ActSc 371 - Fall 2011_ Sample Midterm 1_solutions

ActSc 371 - Fall 2011_ Sample Midterm 1_solutions - ActSc...

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Corporate Finance 1 October 7, 2011 Instructor: Dr. Lysa Porth Part One: Circle the correct answer for the following multiple choice questions. (Total of 8 marks) . 1. Which of the following is the best investment (assume a 52 week year)? (2 marks) A) 1.38% per quarter compounded weekly; B) An investment of $1,264.98 that grows to $2,856.64 in 14.75 years; C) 47.98% per 8 years compounded continuously; D) 0.13% per week compounded hourly; Solution: D Convert all to a common effective period and compare (in this case per year, but could be any timeframe). a) 056721 . 0 1 13 0138 . 0 1 52 = - + = r b) 0567794 . 0 1 98 . 1264 $ 64 . 856 , 2 $ 0677961 . 0 = - = r c) 068100 . 0 1 615751 . 1 615751 . 0 1 125 . 0 ) 1 ( 4798 . 0 ) 8 ( = - = = - = year effective year effective r e r d) 0.069937 1 168 0013 . 0 1 1 24 7 0013 . 0 1 8736 24 365 = - + = - × + = × r 2. A Government $1000 face-value bond with 12 years to maturity and an 8.2% coupon rate paid semi- annually, recently sold for $1015.24. The YTM for this bond is: (2 marks) A) 4.4% per year compounded semi annually b) 8.2% per year compounded semi annually c) 8.75% per year compounded semi annually d) 9.25% per year compounded semi annually e) None of the above. Solution: E 3. Financial planning models frequently assume that many variables are proportional to: (2 marks) A) Economic growth B) Industry growth C) Interest rates D) Company sales E) None of the above Solution: D 08 . 0 , 04 . 0 000 , 1 $ , 24 2 12 , 24 . 1015 , 41 $ 000 , 1 $ 2 082 . 0 = = = = × = -
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ActSc 371 - Fall 2011_ Sample Midterm 1_solutions - ActSc...

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