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 10-year 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
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