There are 2.0 hours in this exam.
Student Name ____________________________
Student Number _________________________________
1. This is a closed book exam. You may only have pens, pencils and a calculator at
2. A formula sheet is attached to the end of the exam. You may detach the formula
sheet from the exam.
3. Please fill out the scanner sheet as you go along in the exam. You will not be given extra
time at the end of the exam to fill it out.
4. Select the best possible answer for each multiple-choice question
5. Each of the 30 MC questions is worth 1 mark
Total 30 _________
There are 14 pages in this exam. CFIN300 Midterm Exam Fall 2007
Page 2 2. Poor Dog, Inc. borrowed $135,000 from the bank today. They must repay this money over the
next six years by making monthly payments of $2,215.10. What is the interest rate on the loan?
Express your answer with annual compounding.
3. How much would you pay for a security that pays you $500 every 4 months for the next
10 years if you require a return of 8% per year compounded monthly?
4. You can earn 5% per year compounded annually for the next 4 years, followed by 8%
per year compounded quarterly for 5 years. What is the average annual compounded
rate of return over the 9 year period? Express your answer with monthly compounding.
5. You have just purchased a house for $540,000 with a $200,000 down payment. You are
going to get a mortgage at the TF bank for the balance. TF is charging a rate of 5.8%
per year compounded semi-annually on 5 year term mortgages. You want to make
weekly payments amortized over 20 years. What is your weekly payment?
E) $871.92 CFIN300 Midterm Exam Fall 2007
6. Master Meter is planning on constructing a new $20 million facility. The company plans
to pay 20% of the cost in cash and finance the balance. How much will each monthly
loan payment be if they can borrow the necessary funds for 30 years at 9% per year
7. Gerry Industries has some 8% (per year compounded semi-annually) coupon bonds on
the market that are selling at $989, pay interest semi-annually, and mature in fifteen
years. The company would like to issue $1 million in new fifteen-year bonds. What
coupon rate should be applied to the new bonds if Gerry Industries wants to sell them at
par? Express your answer with semi-annual compounding.
8. You have decided to save $30 a week for the next three years as an emergency fund.
You can earn 3.5 % per year compounded weekly. How much would you have to
deposit in one lump sum today to have the same amount in your savings at the end of
9. A credit card company charges you an interest rate of 1.25% per month. The annual
percentage rate is ____ and the effective annual rate is _______.
A) 15.00%; 16.08%
B) 16.08%; 15.00%
C) 15.00%; 15.00%
D) 15.00%; 14.55%
E) 14.55%; 15.00%
Page 2 CFIN300 Midterm Exam Fall 2007
10. The Friendly Bank wants to earn an effective annual rate of 9% on its auto loans. If
interest is compounded monthly, what APR must they charge?
Use the following to answer question 11:
2006 Income Statement
Net Sales $12,800
Less: Cost of Goods Sold 10,400
Less: Depreciation 680
Earnings Before Interest and Taxes 1,720
Less: Interest Paid 280
Taxable Income $1,440
Less: Taxes 500
Net Income $940
Additions to retained earnings $517
2006 Balance Sheet
Cash $520 Accounts payable $1,810
Accounts rec 1,080 Long-term debt 3,600
Inventory 3,120 Common stock 5,000
Total $4,720 Retained earnings 1,790
Net fixed assets 7,480
Total assets $12,200 Total liabilities & equity $12,200
11. Rondolo, Inc. is currently operating at maximum capacity. All costs, assets, and current
liabilities vary directly with sales. The tax rate and the dividend payout ratio will remain
constant. How much additional debt is required if no new equity is raised and sales are
projected to increase by 4 percent?
Page 3 CFIN300 Midterm Exam Fall 2007
12. Your brother-in-law borrowed $2,000 from you four years ago and then disappeared.
Yesterday he returned and expressed a desire to pay back the loan, including the interest
accrued. Assuming that you had agreed to charge him 10% per year compounded
annually, and assuming that he wishes to make five equal annual payments beginning in
one year, how much would your brother-in-law have to pay you annually in order to pay
off the debt? (Assume that the loan continues to accrue interest at 10% per year.)
