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Term Test 1 Fall 2005

# Term Test 1 Fall 2005 - UNIVERSITY OF TORONTO ACT349H1F...

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ACT349H1F 2005 Test 1 Privacy ID 01 v08 UNIVERSITY OF TORONTO ACT349H1F TERM TEST 1 6:00 pm October 19, 2005 Instructor: Keith Sharp PhD FSA NOTES: 1. Calculators allowed 2. Scrap paper is to be handed in with this book. It’s OK to write on book. 3. This is a closed book exam. 4. Multiple choice: only your letter answer on the last page will be graded. 5. 10 points correct, two if blank, zero points if wrong 6. So expectation if you guess is the same as leaving a blank. 7. Timing: 55 minutes 8. Make sure you’ve indicated your letter answers on back page table before time’s up 9. Please stay in your seats and don’t talk till all papers have been collected. 10. Photo ID on desk during exam please. 11. Good luck

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UNIVERSITY OF TORONTO ACT349H1F 2005 TEST 1 ACT349H1F 2005 Test 1 Privacy ID 01 v08 1. (BMA 8 th . Ed. Ch. 1 Quiz, Q 6) Which of the following statements always apply to corporations? I Unlimited liability II Limited life III Ownership can be transferred without affecting operations. IV Managers can be fired with no effect on ownership V Shares must be widely traded. (A) II and III only (B) III and IV only (C) IV and V only (D) I, II and IV only (E) The correct answer is not given by (A), (B), (C) or (D) (B): Solution III and IV are true 2. (BMA 8 th . Ed. Ch. 4 Practice Questions, Q 8b) Spadina Express currently ploughs back 40 percent of its earnings and earns a return on investment of 15 percent on this investment. The dividend yield on the stock is 4 percent. Suppose that management suddenly announces that future investment opportunities have dried up. Now Spadina intends to pay out all its earnings. To the nearest percentage, calculate the fall in the stock price.
ACT349H1F 2005 Test 1 Privacy ID 01 v08 (A): Solution g(Before) = 0.40 × 0.15 = 0.06 0.04 = Div1/P 0 (Before) = r-g Hence r = 0.10 P 0 (before) = Div 1 /(r-g) = . Earn 1 × 0.60 / (r – 0.40 × 0.15) = Earn 1 × 0.60 / (0.10 – 0.40 × 0.15) = 15 Earn 1 After the announcement, the market will assume g=0 but will continue to use r=0.10.

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