York UniversitySchulich School of BusinessIntroduction to Corporate Finance FINE 2000Final Exam: SolutionsSaturday, April 14, 2012Instructions:There are 20 multiple choice questions, 4 problems and a formula sheet on the followingpages. Please examine your quiz booklet to ensure it is complete & answer all questionson the following pages. This is a closed book test.All process work & steps must be shown and will be awarded part marks.No marks willbe awarded if only the answer is provided.Process includes either the calculator key strokes used or formulas and logic includingthe 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 forpercentages. Round any dollar based answers to 2 decimal points.Calculators are permitted. Laptops, cell-phones, and other electronics arenotpermitted.Time allocation:180 minutes.Mark allocation: Shown on exam.Printyour name:___________________________________Signyour name:___________________________________Student Number: ___________________________________Nameof 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 milliondollars.You take out a $200,000 mortgage with a 25-year amortization period, a 5-year term and a 10% APRcompounded semi-annually. Mortgage payments are made at each month's end. Calculate thefollowing: (i) the amount of your monthly mortgage payments, and (ii) at the end of five years, what is theoutstanding 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. Assumethereare NO taxes on any capital gains. If you sell the house after 5 years, what are the netproceedsfrom the sale after you have paid off the remaining balance of your mortgage?
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Part 1c[4 points]Suppose after buying the house, you rent out the house right away. The tenants will pay rent atthe beginningof each year for 5 years (note: rent is paid annually, notmonthly). The first rentpayment (due now) is $40,000 and the annual rent is expected to grow at 1% in real terms.Whatis thepresent value of this rental income if the appropriate annually compounded nominaldiscount ratefor you is 5% and the expected annual inflation is 3%. For this question, assume you do not pay any taxon the rental income.
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