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UB MGF 301 - MGF301 Test 1 (Fall 2015) - version I (answers)

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Name_________________________________ Student Number___________________________________TEST 1MGF 301 Corporation FinanceFall 2015 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. Bond A has a 5% coupon and Bond B has a 8% coupon. If both bonds are 5 year bonds and both are selling for $1,000, which bond will have the higher return over the next year?(a) Bond A(b) Bond B(c) The return will be the same(d) It depends on what happens in the market over the next few years2. Which of the following is an appropriate situation to use the EAR instead of the annual discount rate r?(a) Calculating the present value of annual payments using annual compounding(b) Calculating the present value of monthly payments using daily compounding(c) Calculating the present value of daily payments using annual compounding(d) None of the above3. Ten years ago, the founder of the company started XYZ and purchased 1,000,000 shares of common stock for $200,000. Five years ago, a venture capitalist purchased 400,000 shares of common stock for $1,200,000. The company now has the following book value of equity:Par Value 1,400Capital in Excess of Par 1,398,600Retained Earnings 1,500,000Net Equity 2,900,000(a) Which of the following must equal the par value of each share of common stock?(i) $.001(ii) $.005(iii) $.0001(iv) $.007(b) Mark each of the following as (T)rue and (F)alse (2 points each):__F__ (i) The par value of equity will increase if the stock price goes up in the market__T__ (ii) The retained earnings goes up when a company reports a positive net income__F__ (iii) The book value of equity is at least as great as the market value of equity4. As an analyst, you are trying to estimate a fair price for stock XYZ. Which of the following is true? (a) If XYZ does not pay a dividend, then there is no way to estimate the stock price(b) The price of XYZ stock can estimated using either dividends or expected free cash flows(c) A good estimate of the stock price for XYZ is book value of equity(d) None of the aboveName_________________________________ Test 1 – Fall 2015 Student Number_____________________5. The lottery is offering the choice: (a) a perpetuity payout of $5,000 per month with payments starting today (time 0)(b) $1,000,000 in time 0, $500,000 in time 1 and $500,000 in time 2.If the interest rate is 4%, which payout has the higher present value? Show your work and solve for an exact answer. (6 points)(a) =5000 + 5000/.04/12 = 1,505,000(b)= 1000000 + 500000/1.04 + 500000/1.042 = 1,943,047.346. If you will be making equal deposits into a retirement account for the next 5 years (with each payment at the end of the year 1 through 5), how much must you deposit each year if the accountearns 6% compounded annually and you wish the account to grow to $100,000 20 years from today (in time 20)? Set up your solution but do not solve it. (6 points)100000/(1.0620) = C [1/.06 - 1/(.06 x 1.065)]or =pv(.06,5,100000/(1.06^20)7. A 10 year bond with a coupon rate of 7.2% was issued 6 years ago. It has a $1,000 face value and pays a quarterly coupon. If the yield to maturity is 6.4%, set up a calculation to find the bondprice. (Note you do not have to solve). (6 points).=18/(1.016) + 18/(1.0162) + ... + 1018/(1.01616)8. Your bank has informed you that it will pay interest on your savings account using daily compounding instead of monthly compounding. Which is correct?(a) This change benefits the bank because they will be charging you a higher effective interest rate(b) The extra compounding benefits you as the owner of the account(c) There will be no change in the effective return due to the change in compounding(d) None of the above 9. A bond has a 7% coupon and a yield to maturity of 8%. If the bond is held for one year and the yield to maturity does not change, the bond price will be:(a) The same(b) Higher(c) Lower(d) More information is required to answer2Name_________________________________ Test 1 – Fall 2015 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) $2,000 annual payment for 5 years(ii) $166.67 monthly payment for 60 months(iii) $38.46 weekly payments for 260 weeksWhich has the lowest present value (assuming r >0)? Explain. (6 points)Each choice pays $10,000 spread over 5 years. If you pay annually in choice (i) it has the lowest PV because the first payment is not until the end of the year. This means you are paying the slowest, so the cash flows are further in the future for (i) - giving it a lower PV11. 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 dividend payout ratio is 40% and the Return on Equity is 11%, find the stock price using the constant growth model. Show your work (6 points) g = .6 x .11 = .066D1 = .4* 2000000/1000000 = .80P = .8/(.09 - .066) = $33.33(b) Find the present value of growth opportunities (PVGO). Show your work (6 points) PVGO = 33.33 - 2/.09 = $11.1112. Today, WXZ issued a bond paying interest of X, with face value of $1,000 and a 30 year 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) the coupon rate for this bond is determined when issued and will not change over the 30 year life(b) the bond pays less interest than investors currently require given the risk(c) the bond sells at a discount(d) a change in rating from A to AA reflects an increase in the risk of default13. A company is offering a perpetuity you can purchase for retirement. If the perpetuity starts 40 years from today and pays $50,000 per year, which formula correctly gives the PV if r = 4%?(a) PV = 50,000 x [(1/.04) - (1/(.04 x 1.0440))] x(1.0440)(b) PV = 50,000/(1.0440)(c) PV = 50,000 x 40(d) none of the above3Name_________________________________ Test 1 – Fall 2015 Student Number_____________________14. If the nominal return is 8%, approximately what is the inflation rate if the real return is 3%? (a) 11%(b) 6%(c) 3%(d) 5%15. Today's (time 0) dividend is $1 per share. The dividend is expected to grow at 15% for years 1,2,3 and then grow at 6% for years 4 and after in


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UB MGF 301 - MGF301 Test 1 (Fall 2015) - version I (answers)

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