Fin 301 Midterm 091015 A Solution

Fin 301 Midterm 091015 A Solution - Part 1 Multiple Choice:...

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Part 1 Multiple Choice: Please write the letter of the correct answer in the space provided AND circle your choice in the list of possible answers. Students choosing more than one correct answer will get no credit for that question! (2 points each) 1. You notice that interest rates on consumer loans are pretty low (less than 10% APR, compounded monthly) so you decide to borrow some money to purchase a large flat screen TV right away. You have a choice between two loan offers, one from Bank A and another from Bank B. Interest on the loan from Bank A is compounded semiannually while interest on the loan from Bank B is compounded monthly. Your plan is to repay the loan in a single payment exactly two years from today. If both loans have the same effective annual rate of interest, you should ______E ______________ . a. choose Bank A because its loan has a higher APR b. choose Bank A because its loan is compounded less often c. choose Bank B because its loan has a higher APR d. choose Bank B because its loan is compounded more often e. choose either since you would be indifferent between the two f. choose neither and put it on your credit card with 28% APR (compounded monthly) 2. A ______E ______________ can lose, at most, what s/he has already invested in a firm. I. shareholder in a corporation II. general partner III. limited partner IV. sole proprietor _____________________ . a. I only b. I and II only c. I, II, and IV only d. II, III, and IV only e. I and III only 3. Perpetual Inc. has just paid a $4 dividend per share (D 0 = $4). Its stock is priced at $32 and investors require an 8% return on Perpetual stock. What is the expected annual rate of dividend growth for this firm? ___________B ________ a. –4.50% b. –4.00% c. 4.00% d. 7.11% e. 8.00% f. Insufficient information (g = b × ROE)   0 00 0 1 0.08 $32 $4 0.04 $32 $4 Dg r P D Pg r g P D     4. You want to charge your mortgage customers 12% interest (EAR) per year. Canadian regulations require that you advertise the semi-annually compounded APR to your customers. What rate will you need to use in your advertising in order to comply with regulations? ____D _______ a. 1.00% b. 6.00% c. 11.39% d. 11.66% e. 12.00% f. 12.36% g. 12.68% ESR = (1+EAR) 1/2 – 1 = (1.12) 1/2 – 1 = 5.83% APR = m × EPR = 2 × ESR = 2 × 5.83% = 11.66%
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2 5. The call provision ____________F _______________ . a. is that part of the loan agreement that requires a company to take certain actions during the term of the loan b. is that part of the loan agreement that limits certain actions a company might otherwise wish to take during the term of the loan c. is an account managed by the bond trustee for the purpose of repaying the bonds. d. is a description of the property used as security (or collateral) e. indicates preference in position over other lenders f. allows the company to repurchase all or part of a bond issue at stated prices over a specific period 6. Suppose you visit the TD Canada Trust website and see that the posted (quoted) rate for a 10- year term closed mortgage is 5.45%. The 5.45% rate is an example of ___C ___________ .
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Fin 301 Midterm 091015 A Solution - Part 1 Multiple Choice:...

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