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Corporation Finance

Room 2M73 Professor Haifeng Chen

Mid Term Test Dec. 11 ,2009 9:00 a.m. â€“ 12:00 p.m. Total: 100 marks

I. Multiple Choice Section :

Each of the following questions is followed by several suggested answers or completions.

Select the best alternative and place the corresponding letter on the accompanying

computerized answer sheet. (Value: 20x 2 = 40 points)

1. One of the key differences between corporate finance and financial accounting courses

is:

a) the focus on cashflows instead of earnings.

b) the focus on marginal tax rates versus average tax rates.

c) the role of total income flow versus incremental flows.

d) the focus on corporate avarice versus stewardship.

e) none of the above.

2. Money that the firm has already spent or is committed to spend regardless of whether a

project is taken is called a(n):

a) sunk cost.

b) opportunity cost.

c) erosion cost.

d) fixed cost.

e) none of the above.

3. The Harlow Corporation has promised to pay its debt holders an amount of $1,700 over

the next year. Calculate Harlow's debt and equity level if its assets total $1100 at the

end of the year, Value of Debt =( ) Value of Equity = ( ). If

asset levels is of $2,200, Value of Debt =( ) Value of Equity =

( ). This show that the value of debt and value of the equity of a

corporation is contingent on ( ). It also show that a Corporate shareholder has (

).

a) 1100; 1100; 2200;2200; equity; unlimited liability

b) 1100; 1100; 2200;2200; equity; limited liability

c) 1100; 1100; 2200;2200; asset value; limited liability

d) 1100; 1100; 2200;2200; asset value; unlimited liability

e) 1100; 0; 1700;500; asset value; limited liability

4. Given Maryâ€™s income this year and next year and the availability of financial markets,

Mary has decided that if she saves everything this year, she can spend $160,000 next

year. If she borrows against all of next yearâ€™s income and spends everything now, she

can spend at most $125,000 now. The implied market rate of interest is

a) 28%

b) 21.875%

c) 18.8%

d) 16.25%

e) 12.625

5. The term structure can be described as the:

a) relationship of spot rates of interest and bond prices.

b) relationship of coupon rates and money rates.

c) relationship of spot rates of interest and term to maturity of the loan.

d) relationship of coupon rates and maturity.

e) None of the above.

6. You bought one share of Pouce Coupe Resorts (PCR) one year ago for $9. Today, you

received a dividend payment of $1 and sold the share for $9.50. What was your realized

return on PCR over the last year?

a) 11.11%

b) 16.67%

c) 10%

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14.2319 ï£§ Mid-term Examination I 9:00 a.m. â€“ 12:00 p.m. Page 2 of 5

d) 5%

e) 15%

7. Weaknesses of the discounted payback system of evaluating investments include

a) the fact that it ignores the timing of the associated cash flows.

b) the fact that it ignores cash flows after the payback period.

c) the fact that it uses an arbitrary cut-off period.

d) the fact that it uses accounting income instead of cash flows.

e) both b) and c) above.

8. The internal rate of return (IRR):

I. rule states that a typical investment project with an IRR that is less than the required

rate should be accepted.

II. is the rate generated solely by the cash flows of an investment.

III. is the rate that causes the net present value of a project to exactly equal zero.

IV. can effectively be used to analyze all investment scenarios.

a) I and IV only

b) II and III only

c) I, II, and III only

d) II, III, and IV only

e) I, II, III, and IV

9. The nominal interest rate is 18%. The inflation rate is 9%. What is the real rate?

a) 27.00%.

b) 9.00%.

c) 7.63%.

d) 28.62%.

e) None of the above.

10. The common stock of Prairie Grain Storage Inc. (PGS) just paid its annual dividend this

morning. It is expected to pay a $11 dividend a year from now, and following dividends

are expected to grow at a rate of 2% per annum into the foreseeable future. Given the risk

of PGS shares, the required expected return is 13% per year. The price of one share of

PGS stock is

a) 109.09

b) 100

c) 111.2727

d) 92.3076

e) None of the above

11. Fleetwood Mac Inc.(FM) just paid its annual dividend this morning. You expect future

annual dividends to grow at a constant rate of 4% per year. Given the risk of FMâ€™s stock,

the required expected return is 13% per annum, and its current price is $19.60. The

dividend that was paid this morning is

a) 2.54

b) 1.96

c) 1.6962

d) 1.764

e) None of the above

12. Bond A has a coupon rate of 10% and 10 years till maturity. Bond B has a coupon rate of

14% and 14 years till maturity. Bond C has a coupon rate of 18% and 18 years till

maturity. If the yield to maturity of each of the bonds is 14%, then the bonds will sell

respectively at

a) a discount; a discount; a discount.

b) a premium; a premium; a premium.

c) par; par; par.

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