MGF301 Test 1 (fall 2013) - Version I (answers).doc

# MGF301 Test 1 (fall 2013) - Version I (answers).doc - Name...

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Name_________________________________ Student Number___________________________________ TEST 1 MGF 301 Corporation Finance Fall 2013 Please sign name in box Please tear off the answer sheet and answer all of the following questions on the answer sheet. (Note: Total Points = 100; Multiple Choice = 4 points each) 1 . Bond A has a 5% coupon and Bond B has a 8% coupon. If both bonds are 5 year bonds, both have the same yield to maturity and you buy both bonds today and hold them until maturity, on which bond will you earn the higher return? (a) Bond A (b) Bond B (c) The return will be the same (d) It depends on what happens in the market over the next few years 2. Which of the following gives the formula for calculating the EAR with daily compounding of an 8% APR? 3. ABC announced this morning that they have developed a drug that will cure a major medical condition. Within minutes of the announcement, the stock price of ABC doubled. Mark each of the following as (T)rue or (F)alse: _T__ (a) The book value of ABC stayed the same when the stock price went up _T__ (b) The market value of ABC's equity doubled when the stock price doubled 4. The lottery is offering two payout choices: Choice 1 pays \$10,000 each year starting today (time 0) and Choice 2 pays \$5,000 each year starting today (time 0). Payments increase each year by 3% in Choice 1 and by 5% in Choice 2. If the discount rate is 6%, calculate the PV of each choice. Show your work and solve for an exact answer. (8 points) PV=10000+10000*1.03/(0.06-0.03) PV=5000+5000*1.05/(0.06-0.05)

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Name_________________________________ Test 1 – Fall 2013 Student Number_____________________ 5. As an analyst, you are trying to estimate a fair price for stock XYZ. You tried the constant growth dividend discount model but this did not work because the company does not pay a dividend. Which of the following is true ?
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