Name_________________________________ Student Number___________________________________TEST 1MGF 301 Corporation Finance Spring 2011 Please sign your name in the 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 unless otherwise indicated)1. Large Co. semi-annual bonds are selling at 102 (i.e., the price is $1020 for the $1,000 bond). There are 23 years remaining until maturity on the bonds and the yield to maturity is 7%. Mark each of the following as (T)rue and (F)alse (2 points each):_T__a. The bonds must have a coupon rate greater than 7%_F__b. If the yield to maturity stays constant, the bonds will sell for the same price one year from now_F__c. Large Co. will pay its bondholders 23 equal payments. Each payment will be a combination of interest and principal repayment2. Common Products has issued its $.01 par value stock in two separate financing transactions. Transaction 1: ten years ago, the founder of the company purchased 2,000,000 shares of stock for$500,000. Transaction 2: last year the company went public last year by issuing 8,000,000 shares of stock to the public for $30 million. Use this information to fill in the following table: (6 points)Common shares (par value) _________100,000 ____Additional paid-in capital ______ 30,400,000_____Retained Earnings ______11,500,000_____Net Equity 42,000,0003. A 30 year maturity bond with a coupon rate of 6.5% has 10 years remaining. The bond has a face value of $1,000, makes semi-annual coupon payments and has a yield to maturity of 5%. Setup a formula in as much detail as possible to find the price of the bond (Note: you do not needto solve the formula). (6 points)P = 32.50/(1.025) + 32.50/(1.0252) + 32.50/(1.0253) + ... + 1032.50/(1.02520)4. Which of the following is true about stock prices?(a) stock prices are based on the book value of equity(b) if future growth rates go up but the current growth rate stays the same, the stock price will stay the same(c) if a stock does not pay a dividend, then there is no way to estimate the stock price(d) none of the aboveName_________________________________ Test 1- Spring 2011 Student Number___________________5. Which of the following gives the formula for calculating the EAR with weekly compounding of an 6% APR?(a) EAR = (1+.06)52 - 1(b) EAR = (1+.06/12)12 - 1(c) EAR = (1+.06/52)52 - 1(d) None of the above6. 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 9 yearsB: $100,000 immediatelyC: $20,000 immediately and $20,000 at the end of each year for 4 yearsAssuming r is a discount rate greater than the risk-free rate, mark each of the following as(T)rue or (F)alse (2 points each):__T_ a. Plan B will always have the highest present value__F_ b. At some discount rates, A will have a higher present value than C__F_ c. The future value in time 10 of A, B & C is the same7. Below are the data for two stocks, both of which have a discount rate of 11 percent. Stock A Stock BDividends per share $ .50 $.80Growth Rate 10% 7%The stock price estimates are PA = .50/(.11 - .10) = 50 and PB = .80/(.11 - .07) = 20If stock B has a higher dividend and stock price is calculated by discounting dividends, how is it possible that stock A has the higher price? Explain. (6 points)Stock A has a higher growth rate which means that, even though the dividend of stock A is lower today, in time the dividend of stock A will be much larger than that of stock B. Hence if we discount all these dividends back to time 0, the dividend stream for stock A has a higher PV.8. United Sports, Inc. is expected to pay a dividend of $1 next year (in year 1) and $2 two years from now (in year 2). For dividends beyond two years, dividends are expected to increase at 6% per year from the prior year. If the discount rate is 10%, which calculation correctly estimates the stock price?(a) P = 1/1.10 + 2/1.102 + 2/(.10 - .06)/(1.102)(b) P = 1/1.10 + 2/1.102 + 2.2/(.10 - .06)/(1.103)(c) P = 1/1.10 + 2/(.10 - .06)/(1.10)(d) none of the above9. If you buy a 10 year bond with a 5% coupon that has a yield to maturity of 6% and you sell it after one year, what return will you earn on the bond if the YTM stays at 6% over the year? (a) 5%(b) 6%(c) We need to know if it is a premium or discount bond to answer this question(d) Cannot be determined2Name_________________________________ Test 1- Spring 2011 Student Number___________________10. A company has introduced a new type of bond that pays interest that increases by 1% each year. There are 5 years to maturity on the bond and it has a $1,000 face value. The coupon rate is 4% interest the first year, 5% the second year, 6% interest the third year, 7% the fourth year, and 8% the fifth year. If the bond is sold for $1,000 and the yield to maturity stays constant over the next 5 years, what will happen to the bond price over time:(a) the bond price will stay the same each year(b) the bond price will go up each year(c) the bond price will go down each year11. You have won a special lottery that pays $1000 per week forever. If the first payment is received today (time 0) and the annual discount rate is 6%, calculate the present value of the lottery using weekly compounding. Show your work. (6 points)PV = 1000 + 1000/(.06/52) = 867,666.6712. Your uncle died last year and left you money in his will. You are to receive $300,000 four years from today (i.e., in time 4). If you invest the money when you receive it in time 4, how much will it grow to 50 years from today (i.e., in time 50) if you earn 4% each year? (a) 300,000 x 1.0450(b) [300,000 / 1.044 ] x 1.0450(c) 300,000 x 50(d) none of the above13. BC Inc. has 3,000,000 shares of stock outstanding. The expected dividend of the company is $1.80 per share next year. The discount rate is 11%. (a) If BC retains 40% of its earnings (i.e., BC pays out 60% as dividends) and has a return on equity of 15%, calculate the growth rate of dividends. Show your work along with the answer (6 points)g = .4 x .15 = .06(b) If the dividend paid by BC is expected to grow at the rate in (a) above, calculate the price of its stock using the constant growth model? (6 points) Show your work along with the answer P = 1.80/(.11 - .06) = 36(c)
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