AK/ADMS 3530.03 Finance Final Exam
Winter 2008
April 10, 2008
Solutions
Type A Exam
Each question is worth 2 points.
1. (Q. 8 in B) You’re a recent Atkinson graduate and make the following
acquisitions this year.
New car of $28,320.
New wardrobe of $3,248.
You also
have a new job that pays you $42,000 after taxes this year and $46,000 after
taxes next year.
Your annual living expenses are $34,000.
You plan to get a
loan to make up for the difference between your current income and current
consumption.
The bank offers you a loan at a rate of 14% annually and you
intend to pay off this loan in one year from today.
How much will you have left to
spend next year?
A) $19,132.48
B) $23,568.00
C) $26,867.52
D) $65,568.00
Answer A
This year you need $28,320 + $3,248 + $34,000 = $65,568.
Therefore you must
borrow $65,568 – $42,000 = $23,568 this year.
You will repay next year FV = $23,568 (1+0.14) = $26,867.52.
Therefore you will have $46,000 – $26,867.52 = $19,132.48 left to spend next
year.
2. (Q. 9 in B) Joshua Corporation recently issued 10year bonds at a price of
$1,000, which is equal to the par value of each bond. These bonds pay $60 in
interest every six months.
The bond price has remained the same since they
were issued.
Due to additional financing needs, the firm wishes to issue new
bonds that would have a maturity of 10 years, a par value of $1,000, and pay $40
in interest every six months.
If both bonds have the same yield, how many new
bonds must Joshua Corp. issue to raise $2,000,000 cash?
A) 2,400
B) 2,596
C) 3,000
D) 5,000
Answer B
1
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View Full DocumentSince the old bond issue sold at its par value, and still sells at par, its yield (and
the yield on the new issue) must be 6 percent semiannually. The new bonds will
be offered at a discount:
V
new bond
= $40(PVIFA
6%,20
) + $1,000(PVIF
6%,20
)
= $40((1  1/1.06
20
)/0.06) + $1,000(1/1.06
20
)
= $40(11.4699) + $1,000(0.3118) = $770.60.
Number of bonds = $2,000,000/$770.60 = 2,595.38, or approximately 2,596.
Financial calculator solution:
Inputs: N = 20; I = 6; PMT = 40; FV = 1,000.
Output: PV = $770.60; V
B
= $770.60.
B
Number of bonds: $2,000,000/$770.60, or approximately 2,596 bonds.
3. (Q. 10 in B) Julia Corporation's stock recently paid a dividend of $2.00 per
share.
The company has a constant growth rate of 5 percent and a beta equal to
1.5.
The required rate of return on the market portfolio is 15 percent, and the
riskfree rate is 7 percent.
Julia Corp. is considering a change in policy which will
increase its beta to 1.75.
If other things being equal, what new constant growth
rate will cause the common stock price of Julia Corp. to remain unchanged?
A) 5.88%
B) 6.77%
C) 8.85%
D) 18.53%
Answer B
Calculate the initial required rate of return:
using the CAPM:
r
e
= 0.07 + 1.5(0.15  0.07) = 0.19 = 19%.
P
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 Spring '09
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 Net Present Value, NPVs, Q.

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