Name_________________________________ Student Number___________________________________TEST 1MGF 301 Corporation FinanceFall 2014Please 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. Bond A has a 9% coupon and Bond B has a 8% coupon. If both bonds are 10 year bonds, bothhave the same yield to maturity and you buy both bonds today and hold them until maturity, on which bond will you earn the higher return?(a) The return will be the same(b) It depends on what happens in the market over the next few years(c) Bond A(d) Bond B2. Which of the following gives the formula for calculating the EAR with weekly compounding of an 8% APR?(a) EAR = (1+.08/12)12 - 1(b) EAR = (1+.08/52)52 - 1(c) EAR = (1+.08)365 - 1(d) None of the above3. ABC announced this morning that they lost their contract to supply Apple Computer with screens for Apple phones. Within minutes of the announcement, the stock price of ABC fell by 50%. Mark the potential effects of the announcement as (T)rue or (F)alse (2 points each)_T__ (a) The market value of ABC's equity decreased by 50% when the stock price decreased by 50% _F__ (b) ABC's cash position decreased due to the lower stock price _T__ (c) The book value of ABC stayed the same when the stock price went down4. The lottery is offering two payout choices: Choice 1 pays $10,000 each year starting today (time 0) and increasing by 5% each year; Choice 2 pays $190 each week starting today (time 0) and increasing by .1% each week. If the discount rate is 8%, calculate the PV of each choice. Show your work and solve for an exact answer. (8 points)Choice 1: 10,000 + 10,000(1.05)/(.8-.05) = $360,000Choice 2: 190 + 190(1+.001)/(.08/52 - .001) = 353,400Name_________________________________ TEST 1 - Fall 2014 Student Number_____________________5. As an analyst, you are trying to estimate a fair price for stock XYZ. You tried the constant growth dividend discount model but this did not work because the company does not pay a dividend. Which of the following is true? (a) XYZ stock can still be estimated by using the cash the company pays to its stockholders each year(b) The best estimate of stock price for companies that do not pay a dividend is the book value of equity(c) XYZ should be paying a dividend because all publicly traded stocks are required to pay a dividend(d) None of the above6. If you invest $10,000 today (time 0), $10,000 next year (time 1) and $10,000 the following year (time 2), what will the total of your investments be after 10 years if each investment grows at 7%? Set up a calculation using annual compounding. Note: you do not need to solve your formula. (6 points)10,000 x (1.07)10 + 10,000 x (1.07)9 + 10,000 x (1.07)87. The following bonds are trading in financial markets:Bond A: 7% 30 year bond with YTM =7%Bond B: 6% 10 year bond with YTM=8%Bond C: 8% 20 year bond with YTM=6%Which bond has the lowest price and which bond has the highest price? Explain. (6 points) Bond C sells for a premium because coupon = 8% is greater than YTM = 6%Bond A sells for face value Bond B sells for a discount because coupon = 6% is less than YTM = 8%So C is the highest price and B is the lowest8. A 7 year bond with a coupon rate of 6% was issued 4 years ago. It has a $1,000 face value andpays a quarterly coupon. If the yield to maturity is 8%, which of the following gives the bond price?(a) 80/(1.06) + 80/(1.06)2 + … + 1080/(1.06)7(b) 60/(1.08) + 60/(1.08)2 + … + 1060/(1.08)7(c) 20/(1.015) + 20/(1.015)2 + … + 1020/(1.015)12(d) 15/(1.02) + 15/(1.02)2 + … + 1015/(1.02)129. You will receive $50,000 in 3 years under an inheritance. If you invest the money in time 3 and it grows for 10 years at 5%, what is the value of the inheritance in time 13?(a) $50,000 x (1.0510)(b) $50,000/(1.053)(c) $50,000 x (1.0513)(d) $50,000/(1.0510)2Name_________________________________ TEST 1 - Fall 2014 Student Number_____________________10. Under a special promotion by the dealer, you have three choices for a “no-interest” 5 year car loan of $10,000: (i) 10,000/5 =$2,000 annual payment for 5 years(ii) 10,000/60 = $166.67 monthly payment for 5x12= 60 months(iii) 10,000/260=$38.46 weekly payments for 5x52 = 260 weeksAll loan payments are made at the end of the period. Mark the following answers as (T)rue or (F)alse (assuming the discount rate is greater than 0): (2 points each)_F__(a) The weekly loan has a lower present value than the monthly loan_T__(b) The true cost of the car is lower than $10,000 in all three choices_T__(c) The annual loan has the lowest present value 11. BC Inc. has 1,000,000 shares of stock outstanding. The expected earnings of the company are $2 million next year. The discount rate is 9%. (a) If the perpetual growth rate is 6% and the stock price evaluated using the constant growth dividend model is $20, what is the dividend payout ratio? Show your work (6 points) P = D1/(r-g)20=D1/(.09-.06)D1 =.6EPS1 = 2M/1M = 2Dividend Payout = .6/2 = .3(b) Find the present value of growth opportunities (PVGO). Show your work (6 points) PVGO = PV with growth – PV without growthPV with growth = given in (a) as $20PV without growth = EPS1/R = 2/.09 = $-22.222PVGO = 20 – 22.22 = $-2.2212. Today, WXZ issued a bond with face value of $1,000 and a 30 year maturity. The bond was issued with a price of $1010 and was rated A by Standard & Poors. Without doing any calculations, which of the following is true? (a) the bond pays less interest than investors currently require given the risk(b) the bond pays a little more than $60 each year in interest(c) the yield to maturity for this bond is determined when issued and will not change overthe 30 year life(d) none of the above13. For the bond in question 12, assume that two changes happen over the next 5 years: (a) overall interest rates in the economy decrease by two percent and (b) WXZ struggles financially and its rating changes to B. 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)(a ) will lower YTM which raises price(b ) financial difficulty will increase YTM which lowers priceNet effect depends on which effect is stronger3Name_________________________________ TEST 1 - Fall 2014 Student Number_____________________14. A company is offering a perpetuity you can