FIN_305W_-_Practice_Exams - Practice Exams: Midterm 1...

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Lukas Roth FIN 305W Practice Exams: Midterm 1 Problems have different weights. Points are indicated at the beginning of each question and refer to the difficulty of the question. 5 points = easy, 6 points = medium, and 7 points = challenging. Practice Exam 1 1. 5p Agency costs are incurred by a corporation because: A) Managers may not attempt to maximize the value of the firm to shareholders B) Shareholders incur monitoring cost C) Separation of ownership and management D) All of the above 2. 5p The main disadvantage(s) of organizing a business as a corporation is: A) Limited liability B) Separation of ownership and management C) Double taxation D) All of the above 3. 5p What’s the present value of $1,000 to be received in 50 years assuming monthly compounding at an annual percentage rate (APR) of 10%? A) $6.88 B) $8.52 C) $556.23 D) $660.38 4. 5p What’s the NPV of a project that needs an initial investment of $1.5 million today and earns $0.5 million in 1 year and $3 million in 5 years? The relevant discount rate is 10%. A) $0.67 million B) $0.82 million C) $1.68 million D) $2 million 5. 5p By investing $1,000 in a given project, you can obtain $5,500 in one year. At a 10% opportunity rate of return, the project has an NPV of $4,000. The most that market participants would be willing to pay for this project is: A) $1,000 B) $4,000 C) $4,500 D) $5,500
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2 6. 5p What’s the payback period of a project that requires an initial investment of $5,000 and pays $900 to perpetuity starting in two years from now? A) 6 B) 7 C) 8 D) 9 7. 6p Mountain Co. has just paid a dividend of $5 a share. Investors expect a constant long-term dividend growth rate of 3% per year and require a rate of return of 10% to invest in Mountain’s stock. What’s the current stock price implied by a dividend discount model? A) $50.0 B) $71.4 C) $73.6 D) $75.0 8. 6p A three-year bond has an 8% coupon rate and a face value of $1,000. If the yield to maturity on the bond is 12%, calculate the price of the bond assuming that the bond makes annual coupon payments and that the next payment is expected in one year. A) $872.7 B) $903.9 C) $1,000.0 D) $1,030.2 9. 6p What’s the present value of the following cash flow assuming a discount rate of 15%? A) $81.3 B) $83.7 C) $85.6 D) $92.8 10. 6p Consider a project that requires an initial investment of $5,000 and pays every year $250 forever (first payment in one year). What’s the project’s IRR (internal rate of return)? A) 3.2% B) 4.6% C) 5.0% D) 5.5% (infinity) Cash flow Year 0 1 2 3 4 5 $0 $5 $5 $5 $5.5 $6.05 Constant growth rate
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3 11. 6p Consider a coupon bond that trades at par, has a coupon rate of 10%, pays annual coupons, has a time-to-maturity of 10 years, and is expected to pay the next coupon in one year. What’s the relative price change if interest rates jump to 12%? A) –8.8% B) –9.2% C) –10% D) –11.3% 12. 6p Mike would like to put aside money for his newborn daughter. How much money does Mike have to save at the end of each year to be able to make her a gift of $1 million on the day of her twentieth birthday? The relevant interest rate is 10% per year. Assume Mike makes the first payment in one year and the last payment in 20 years.
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This note was uploaded on 04/06/2010 for the course FIN 305W at Pennsylvania State University, University Park.

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FIN_305W_-_Practice_Exams - Practice Exams: Midterm 1...

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