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    Finance 301 Test 1      Name _______________________
    Summer 2000       May 18, 2000
     

    Multiple choice (3 points each)  Total 45

1.   Mr Jones purchased a 20-year Treasury bond bearing a 12% coupon rate.  She purchased the bond at par ($1000).  If rates fall to 9% what will be the new price of the bond?
    A. $1333
    B. $1500
    C. $750
    D. $900
    E. There will be no change in the price of the bond
2. Pricing of a closed end fund is determined by:
    a.  net asset value 
    b.  net asset value, plus a commission
    c.  net asset value, plus a sales charge  
    d.  supply and demand for the shares
    e.  none of the above
3.   The FDIC presently insures deposits up to what amount?
    a.  $25,000 per account
    b.  $50,000 per account
    c.  $100,000 per account
    d.  $1,000,000 per account
    e.  Unlimited
     
4.  Firms which specialize in helping companies raise capital by selling securities are called ________.
    a.  commercial banks  
    b.  investment banks  
    c.  savings banks 
    d.  credit unions  
    e.  all of the above
     
5.   Company A and Company B are identical in every way except their capital structure.  
    Each firm can borrow at 10% and each is taxed at 40%.. 
         Company A            Company B
    Assets   1000                  1000
    Equity      600                  1000
    Debt  400                            00

    EBIT  100                          100

Which firm had the higher Net Income?  Which firm had the higher ROE?
    A.  Company B had a higher net income but the ROEs were identical.
      B. Company A had a higher net income, company A had a higher ROE.
    C. Company B had a higher net income, company B had a higher ROE.
    D. Company A had a higher net income, company B had a higher ROE.
    E. Company B had a higher net income, company A had a higher ROE.
 6.   Consider a project with the following cash flows and assume that the correct discount rate is 10%.
    cost   c1 c2  c3 c4 c5 
       10   2   3    4  5   6
     
7.    What the Net Present Value (NPV) of the investment?
    a. 4.44  b. -6.36  c. 14.44   d. 10 e. none of the above
     
8. What is the present value of $500 in 6 years if your required return is 13%?
     a. $345.16 b. $500 c. $240.16 d. $1040.16 e. none of the above
     
9.  How many 20-year zero coupon bonds (par value $1000) must be sold in order to raise $3 million if the investors are requiring a 9% return. (ignore transaction costs)
        a 178 b. 3,000     c. 11,340      d. 16,814 e. 27,909
     
10. Five years ago, the DCA Corporation issued 20-year bonds with a coupon rate of 12%.  If the investors’ required rate of return (IRR) on these bonds is currently 9%, the bonds will be priced:
     a.  below par.  b.  above par.  c.  above and below par. d.  at par. e.  as a perpetuity
     
11. What is the implied discount rate of a perpetuity that pays $5 and has a present value of $60?  (Choose the closest answer)
     a.  12%    b.  20%      c.  8.33%       d.  10.30%   e.  5.2
     
12.  You have just won the lottery (congratulations!) and are given the option of receiving $2,000,000 now or an annuity of 200,000 at the end of each year for thirty years.  Which of the following is correct?  (assume you are making the decision based on present values)
     a.  You cannot choose between the two without first computing future values.
     b.  You will always choose the lump sum regardless of interest rates.
     c.  Comparing the future value of each will lead to the same decision as comparing 
          present values.
     d.  You will always choose the annuity.
     e.  You will choose the lump sum if interest rates are 7%.
     
12. What is the price of a 5% annual coupon bond with 30 years until maturity if the market interest rate is 6% for bonds of comparable risk?
     a. $777.90 b. $948.19 c. $862.35 d. $950.00 e. $1,128.07
     
13. If you set aside $2000 a year and you earn 12% on your investment how much will you have in 30 years?
      a. $482,665
      b. $384,516 
      c. $60,000 
      d. $120,000 
      e. $1,480,900
14.   Which of the following is NOT true?
      a. If interest rates rise, it is good for bondholders.
      b. The Fed just cut interest rates
      c. For a straight bond, the coupon rate goes up as interest rates drop.
      d. Inflation leads to lower bond prices.
      e. The more compounding periods, the higher the amount of interest you must pay if you are the issuer of a bond.
15.  The "Rule of 72" says that if you earn 8% per year, your money will double in ___ years.
      a. 12     b.  6     c. 8      d. 9    e. 10

     
     
Short answers

1. Define the following: 5 points each

     
    Zero coupon bond

    Convertible Bond

    Callable Bond

    Putable Bond
     

2.  What is the value of a growing 10 year annuity if the cash flow in the first year is $100 if the growth rate is 5% and the required return is 16%? (12 points)

3. How much will you have in 35 years if you save $100 a month and you earn 18% a year?  (hint use months) (13 points)

4.  What is ratio analysis?  List 4 ratios and what they are used for.  What are the Benefits and Drawbacks of ratio analysis?  What is a proper use of ratios? (20 points)

     

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