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AK/ADMS 3530.03 Finance Final Exam Summer 2006 Solutions Type A Exam 1. (Q.2 in B) You are expected to pay \$1,883.33 per month on a one-year loan with a principal of \$20,000. What is the EAR of this loan? A) 13.00% B) 13.80% C) 23.19% D) 25.82% Answer D %. 82 . 25 2582 . 0 1 ) 019322 . 0 1 ( 1 ) r 1 ( EAR %. 9322 . 1 r for Solve ]. ) r 1 ( r 1 r 1 [ 33 . 883 , 1 \$ 000 , 20 \$ ] ) r 1 ( r 1 r 1 [ payment PV 12 12 month month 12 month month month n month month month = = - + = - + = = + - × = + - × = 2. (Q. 1 in B) You are planning to buy a \$240,000 home with a \$105,000 mortgage at 6% APR for 25 years. What is your monthly payment? A) \$470.49 B) \$671.83 C) \$940.97 D) \$1,343.66 Answer B . 83 . 671 \$ 29 . 156 000 , 105 \$ Payment , 29 . 156 Payment ] ) 004939 . 1 ( 004939 . 0 1 004939 . 0 1 [ Payment 000 , 105 \$ %. 4939 . 0 1 ) 0609 . 0 1 ( 1 ) EAR 1 ( r %. 09 . 6 1 ) 2 / 06 . 0 1 ( 1 ) 2 / APR 1 ( EAR 12 25 12 / 1 12 / 1 month 2 2 = = × = - × = = - + = - + = = - + = - + = × 1

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3. (Q. 5 in B) ABC Corp. has a 10% coupon (semiannual payments) bond with 7 years to maturity selling at 104% of par (par value =\$1,000). What is the bond’s effective annual yield (i.e. EAR)? A) 9.21% B) 9.42% C) 9.62% D) 10.00% Answer B Use your financial calculator, the YTM on the bond is found to be 9.212%. (If you use the approximate formula, the YTM is found to be 9.243%. Here we use the YTM obtained using the financial calculator.) The YTM is an APR assuming semi-annual compounding, so the effective annual yield (i.e. EAR) = (1+0.09212/2) 2 -1 = 9.4242%. 4. (Q. 6 in B) Based on the following information about yesterday’s trading activity which appears in today’s Globe and Mail for IC Inc., what was the closing price the day- before-yesterday on IC’s \$1,000 face value 7.875% bond? Bond prices are quoted as percentage of face value. Bond Current Yield Volume Close Net Change IC Inc. 7.875 9.4 10 ? -0.5 A) 83.25 B) 83.75 C) 84.25 D) 94.00 Answer C . 75 . 83 par of % 77 . 83 77 . 837 \$ 094 . 0 75 . 78 \$ P . 094 . 0 P 75 . 78 \$ P 000 , 1 \$ 07875 . 0 yield Current = = = = = × = Since the price closed down 0.5 yesterday, the price the-day-before- yesterday was 83.75 + 0.5 = 84.25. 5. (Q. 3 in B) Big Sell Computers has planned dividend payments of \$6.50, \$5.00, \$3.00 and \$2.00 over the next four years. If the required rate of return on the stock is 16%, what is the current share price if dividends are expected to grow at a constant rate of 5% infinitely after the fourth year? A) \$6.82 B) \$14.22 C) \$19.09 2
D) \$22.89 Answer D . 89 . 22 \$ 16 . 1 09 . 19 \$ 16 . 1 2 \$ 16 . 1 3 \$ 16 . 1 5 \$ 16 . 1 5 . 6 \$ ) r 1 ( P ) r 1 ( DIV ) r 1 ( DIV ) r 1 ( DIV r 1 DIV P . 09 . 19 \$ 05 . 0 16 . 0 ) 05 . 0 1 ( 2 \$ g r DIV P 4 4 3 2 4 4 4 4 3 3 2 2 1 0 5 4 = + + + + = + + + + + + + + + = = - + = - = 6. (Q. 4 in B) Given that XYZ Inc. is projecting a dividend growth of 25% annually over the next 3 years, 18% in the fourth year and 8% annually thereafter, what is the projected dividend for next year based upon an expected 15% return on the stock and a current

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