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
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Name_______________________________
TEST 1 Spr 2010
Student Number__________________________
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '08
 Mohr

Click to edit the document details