Georgia State University Department of Finance MBA 8135 - Corporate Finance CUMULATIVE FINAL EXAM - Summer 2010 August 7, 2010 Name (please print) ____________________________________________ Instructor: _____________________________________________ PART I: MULTIPLE CHOICE – Choose the letter of the most correct answer for each question. Record only one answer per question. (4 pts each) 1) A financial institution promises that $100 deposited in their quarterly compounded CD will grow to $250 in 10 years. What nominal annual interest rate (APY) is the financial institution offering? a. 150.00% b. 9.60% c. 9.27% d. 2.40% e. 2.32% 2) A fixed coupon bond with par value of $1,000 has a coupon of 8%, semiannually payable. The current annual nominal market interest rate (i.e., yield to maturity) for this bond is 6%. Therefore the bond is selling ……….. and the bond’s current yield is ……….. : a. at a discount; greater than 8% b. at a premium; greater than 8% c. at par value; at 8% d. at a discount; less than 8% e. at a premium; less than 8% 3) Two years ago an investor purchased a 4% semi-annual compounding coupon bond with a remaining maturity of 20 years at a price of (at that time) 90% of par. Today, i.e. two years after the purchase, the investor realizes that the bond has exactly the same price like it had two years ago (i.e. 90%). Based on this information, which of the following answers is correct: a. The YTM of the 4% Bond today is the same like two years ago. b. Overall, the profit for the investor from this investment over the two years is Zero. c. Over the remaining life of the bond, the value of the principal exceeds the value of the coupons. d. If the investor held the 4% coupon bond until maturity, the overall return from this investment over the 18 years would be 100% minus 90%, i.e. 10% e. None of the above answers is correct 4) Softech Ltd just declared a dividend of $2 (D0). Equity analysts following the firm estimate that the growth rate will be 6% forever. The firm’s required rate of return is 11%. You plan to buy the share today and sell it 10 years from now (at the end of year 10). What will be your capital gain over the ten year holding period? a. $33.5 b. $29.2 c. $78.0 d. $61.3 e. $67.6GSU, Department of Finance - Final Exam / page 2 - Corporate Finance Summer 2010 August 7, 2010 MBA 8135 5) To the nearest half year, how many years will it take for $1 to triple with a stated interest rate of 9.6% and monthly compounding? a. 11 years b. 11.5 years c. 12 years d. 12.5 years e. 13 years 6) GHI Corp. wants to increase its leverage ratio from 30% debt/assets to 50% debt/assets (measured in market values). The current equity beta (at a 30% debt/assets ratio) is 1.2, and the current cost of debt are 6% before tax. Which of the following statements is most correct: a. The unlevered Beta will be less than 1.2 b. After the recapitalization the equity beta will be greater than 1.2 c. After the recapitalization the cost of debt will be higher than 6% d. The after-tax cost of debt are lower than the before-tax cost of debt e. All of the above answers are correct 7) A payday lender offers a loan of $400 that has to be repaid after 1 month in the amount of $448. Which effective annual rate is the lender charging (rounded to the nearest %)? a. 390% b. 290% c. 144% d. 48% e. 12% 8) Which of the following statements is most correct? a. Unlimited life, easy transferability of ownership, limited liability, these are all typical characteristics of a sole proprietorship. b. In a partnership there is usually a limited liability for the owners (i.e. the partners). c. One of the disadvantages of sole proprietorships and partnerships is the fact that they are subject to a so-called “double-taxation”, i.e. the earnings per share are taxed at the firm’s level as well as at the investor’s level. d. The overall goal of a manager in a corporation should be to maximize the value of outstanding shares. e. One of the disadvantages of a corporation is the fact that it is - especially compared to a partnership - very difficult to transfer ownership or to raise relatively large sums of share capital. 9) Today, long term (25 years) Aaa-rated bonds have a yield to maturity of 7.4%. Aa-rated bonds have a yield to maturity of 8.2%. If you own a 25 year, Aaa-rated bond with a 5% coupon (semi-annual payment), that is downgraded to Aa and follows the YTM-pattern described above, then the dollar amount of your gain or loss from a change in a $1,000 face value bond’s rating is closest to a. -$66.31 b. +$66.31 c. -$65.95 d. +$65.95 e. -$64.24 f. +$68.02GSU, Department of Finance - Final Exam / page 3 - Corporate Finance Summer 2010 August 7, 2010 MBA 8135 10) Winslow, Inc. is considering the purchase of a $225,000 piece of equipment. The equipment is classified as 5-year MACRS property. The company expects to sell the equipment after four years at a price of $50,000. What is the after-tax cash flow from this sale if the tax rate is 35%? [MACRS 5-year property depreciation: 20.00%; 32.00%; 19.20%; 11.52%; 11.52%; 5.76%] a. $37,036 b. $38,880 c. $46,108 d. $47,770 e. $53,892 11) Wilson's Antiques is considering a project that has an initial cost today of $10,000. The project has a two-year life with cash inflows of $6,500 a year. Should Wilson's decide to wait one year to commence this project, the initial cost will increase by 5% and the cash inflows will increase to $7,500 a year. What is the value of the option to wait if the applicable discount rate is 10%? a. $1,006.75 b. $1,235.54 c. $1,509.28 d. $1,606.76 e. $1,735.54 12) MMM & Co. purchased a corner lot in five years ago at a cost of $640,000. The lot was recently appraised at $810,000. At the time of the purchase, the company spent $50,000 to grade the lot and another $4,000 to build a small building on the lot to house a parking lot attendant who has overseen the use of the lot for daily commuter parking. The company now wants to build a new retail store on the site. The building cost is estimated at $1.2 million. What amount should be used as the initial cash flow for this building project? a. $1,200,000 b. $1,840,000 c. $1,890,000 d. $2,010,000 e. $2.060,000 13) Normal project A has an internal rate of return (IRR) of 15 percent. Normal project B has an IRR of 14 percent. Both projects have a cost of capital of 12