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Finance

FIN 300

Brad Mac Master

Winter

Description

1. At 10:59 A.M., the price of Nexus Corp. stock is $25 on the stock exchange. At 11:00, Nexus
management unexpectedly announces that the firm has just struck oil in Northern Timbuktu (a good
thing). There are no other relevant announcements during the day. At 11:01, Nexus stock is selling
for $28.10. At 12:01, the stock is selling for $28.00 on the stock exchange. At 4:00 at the close of
trading, Nexus stock is still selling for $28.05. Which of the following statements is most consistent
with the above information?
a) The market is weak form efficient
b) The market is not weak form efficient
c) The market is semi-strong form efficient
d) The market is not semi- strong form efficient
e) The market is strong form efficient
2. You have just gotten a mortgage for $150,000. The interest rate on the mortgage is 6% per year,
compounded semi-annually. If the amortization period is 25 years, and you are going to make weekly
payments what will be the size of each payment?
a) $221.05
b) $590.44
c) $219.27
d) $219.02
e) $302.46
3. In a truly competitive environment in which everyone has the same capabilities, where there are no
barriers to entry, where there are no patent or copyright laws, and where everyone has equal access to
funding, investments…
a) Will tend to have a net present value of zero
b) Will tend to have a potential profit of zero
c) Will tend to have a positive net present value
d) Will tend to have a negative net present value
e) None of the Above
4. You have been asked to calculate the required rate of return on ABC’s common stock. The stock just
paid a dividend of $2. The dividend is expected to increase by 6% per year in perpetuity. The stock’s
current price is $10 per share.
a) 27.2%
b) 26.0%
c) 16.6%
d) 16.0%
e) none of the above
5. Given no change in required returns, the value of a share of stock whose dividend is constant will:
a) increase over time at a rate of r percent
b) decrease over time at a rate of r percent
c) increase over time at a rate equal to the dividend growth rate
d) decrease over time at a rate equal to the dividend growth rate
e) remain unchanged
6. A bond is issued on January 1 , 1994. It is a 20-year 5% annual coupon bond with a $1000 face
value. If the price of the bond at issue is greater than $1000,
a) The yield to maturity on the bond will be less than 5%
b) The yield to maturity on the bond will be greater than 5%
c) The yield to maturity on the bond will be 5%
d) We cannot determine from the information provided if the yield to maturity on the bond will be
greater than, less than, or equal to 5%
e) None of the Above
7. Sunk costs
a) Must be incorporated into the capital budgeting calculation, just like any other cash flow b) Should not be factored into the capital budgeting calculation
c) Should or should not be factored into the capital budgeting calculation, based on the type of sunk
cost involved
d) Are costs that occur after the start of a capital budgeting project
e) None of the Above
8. Risk adverse investors prefer risk for a given level of expected return and
expected return for a given level of risk.
a) More, more
b) More, less
c) Less, more
d) Less, less
e) None of the above.
9. You have been asked to determine the cash flow from the assets for ABC Inc. ABC had net income of
$100. Its interest expense was $20. The company’s tax rate was 40%. ABC’s capital spending and
depreciation was $10. The company’s net working capital for the year did not change.
a) $ 60.00
b) $166.67
c) $120.00
d) $170.00
e) none of the above
10. Assume the anticipated growth rate in dividends is constant for Fly-By-Nite Airlines. The expected
value of the firm's stock at the end of four years (P4) is
I. D5/(r – g)
II. P0 * (1 + g)4
III. D0 * (1 + g)/(r – g)
a) I only
b) II only
c) I and II only
d) I and III only
e) I, II, and III
11. The risk free rate in the economy is 7%. Stock A has an expected return of 13.5% and a beta of 1.2.
Stock B has an expected return of 10.5% and a beta of 0.8. Suppose that we know that stock A is
fairly priced and the betas of stocks A and B are accurate. Which of the following regarding stock B is
correct?
a) Stock B is also fairly priced
b) The expected return on stock B is too high
c) The expected return on stock A is too high
d) The price of stock B is too high
e) The price of stock A is too high
12. You wish to have $200,000 in 20 year’s time. The bank has offered to set up a special account that
