MGF301 Test 1 (Spring 2015) - Version I (answers) (1).doc

# MGF301 Test 1 (Spring 2015) - Version I (answers) (1).doc -...

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Name_________________________________ Student Number___________________________________ TEST 1 MGF 301 Corporation Finance Spring 2015 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. Which of the following statements about the constant growth stock pricing model is false ? (a) there is no way to estimate the stock price of a company using this model if the company does not pay a dividend (b) a higher discount rate will result in a lower estimated stock price (c) a higher growth rate will result in a higher estimated stock price (d) none of the above 2. You have won an accident settlement in court and can choose between the following choices of payment plans: A: \$10,000 immediately and \$10,000 at the end of each year for 19 years B: \$75,000 immediately C: \$20,000 immediately and \$20,000 at the end of each year for 3 years Mark the following as true (T) or false (F) for r > 0: (2 points each) _T_ a. If the discount rate is very low (close to 0), plan A will have the highest present value _ T _ b. The present value of plan A will be larger than 10,000 x (20 year annuity factor) _ F _ c. Plan B will never have the highest present value 3. (a) A company has introduced a new type of bond that pays interest that increases by 1% each year. It is a 5 year bond with a \$1,000 face value that pays 4% interest the first year, 5% the second year, 6% interest the third year, 7% the fourth year, and 8% the fifth year. Set up a formula to calculate the price if the YTM is 6%: (Note: you do not have to solve the formula) (6 points) PRICE=40/1.06+50/1.06^2+60/1.06^3+70/1.06^4+80/1.06^5 (b) When, if ever, would this bond sell for a premium? Explain. (6 points)

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Name_______________________________ TEST 1 Spr 2015 Student Number__________________________
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• Spring '08
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