MGF301 Test 1 (Spring 2010) - Version I(answers).doc

Name Student Number TEST 1 MGF 301 Corporation Finance...

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Name_________________________________ Student Number___________________________________ TEST 1 MGF 301 Corporation Finance Spring 2010 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) a higher discount rate will result in a lower estimated stock price (b) a higher growth rate will result in a higher estimated stock price (c) there is no way to estimate the stock price of a company using this model if the company does not pay a dividend (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: $60,000 immediately C: $20,000 immediately and $20,000 at the end of each year for 3 years Mark each of the following as true (T) or false (F): (2 points each) __f_ a. Regardless of the discount rate, plan B will never have the highest present value __t_ b. If the discount rate is very low, plan A will have the highest present value __t_ c. If the discount rate = r, the present value of plan A will be larger than 10,000 x (20 year annuity factor) 3. 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. (a) Set up an equation to find the price of this bond if the yield to maturity is 6%. Show as much detail as possible (you do not need to solve for an exact answer) (6 points) PRICE=40/1.06+50/1.06^2+60/1.06^3+70/1.06^4+1080/1.06^5 (b) When, if ever, would this bond sell for a premium? Explain. (6 points) when interest rate > YTM, this bond will sell for a premium. Forth year and fifth year
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Name_______________________________ TEST 1 Spr 2010 Student Number__________________________
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