pays 16% per year, compounded quarterly. How much money do you need to put into the account
today to have $200,000 in 20 years?
a) $10,817.58
b) $ 8,676.87
c) $ 9,206.19
d) $10,277.09
e) none of the above
Use the following information to answer the following two questions
You and your spouse have found your dream home in Brandon, Manitoba. The selling price is $120,000;
you will put $20,000 down and obtain a 30-year fixed-rate mortgage at 8.25% compounded semi-annually
for the rest.
2 13. You decide to make monthly payments starting in one month. What will each payment be?
a) $725.01
b) $741.56
c) $757.76
d) $825.45
e) $901.52
14. How much interest will you pay (in dollars) over the life of the loan? (Assume you make each of the
required 360 payments on time.)
a) $145,583
b) $166,963
c) $170,457
d) $190,457
e) $270,457
15. The advantage of the payback method is its:
a) Time value of money considerations
b) Application of readily available accounting data.
c) Cut-off point.
d) Long-term perspective
e) Simplicity
16. You are considering the following projects but have limited funds to invest and can’t take them all.
Using the profitability index, rank the projects in the order in which you would accept them. That is,
rank them from best to worst.
Project Initial Investment NPV
A $100,000 $30,000
B 80,000 25,000
C 40,000 17,000
a) A, B, C
b) B, C, A
c) C, A, B
d) C, B, A
e) A, C, B
17. The equipment below is required for your business. Assume each machine will be replaced as it wears
out. The required return is 15%. Ignore taxes.
Machine A Machine B
Initial Cost $200,000 $300,000
Operating Cost / year 15,000 17,500
Life 8 years 10 years
What is the EAC of machine A?
a) -$301,664
b) -$201,676
c) -$48,163
d) -$59,570
e) -$22,437
18. Your parents are saving for their retirement. They have set up a special retirement account. They have
deposited $100 into the account every 4 months for the past 12 years. The effective annual rate of
return on the account is 20%. How much money is in the account at the end of the 12 years? The
payments were made at the end of each 4 month period?
a) $ 9,583.63
3 b) $ 8,919.84
c) $10,184.13
d) $12,633.71
e) $15,132.88
19. Twenty years ago your parents set aside $10,000 in a bank account. The account now has $100,000 in
it. What was the effective annual rate of return that the account paid?
a) 10.0%
b) 12.2%
c) 12.6%
d) 13.1%
e) –10.9%
20. Which of the following statements is consistent with the concept of market efficiency?
a) The current price reflects all available relevant information
b) The price reacts very quickly to new information
c) In an efficient market, an investor should expect to make a reasonable risk-adjusted return
d) None of the Above
e) a), b) and c) are true.
21. Which of the following statements are true?
I If the NPV is positive then the IRR is greater than the discount rate
II If the NPV is negative then the IRR is greater than the discount rate
III If the NPV is zero then the IRR is zero
IV If the NPV is zero then the IRR is equal to the discount rate
a) I only
b) II only
c) IVonly
d) I and IV
e) None of the above
22. DEF’s common stock just paid a dividend of $3 per share. You expect the dividend to increase by 5%
per year in perpetuity. If you require a 15% rate of return what is the price of the stock today?
a) $20.00
b) $21.00
c) $31.50
d) $30.00
e) none of the above
23. Suppose investors had to invest 100% of their wealth in one of the following four stocks which stock
would they choose?
Stock Expected Return Standard Deviation
A 10% 15%
B 5% 12%
C 15% 30%
D 25% 10%
a) Stock A
b) Stock B
c) Stock C
d) Stock D
e) Can’t say
24. You borrowed $30,000 to go to school. The bank agreed that you could repay the loan by making 180
equal monthly payments, starting 12 months from now. If the bank is charging 8% per year
compounded semi-annually, what are your monthly payments?
4 a) $284.45
b) $305.65
c) $307.65
d) $310.09
e) $334.90
25. You owe $10,000 on your credit card. The card charges interest of 2% per month. If you make
payments of $250 per month, at the beginning of each month, how many months will it take you to
pay off your credit card?
a) 81.3 months
b) 77.5 months
c) 71.7 months
d) 69.2 months
e) 89.4 months
26. Finance Inc had cash flow from the assets last year of $5,000. It paid $1,000 in interest to its
bondholders. It did not make any payments on the principal. It did not issue any new debt. The
company paid $500 in dividends to its common shareholders. What was the Cash Flow to the
Shareholders last year?
a) $3,500
b) $4,000

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