Name Student Number MGF 301 Corporation Finance Spring 2011 TEST 1 Please 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 Please sign your name in the box 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 a The bonds must have a coupon rate greater than 7 b If the yield to maturity stays constant the bonds will sell for the same price one year from now c Large Co will pay its bondholders 23 equal payments Each payment will be a combination of interest and principal repayment 2 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 Additional paid in capital Retained Earnings Net Equity 42 000 000 3 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 need to solve the formula 6 points 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 above 5 Which of the following gives the formula for calculating the EAR with weekly compounding of an 6 APR Name Test 1 Spring 2011 Student Number a EAR 1 06 52 1 b EAR 1 06 12 12 1 c EAR 1 06 52 52 1 d None of the above 6 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 years B 100 000 immediately C 20 000 immediately and 20 000 at the end of each year for 4 years Assuming 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 a Plan B will always have the highest present value b At some discount rates A will have a higher present value than C c The future value in time 10 of A B C is the same 7 Below are the data for two stocks both of which have a discount rate of 11 percent Dividends per share Growth Rate Stock A Stock B 80 7 50 10 The stock price estimates are PA If 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 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 above 9 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 determined 2 Name 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 year 11 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 12 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 above 13 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 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 c Calculate the present value of growth options PVGO for BC stock 6 points Show your work along with the answer 3 Name Test 1 Spring 2011 Student Number 14 Setup a formula to solve for how much money you would have to put aside today so that you have exactly 1 million 10 years from today if you earn a 4 annual rate compounded …