 3 5 d 4 3 e 4 9 13 You want to have 4 million in real dollars in an account when you retire in 40 years The nominal return on your investment is 9 and the inflation rate is 5 5 What real amount must you deposit each year to achieve your goal a 49 341 49 b 11 838 44 c 51 808 56 d 51 315 15 e 46 874 41 14 What is the IRR of the following set of cash flows a b c d e 25 03 26 82 26 05 25 54 24 26 15 Which of the following will decrease the net present value of a project a Increasing the value of each of the project s discounted cash flows b Moving each of the cash outflows one period farther into the future c Decreasing the discount rate d Increasing the project s initial cost at time zero e Increasing the amount of the final cash inflow 16 The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following a b c d e Salvage value Wasted value Sunk cost Opportunity cost Erosion 17 JL Plastic Corp spent 1 200 last week repairing a machine This week …