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Test 2006 Solutions.pdf

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McMaster University
Kevin Brewer

Name: ________________________________ Student Number: _______________________ Commerce 2FA3: Introduction to Finance Mid term test, summer session 2006 Instructor: K. Brewer Time allowed for this test: 3 hours. July 13, 7:00-10:00 Instructions: • Each multiple choice question has only one right answer. Fill in the appropriate bubble on the scan sheet. Be sure to enter your name and student number on the scan sheet. Right answers will be worth 2 marks and wrong or missing answers will be worth zero. There is no correction factor. • This exam has 10 pages (including this one) and a formula sheet. Please check that you are not missing any pages and bring any problems to the attention of the invigilator. • Long answer questions are to be answered on the question paper. If you are running short of space and decide to use the back of a page, please indicate where the rest of the answer is located. The marker cannot give you marks for an answer that they cannot find. • There is a formula sheet attached to th e back of this exam, no other references are allowed. • Only the standard McMaster calculator is allowed in this exam. Multiple choice /40 Problem 1 /10 Problem 2 /10 Problem 3 /15 Problem 4 /10 Problem 5 /15 Total /100 Commerce 2FA3 Mid term test July 13, 2006 Page 2 of 10 Commerce 2FA3 Mid term test July 13, 2006 Multiple choice questions; 2 marks each. 1) From the point of view of the owners, the primary objective of the financial manager should be to; a) maximize revenue b) maximize net income c) maximize shareholder wealth d) maximize dividend payments e) maximize managerial compensation 2) Which of the following is a depository intermediary? a) a pension fund b) a chartered bank c) a securities dealer d) a finance company e) a life insurance company 3) Which of the following is not a feature of the form of business organization? a) A partnership has the most limited life b) Limited partners have limited liability c) Corporations are subject to double taxation d) It is easier to raise capital and transfer ownership with a corporation e) A sole proprietorship requires the most amount of paperwork to set up 4) If you are indifferent between receiving $100 today and receiving $144 in two years, approximately what is your discount rate? a) 9.5% b) 10% c) 20% d) 6.5% e) 10.25% 5) The process of accumulating interest on an investment over time to earn more interest is called ___________. a) growth b) aggregation c) accumulation d) compounding e) simple interest 6) You've been offered a simple interest investment that pays 8% per year for r = (1+5*.08)0.-1Page 3 of 10 Commerce 2FA3 Mid term test July 13, 2006 5 years. What would this be if converted to an effective annual rate? a) Below 4% b) Between 4.00% and 5.0% c) Between 5.00% and 6.0% d) Between 6.00% and 7.0% e) Between 7.00% and 8.0% Page 4 of 10 Commerce 2FA3 Mid term test July 13, 2006 7) What is the value of a bond that pays $90 per year forever? a) $800 if your required return is12% b) $1,050 if your required return is 9% c) $1,250 if your required return is 8.5% d) $1,500 if your required return is 6% e) $2,000 if your required return is 4% 8) If a $1,000 face value, 15% coupon bond with 5 years to maturity is trading at $1,250, what is it's YTM? a) Less than 8% b) Between 8% and 10% c) Between 10% and 12% d) Between 12% and 15% e) Over 15% 9) You have two $1, 000 face value bonds from the same company. One will mature in 7 years, the other in 9 years. Which bond will decrease more in price if market interest rates rise? a) the price decrease will be the same b) the 7 year bond will decease more in price c) the 9 year bond will decease more in price d) it would depend on how risky the company is e) the bonds will actually rise in price 10) Which of the following features will decrease the value of a bond a) the bond is extendable b) the bond has a sinking fund provision c) the bond is callable at a 10% premium d) the bond is convertible into 40 shares with a current market value of $12 per share e) none of the above, they will all increase the value of the bond 11) Currently available interest rates are 7% for a one year term deposit and 8% for a 2 year term deposit. What would you be expecting the one year rate to be next year if you were indifferent between investing in the 2 year term deposit and investing in the one year term deposit and reinvesting the proceeds for one year at the prevailing interest rates at that time? a) 7% b) 8% c) 9% d) 10% e) 11% Page 5 of 10 Commerce 2FA3 Mid term test July 13, 2006 12) To settle a debt of $4,000, a friend of yours has offered to pay you $300 per month for 15-months. What is the implied EAR in these terms? a) 9.0% b) 12.5% c) 18.1% d) 19.7% e) none of the above 13) If the te rms of a loan agreement call for you to make equal periodic payments over the life of the loan, and a balloon payment at the end of the term equal to 40% the amount borrowed, this type of a loan is a(n) a) consol b) amortized loan c) interest only loan d) pure discount loan e) partial amortization loan 14) A bond that pays a variable coupon, set in relation to a measure of prevailing inflation rates (e.g. CPI) is called a(n) _______ a) LYON b) income bond c) real return bond d) floating rate bond e) deep discount bond 15) A preferred share feature that means that any missed dividends have to be paid to the preferred shareholders before the common shareholders can receive dividends is called a) retractable b) cumulative c) convertible d) subordinated e) participating 16) The duration of a 3-year 15% coupon bond is a) slightly more than 3 years b) greater than a 3-year 5% bond c) equal to a 4 year pure discount bond d) dependent on the discount rate e) dependent on the bond rating Page 6 of 10 Commerce 2FA3 Mid term test July 13, 2006 17) Paradise Properties is trading at $30 per share. According to their annual report their earnings last year were $17,000,000. There are 8.5 million shares of Paradise Properties outstanding. If investors require a return of 12% to invest in Paradise Properties, what percentage of that $30 per share represents the growth potential of the company? a) 8.33 b) 15.0 c) 44.4 d) 55.6 e) cannot be determined from the information given 18) Investors require a yield of 12.5% to buy shares in BSB. The shares have a dividend yield of 8.5%. If the current price of BSB's shares is $18.00, what price should you expect BSB's shares to be trading at in one year? a) $18.00 b) $18.72 c) $19.53 d) $20.25 e) none of the above 19) AMW I
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