Name Student Number MGF 301 Corporation Finance Fall 2011 TEST 1 Please sign name in box 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 If you are earning interest at a 4 annual rate on deposits at a bank which of the 1 following will have the highest value after 5 years a an account that pays simple interest without compounding b an account that pays compound interest quarterly i e 4 times per year c an account that pays compound interest daily i e 365 times per year d cannot be determined ABC corp reported no news yesterday but its price increased yesterday by 10 in 2 trading on the New York Stock Exchange Which of the following is true about ABC yesterday a the market value of the equity stayed the same b the book value of equity increased by 10 c the increase in the stock price increased the amount of cash that ABC has on hand d none of the above is true You are planning to make 20 equal annual payments beginning today time 0 and 3 running through time 19 to save for retirement If you want to have 1 000 000 in 40 years from today time 40 and the interest rate you can earn on invested money is 5 set up a calculation to show how to find the annual payment Note you do not need to solve 6 points 1 000 000 in time 40 has PV 1 000 000 1 0540 142 045 70 So set up an equation where the PV of 20 payments beginning in time 0 equals 142 045 70 and solve 142 045 70 C C annuity factor where r 05 and t 19 4 A 10 year bond with a coupon rate of 8 was issued 4 years ago It has a 1 000 face value and pays a quarterly coupon If the yield to maturity is 6 set up a calculation to find the bond price Note you do not need to solve 6 points Price 20 1 015 20 1 0152 20 1 0153 1020 1 01524 5 BCD Corp has come out with a popular new product that analysts believe will cause BCS earnings to double in two years Which of the following is the effect of this news on the BCD stock price a the price will increase only when dividends paid by BCD increase b the price is set by the stock exchange and will not change because of the new product c the price will increase only when the higher earnings are realized in two years d none of the above Name Student Number 6 Your retirement plan will begin making fixed monthly payments of 2 000 to you 40 years from today These payments will continue forever in perpetuity and will go to your beneficiaries after you die Set up a formula using monthly compounding to calculate the present value of this retirement plan Note you do not need to solve your formula 6 points Test 1 Fall 2011 If R r 12 then PV 2000 R 1 R 479 Ben is buying a car for 15 000 If Ben wants to make four annual payments and the 7 interest rate is 7 which of the following is most consistent with time value of money principles if interest is compounded monthly a There is no way to compound monthly if the payment is annual b The annual payment equals 15 000 divided by 4 because there are 4 payments c The annual payment can be calculated by applying the annuity formula to find forty eight equal monthly payments and then multiplying the monthly payment by 12 d None of the above is consistent 8 Jason has a choice of Option A receiving 15 000 next year in time 1 or Option B receiving 10 000 in time 1 and 10 000 in time 2 Answer the following as T rue or F alse T a For some discount rates option A will have a higher PV than option B F b There is no discount rate where option B has a higher PV than option A F c If you calculate the future value of both options in time 2 Option B might have a higher FV even if it has a lower PV than A 9 Mark each of the following as True T or False F 2 points each T a In the primary market the company issues stocks and or bonds to investors F b If a company does not pay a dividend most analysts will estimate the stock price using the book value of equity T c Market value of equity is usually higher than book value of equity Today WXZ issued a bond paying interest of X with face value of 1 000 and a 30 year 10 maturity The bond was issued with a price of 1 010 and was rated A by Standard Poors Without doing any calculations which of the following is not true a the coupon rate for this bond is fixed when issued and will not change over the 30 year life b the bond currently pays more interest than investors require given the risk c the bond price will increase each year d none of the above 11 For the bond in question 10 if the following changes occur 5 years from now i the company s rating is changed to AA and ii overall interest rates in the economy go down which of the following is true about the price of the bond in 5 years a the price of the bond will go down b the price of the bond will go up c the two effects at least partially offset so that it is not clear what will happen to the price of the bond d none of the above 2 Name Student Number 12 Which of the following is true about a 10 year 8 bond with a face value of 1 000 that is selling for 1050 a the bond will pay more interest each year if it is a semi annual bond that pays twice a Test 1 Fall 2011 b if the yield to maturity remains constant over the next year the price will be higher year next year c the yield to maturity is less than 8 d none of the above 13 If you have received a 7 return on a bond that you own and the inflation rate is 3 what is the approximate real rate of return on the bond a 10 b 7 c 3 d 4 g 13 x 04 052 14 BP Inc has 3 000 000 shares of stock issued and outstanding The expected earnings of the company are 6 million in time 1 The discount rate is 11 a If BP pays out 60 of its earnings as dividends and has a return on equity of 13 calculate the growth rate of dividends Show your work 6 points b If the dividend paid …