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Final Exam Practice #2

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University of Winnipeg
Hai Ta

9220 Corporation NnanccN Bhattacharyya L Elkow G Jacoby L LongobartliMidterm Examination IIMarch 15ZOOl 700 pm900 pmTotal 100 marks Note It is your responsibility to verify that this examination has 15 pages1 Multiple Choice Section1Slch nf the following questions or statements is followed by several suggested answers orcompletions Select the best alternative and place the corresponding letter on theIcconlplnying computerized answer sheet Value 12 x 2530 marks The lollowing information applies to questionsIand 2I IASpot rates of interest for zerocoupon Government of Canada bonds are observed for differentterms to maturity as follows2 A IWJIIIII bond has a face value of 1000 and matures 4 years from today If youbelieve in the pure expectations theory of the term structure what do you expect the price of3Your broker has recommended that you buy the stock of a new company She told you thathc ompany will not be paying any dividend for the next five years and in the fifth year theconpany is cspected to pay its first semiannual dividend of 320 per share The company isIXII cxpccted to maintain this semiannual dividend indefinitely If the broker recomrncndsthat you use an effective annual required rate of return of 25 44 then what is the price you0 i 2 5shoild pay for the stockiI 4 0s1 SiX4c X59QSWPs fcg TJlllC crlrhc above1The llR of in itncstment in a fairly priced stock must be1 calculated based on all future earnings per shareI squd to Lcrogclci 1h11 tIe rcqulred rate of returnclual 10 the required rate of returngrelter than or equal to the required rate of return9220 Corporation FinanceN Bhattacharyyaj L Elkow G Jacoby L LongobardiLMidterm Esamination IIMarch 15200l 700 pm900 pmTotal 100 marks5The ekvv required annA rate of return on the ordinary shares of Northwest Corporationis II0Ihe shares annul dividends are expected to grow at a constant rate of 4 a yearlorcvcr Which of the following is a correct statementx dig4 3obi I mydIllC SllitWScspected dividend yield for year one is 4aFL2 p3bThe shares cspected dividend yield for year one is 10dcThe shares expected dividend yield for year one is 14 01oyooy ad The shares expected capital gains yield for year one is 10p r3c Nolm of the abovec3984 I46A prcrjcct will pay a constant nominal cash flows of X per year at the end of each year forthe nest ten years The expected inflation rate per year is 6 The expected growth rate in theprojects real Cxh flows i0e zvcLoS660 5661401 aI 063b 61000moCI s300111111 toI 1111 Llxc7Consider project Z with IRR20 and with the following cash flows CO C I60000C2 ZI6000 C3172XOOC4311O4OC5248832lhc payback pcriocl lir the prcjccta is bctwcen i and 2 yearsb ic between 1 and 3 yearsJ is between 1 and 4 yearsd is between 4 and 5 yeusecannot be calculated with the given informationin independenl project that has initial cash inflows followed by a series of cash 0uIIloLvshould always he acccptecl when the prqjects IRR is lower than the discount rate1 I Ill always reaches the same decision as NPV when tile initial investment outlays 01 111nJcpencictt project arc Ibllowed by a series of cash inflows I indcpcndent projcI with two IRRs should always be accepted when the projecttllsxunt rate is between the two IRRsdwhen an lrrdependent project always has a positive NW IRR cannot be calculatedc IRR Payback Icriod and Profitability Index may mislead when used for mutuallyrciusv projects wnile NW will always lead to selecting the correct project9Whrch of rhc tllowing s NOT a correct statement of a capital budgeting decision rule for ainvcstment prjectII1 project has a pro itability index greater than one the prqject should be acceptedII It a tirnls target average accounting return is lower than the average accounting returnmputecl ibr a given prqject then the project should be acceptedc UK projcct should always be accepted when the firms target discounted paybackQperiod IS higher thaIi the payback period computed for a given project1Iilc prCJect should always he accepted when the firms target payback period is highclthan the discounted payback period computed for a given prqjecteltthc NPG of a project is positive it should be acceptedyAC brF OcCtoL rPQ loks 0aby trlhQLAbW ppTkbs A ij 01ccr 3ikcc 11 hybS APilgC 2 Of 15
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