FIN3701_exam - FIN3701 Corporate Finance Sample Questions...

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FIN3701 Corporate Finance Sample Questions 1 QUIZ I 1. The professional investors stated in Wall Street Journal that “we won’t take on additional risk unless we expect to be compensated with additional return.” Do you agree with this statement? Explain your opinion with example. 2. You consider investing in the investment that provides the return $10,000 at the end of 4 th , 5 th , 6 th , and 7 th year and $20,000 at the end of 8 th , 9 th , and 10 th year. What is the maximum price you would like to pay for this investment if your required rate of return is 6? 3. If you want to borrow $150,000, which of the following banks should you select? Explain clearly with necessary calculation. Bank A requires quarterly repayments of $12,872.96 end of each quarter over 4 years. Bank B requires a total repayment of $276,360 at the end of 5 years. 4. You plan to buy a 15-year bond issued by Anorax Co., which has a par value of $1,000 with a 12% annual coupon rate. However, this bond has only 10 years remaining until maturity. 4.1 If you require 14% rate of return, what is the value of this bond? 4.2 Everything else held constant, how will the value of this bond change over time? Explain. 5. ProMax Co.’s common stock is currently selling for $36 per share. The firm is expected to pay $4 per share dividend next year and its earnings are expected to grow at 9% per year in the future. If investors require 19% rate of return on this stock, which of the following statements is correct? Explain in detail with necessary calculation. 5.1 The value of the stock is more than its market price, hence it is overvalued. The stock should not be purchased. 5.2 The value of the stock is more than its market price, hence it is undervalued. The stock should be purchased. 6. HiLow Company has a perpetual preferred stock issue that pays a 15% dividend. The par value of each share is $80. The stocks are currently trading for $85. The going rate of interest in the market is 12%. Which of the following statements is true for this stock? Explain in detail with necessary calculation. 6.1 The market rate is less than the stock’s expected rate of return and it should be purchased. 6.2 The market rate is less than the stock’s expected rate of return and it should not be purchased. 7. Aspen Co., has issued a callable preferred stock (i.e. preferred stock with a call option). After two years, the company decides to exercise the call option by buying the stocks back from its investors. In your opinion, what might be the possible reason(s) in doing so? Also explain why the company decides to call back the stocks. 8. You intend to buy Berrymore Inc.’s common stock at $100 per share, hold it one year and sell after that. The firm paid a $5 per share dividend last year and its dividends are expected to grow at an annual rate of 7% for indefinite number of years. If you can sell the stock at $110, what is your expected rate of return?
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FIN3701 Corporate Finance Sample Questions
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FIN3701_exam - FIN3701 Corporate Finance Sample Questions...

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