Name_________________________________ Student Number___________________________________TEST 1MGF 301 Corporation FinanceFall 2012 Please sign name in boxPlease tear off the answer sheet and answer all of the following questions on the answer sheet.(Note: Total Points = 100; Multiple Choice = 4 points each)1. Which of the following statements about the constant growth stock pricing model is false?(a) the stock price of a company can be estimated even if the company does not pay a dividend(b) a higher discount rate will result in a lower estimated stock price (c) a higher growth rate will result in a lower estimated stock price(d) none of the above2. You have won an accident settlement in court and can choose between the following choices of payment plans:A: $10,000 immediately and $10,000 at the end of each year for 7 yearsB: $60,000 immediatelyC: $20,000 immediately and $20,000 at the end of each year for 3 yearsMark each of the following as true (T) or false (F): (2 points each)_T__ a. For every r > 0, plan C will always have a higher present value than plan A_F__ b. For every r > 0, plan B will always have the highest present value_F__ c. If the discount rate is very low, plan A will have the highest present value 3. A company has introduced a new type of bond that pays interest that increases each year. It is a 5 year bond with a $1,000 face value that pays 3% interest the first year, 4% the second year, 5% interest the third year, 6% the fourth year, and 7% the fifth year. (a) Set up an equation to find the price of this bond if the yield to maturity is 5%. Show as much detail as possible (you do not need to solve for an exact answer) (6 points)30/1.05 + 40/(1.052) + 50/(1.053) + 60/(1.054) + 1070/(1.055)(b) When, if ever, would this bond sell for a discount? Explain. (6 points)For this bond to sell for a discount, the average coupon rate must be less than the yield to maturity. Currently, the average coupon rate if you calculate the time value of money weighted average is just under 5% so this bond will sell at a discount right now. In the future, when there are only larger coupon payments of 6% and 7%, the yield to maturity will have to be higher than 6% for the bond to sell at a discount.Name_______________________________ Test 1 Fall 2012 Student Number__________________________4. Which of the following gives the EAR of a 10% annual rate compounded daily?(a) (1+.10/12)12 - 1(b) .10 x 365(c) (1+.10)365 - 1(d) none of the above5. Your plan is to save $10,000 at the end of each year for the next 30 years. If you earn 4% interest, how much will you have after 30 years (in time 30)? Setup a solution to the problem in as much detail as possible (note: you do not have to solve the equation). (6 points)10,000 [(1/.04) – (1/(.04*1.0430))] x (1.04)306. You have decided to buy a car from a relative for $15,000 and pay equal amounts every week (i.e, 52 payments per year) for the next four years at an annual rate of 5.2%. Using either the annuity formula or the PMT formula from excel (=PMT(r,t,pv)), set up the calculation you would do to solve for the weekly payment. (Note: you do not have to solve your formula). (6 points)=pmt(.052/52,52*4,15000)or=15,000/[1/(.052/52) – (1/(.052/52)*(1+(.052/52))52*4)]7. BP Inc. is expected to have earnings per share (EPS) of $3 in time 1, $4 in time 2 and EPS that grows at 6% for every period after that. The company has a policy of paying 50% of its EPS as a dividend and the discount rate is 9%. (a) For years 3 and beyond, which of the following is the Return on Equity (ROE)? (i) 12%(ii) 6%(iii) 9%(iv) 10%(b) Set up your calculation of the expected stock price in detail. (Note: you do not need to solve for the price) (6 points) Price = 1.50/1.09 + 2/(1.092) + 2*1.06/(.09-.06)/1.092orPrice = 1.50/1.09 + 2/(.09-.06)/1.09(c) Which of the following is false about the present value of growth opportunities(PVGO)? (i) PVGO can be calculated for BP if you assume that year 3 and after are the same as year 2(ii) BP has low PVGO because the growth rate is below the 2Name_______________________________ Test 1 Fall 2012 Student Number__________________________discount rate(iii) a non-growth perpetuity will be required as part of the calculation of PVGO(iv) none of the above8. Mark each of the following as True (T) or False (F). (2 points each)__F_(a) All public companies are required to pay dividends so their stock prices can be estimated__T_(b) The company receives cash when its stocks and/or bonds are bought in the primary market by investors__F_(c) A bond price will not change over the life of the bond unless the YTM of the bond changes9. Which of the following is true about a 10 year 8% bond with a face value of $1,000 that is selling for $1,050?(a) the bond sells at a premium so it must pay more than $80 each year as interest (b) if the yield to maturity remains constant over the next year, the price will be lower next year(c) the yield to maturity is greater than 8%(d) none of the above10. Ten years ago, WXZ issued a bond paying interest of 6.75%, with face value of $1,000 and a 30year maturity. The bond was issued with a price of $990 and was rated A by Standard & Poors. Without doing any calculations, which of the following is false? (a) if the yield to maturity goes down, the price of the bond will go up(b) today, the bond will be priced as if it were a 20 year bond because there are only 20 yearsremaining(c) the bond's rating may change over the life of a bond (d) none of the above11. For the bond in question 10, assume that two changes have happened over the last 10 years: (a)overall interest rates in the economy increased by two percent and (b) WXZ’s rating changed to AAA. What will be the effect of these two changes on the bond price? Explain your answer in the space on the answer sheet. (6 points)In (a), the yield to maturity will go up because all interest rates are going up. This means the price will go down. In (b), the rating change reflects a reduction in default risk which will lower the YTM and raise the bond price. Overall, the two effects move the price in different directions and it is not clear which effect will dominate. 12. A company has a 10 year 8% bond that pays interest quarterly, has a face value of $1,000 and has YTM = 6%. Which of the following is the correct method for finding the price?(a) Price = 15/(1.02) + 15/(1.022) + ... + 15/(1.0210) +