13. What information to you need to find the 3 year forward rate starting 2 years from now?
A) 2 and 5 year zero coupon spot rates
B) 3-year zero coupon spot rate
C) 2 and 3 year zero coupon spot rates
D) 5 year zero coupon spot rate
E) 3 and 5 year zero coupon spot rates
14. You have been making payments for the last 25 years and have finally paid off your
mortgage. Your original mortgage was for $345,000 and the interest rate was 5% per
year compounded semi-annually for the entire 25 year period. How much interest have
you paid over the last 5 years of the mortgage?
15. Which of the following is (are) sources of cash?
I. an increase in accounts receivable
II. a decrease in common stock
III. an increase in long-term debt
IV. a decrease in accounts payable
A) I, II, and IV only
B) II and IV only
C) I only
D) III only
E) I and III only
Page 4 CFIN300 Midterm Exam Fall 2007
16. Financial planning allows firms to:
I. avoid future losses.
II. develop contingency plans.
III. ascertain expected financing needs.
IV. explore and evaluate various options.
A) I, II, III, and IV
B) I and IV only
C) III and IV only
D) II and III only
E) II, III, and IV only
Use the following to answer question 17:
Current Assets $100 Accts. Pay. $50 Sales $1,000
Net Fixed A. $200 Long term debt $100 Costs $800
Equity $150 Taxable income $200
Total Assets $300 Total L&E $300 Taxes $68
Net Income $132
17. Assume costs, assets, and accounts payable all increase at the same rate as sales. Also
assume 80% of net income is paid out in dividends. If sales grow at 25%, compute
external financing needed.
18. A new security will pay an initial cash flow of $100 in 1 year. Thereafter it will pay
cash flows every month for the rest of time. The cash flows will grow at 3% per year
compounded monthly forever. If you require a return of 6% per year compounded
monthly, how much would you be willing to pay for this security?
Page 5 CFIN300 Midterm Exam Fall 2007
19. Which one of the following actions is the best example of an agency problem?
A) Basing management bonuses on the attainment of specific financial goals
B) Requiring stockholders approval of all management compensation decisions
C) Paying management bonuses based on the current market value of the firm's stock
D) Paying management bonuses based on the number of store locations opened during
E) Accepting a project that enhances both management salaries and the market value
of the firm's stock
20. The bonds of Frank's Welding, Inc. pay an 8% annual coupon, have a 7.98% (per year
compounded annually) yield to maturity and have a face value of $1,000. The current
rate of inflation is 2.5% per year compounded annually. What is the real rate of return
on these bonds?
A) 5.42 percent
B) 5.48 percent
C) 5.35 percent
D) 5.37 percent
E) 5.32 percent
21. What is the future value of the following cash flows at the end of year 3 if the interest
rate is 6% per year compounded annually? The cash flows occur at the end of each year.
Year 1 Year 2 Year 3
$5,180 $9,600 $2,250
Page 6 CFIN300 Midterm Exam Fall 2007
22. The I.C. James Co. invested $10,000 six years ago at 5% per year simple interest. The
I.M. Smart Co. invested $10,000 six years ago at 5% per year compounded annually.
Which one of the following statements is true concerning these two investments?
I. The I.C. James Co. has an account value of $13,400.96 today.
II. The I.C. James Co. will have an account value of $13,400.96 six years from now.
III. The I.M Smart Co. will earn $525 interest in the second year.
IV. Both the I.C. James Co. and the I.M. Smart Co. will earn $500 interest in the first year.
A) II, III and IV only
B) II and IV only
C) I and III only
D) III and IV only
E) I, III and IV only
23. The bonds of Microhard, Inc. carry a 10% annual coupon, have a $1,000 face value, and
mature in four years. Bonds of equivalent risk yield 15% (per year compounded
annually). Microhard is having cash flow problems and has asked its bondholders to
accept the following deal: The firm would like to make the next three coupon payments
at half the scheduled amount, and make the final coupon payment be $251. If this plan is
implemented, the market price of the bond will (rise/fall) to ___________. (Continue to
assume a 15% required return.)
24. Your older sister deposited $5,000 today at 8% per year compounded annually for five
years. You would like to have just as much money at the end of the next five years as
your sister. However, you can only earn 6% per year compounded annually. How much
more money must you deposit today than your sister if you are to have the same amount
at the end of five years?
Page 7 CFIN300 Midterm Exam Fall 2007
25. Net income differs from operating cash flow due to the handling of: