Final Exam Solution Fine 2000 - York University Schulich...

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York University Schulich School of Business Introduction to Corporate Finance FINE 2000 Final Exam: Solutions Saturday, April 14, 2012 Instructions: There are 20 multiple choice questions, 4 problems and a formula sheet on the following pages. Please examine your quiz booklet to ensure it is complete & answer all questions on the following pages. This is a closed book test. All process work & steps must be shown and will be awarded part marks. No marks will be awarded if only the answer is provided. Process includes either the calculator key strokes used or formulas and logic including the correct values in the right places. Calculators must be set such that the rate of return is the periodic rate. Calculate using 6 significant figures for absolute numbers and 4 significant figures for percentages. Round any dollar based answers to 2 decimal points. Calculators are permitted. Laptops, cell-phones, and other electronics are not permitted. Time allocation: 180 minutes. Mark allocation: Shown on exam. Print your name: ___________________________________ Sign your name: ___________________________________ Student Number: ___________________________________ Name of Instructor: ___________________________________ Section: ___________________________________ Good Luck!!! 1
Problem 1 (18 points) Part 1a [6 points] Suppose you have $300,000 and you are interested in buying a new house for half a million dollars. You take out a $200,000 mortgage with a 25-year amortization period, a 5-year term and a 10% APR compounded semi-annually. Mortgage payments are made at each month's end. Calculate the following: (i) the amount of your monthly mortgage payments, and (ii) at the end of five years, what is the outstanding principal (how much do you still owe)?
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Part 1b [3 points] Suppose the annual inflation rate is 3% and the house price stays constant in real terms. Assume there are NO taxes on any capital gains. If you sell the house after 5 years, what are the net proceeds from the sale after you have paid off the remaining balance of your mortgage?
Part 1c [4 points] Suppose after buying the house, you rent out the house right away. The tenants will pay rent at the beginning of each year for 5 years (note: rent is paid annually, not monthly). The first rent payment (due now) is $40,000 and the annual rent is expected to grow at 1% in real terms. What is the present value of this rental income if the appropriate annually compounded nominal discount rate for you is 5% and the expected annual inflation is 3%. For this question, assume you do not pay any tax on the rental income.

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