Final Exam winter 2012 Draft 3 with answers (2)

# Final Exam winter 2012 Draft 3 with answers (2) - ACTSC 371...

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ACTSC 371 – Corporate Finance 1 Instructor: Brent Matheson Date: April 13, 2012 Time: 12:30 pm to 3:00 p.m. Duration: 2.5 hours Number of Pages : 19 including cover page, blank page, formula sheet and financial info Aids: Calculator, attached formula sheet Family Name: _____________________________________ Given Name: _____________________________________ ID#: ____________________________________ F OR E XAMINERS ’ U SE O NLY Question Mark 1 /15 2 /3 3 /3 4 /4 5 /3 6 /5 7 /7 8 /5 9 /6 10 /5 11 /5 12 /5 13 /5 14 /6 15 /4 16 /7 TOTAL /88

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ACTSC 371 Winter 2012 Final Exam 1) Multiple Choice – 15 Marks (i) The Double Dip Co. is expecting its ice cream sales to decline due to the increased interest in healthy eating. Thus, the company has announced that it will be reducing its annual dividend by 5% a year for the next two years. After that, it will maintain a constant dividend of \$1 a share. Two weeks ago, the company paid a dividend of \$1.40 per share. What is this stock worth if you require a 9% rate of return? A. \$10.86 B. \$11.11 C. \$11.64 D. \$12.98 E. \$14.23 (ii) The liquidity preference hypothesis explains that the 2 nd year forward rates are set higher than the expected spot rate over year two because A. of a downward sloping yield curve. B. of long term rates being greater than short term rates. C. investors must be induced to buy the riskier two year bond. D. two year bonds are less risk than one years bonds when rates are higher. (iii)You spent \$500 last week fixing the transmission in your car. Now, the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model. In analyzing the brake situation, the \$500 you spent fixing the transmission is a(n) _____ cost. A. opportunity B. fixed C. incremental D. sunk (iv)Which of the following statements is true? A. Call options are issued by corporations and bought by investors. B. Call options are issued by investors and bought by corporations. C. Call options are issued by investors and bought by investors. D. Put options are issued by corporations and bought by investors. (v) In terms of relating options to firm value, if the stockholders have a call option on the firm, what do the bondholders have? A. In addition to owning the firm, they have written a call option against the firm whose exercise price equals the promised payment. B. In addition to owning the firm, they have bought a call option against the firm whose exercise price equals the promised payment. C. In addition to owning the firm, they have written a put option against the firm whose exercise price equals the promised payment. D. In addition to owning the firm, they have bought a put option against the firm whose exercise price equals the promised payment.
ACTSC 371 Winter 2012 Final Exam (vi)A derivative is a financial instrument whose value is determined by: A. regulatory body such as the FTC. B. a primitive or underlying asset. C. hedging a risk D. hedging a speculation. (vii) You have taken a short position in a futures contract on corn at \$2.60 per bushel. Over the next 5 days the contract settled at 2.52, 2.57, 2.62, 2.68, 2.70. You then decide to reverse your position in the futures market on the fifth day at close. What is the net amount you receive at the end of 5 days?

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