WILFRID LAURIER UNIVERSITY
WATERLOO, ONTARIO
Session: Spring/Summer 2018 Midterm Exam
Name:
Course No.: BU283
Title: Financial Management I
I.D. #
Professor: McNally
Number of pages: 15
Length of examination: 2 hours
Examination aids allowed: Calculator and Dictionary (if foreign student)
The doors of the examination room will be opened approximately 10 minutes before the start of the examination. Candidates will be
permitted to enter the examination room quietly up to one half hour after the scheduled start of the exam. Candidates arriving late
will not be allowed any extra time.
Candidates must not begin the examination or attempt to read the examination questions until instructed to do so.
*THE UNIVERSITY IS NOT RESPONSIBLE FOR THE LOSS OF VALUABLES BROUGHT INTO THE EXAM LOCATIONS OR
CLASSROOMS WHERE EXAMS ARE BEING WRITTEN.
Candidates once having entered, may not leave the exam room before completing and submitting the exam unless accompanied
by a Proctor. Candidates are not permitted to submit their examination and leave the examination room until 1 hour after the
examination has begun, and in no case before their attendance has been taken. In no case may a candidate leave the room
temporarily, for any reason, until 30 minutes after the start of the examination. In order that remaining candidates are not
disrupted, candidates must remain seated and may not leave the examination room during the last 15 minutes of the examination
session.
At the close of the examination period, candidates must stop writing immediately. The Presiding Officer may seize the papers of
candidates who fail to observe this requirement, and a penalty may be imposed at the discretion of the instructor. Candidates must
submit all their work, according to the instructions of the Presiding Officer, including all materials and a copy of the examination
paper with their name and student ID number written on it. Unused examination booklets may not be taken from the examination
room.
A candidate who leaves before the examination is over must hand in all completed and attempted work, notes made during the
exam, and a copy of the examination paper with their name and student ID number on it.
Talk or any form of communication between candidates is absolutely forbidden. No information of any kind is to be written on
the question paper or on scrap paper for the purpose of assisting other candidates. Responses to questions must not be done in an
exaggerated way or in a manner that will involve transmission of information to others.
Candidates must remain seated during the examination period. A candidate needing to speak to the proctor (e.g. to ask for
additional supplies or to request permission to leave the examination room for any reason) should so indicate by raising his or her
hand.
Questions concerning possible errors, ambiguities or omissions in the examination paper must be directed to the proctor who will
investigate them through the proper channels. The proctor is not permitted to answer questions other than those concerning the
examination paper.
Candidates must not use or attempt to use any improper source of information. No candidates for an examination may bring
into the examination room any books, notes or other material containing information pertaining to the examination unless the
examiner has given instructions that such material will be allowed and this instruction is specified on the examination paper. Any
item brought into the examination room is subject to inspection.
No briefcases, backpacks or other bags and carriers may be brought to the desk site where the candidate is writing the
examination. These bags should be left outside the examination room. If books, notes etc. cannot be left outside the examination
room, they must be put at the front of the examination room in a place designated by the proctor before a candidate takes a seat.
Candidates are advised not to bring valuables to the examination room.
No electronic or communication devices will be allowed in the examination room, including cell phones, smartphones, pagers,
etc. Cell phones will be taken away if found and an Irregularity notice will be filed with the Integrity Office. Calculators are not
allowed unless specified by the instructor and indicated on the examination paper. Only non-programmable calculators without
lids, authorized by the instructor, will be allowed. It is the candidate's responsibility to ascertain whether the use of calculators is
permitted, and, if it is, whether any restrictions are imposed on the types of calculators that may be brought to the examination.
No pencil cases are allowed on the desks.
Translation dictionaries (e.g. English-French) or other dictionaries, (thesaurus, definitions, technical) are not allowed unless
specified by the instructor and indicated on the examination paper. Electronic dictionaries are never allowed.
Except for bottled water (with label removed), no food or drink is allowed in the examination room. Candidates with health
problems that warrant relaxation of this regulation should provide medical documentation to the presiding officer prior to the
beginning of the examination. Such students should restrict themselves to those items and packaging that will least distract other
examinees.
Candidates are expected to write their examinations in an honest and straightforward manner. Where there are reasonable grounds
for believing a violation of exam protocol has occurred, the candidate will be subject to the disciplinary procedures and
sanctions according to the University Calendar.
Only currently registered students will be permitted to write the final exam. Examinations conducted at Wilfrid Laurier University
will be bound by WLU regulations, regardless of where the candidate is registered.
Approved by Senate ( Oct 27/2003) Updated January 2014
ADDITIONAL INSTRUCTIONS
1 BEFORE THE EXAM
1.
2.
3.
4.
Complete the personal identification portion of the multiple choice answer card.
Shade in the boxes below your student number on the front side of the Scantron
card.
Your student number should be left-aligned in the field.
If you fail to write your student number (on the front), fail to shade the boxes (on the
front) or if you make a mistake, then you will lose the one mark allotted for
instructions. (So, be careful with your student number.)
Make sure that you shade ‘A’ under “Test Form”.
2 DURING THE EXAM
5.
6.
7.
8.
9.
10.
11.
Count the pages to be certain that there are no missing pages.
No questions will be answered by the proctors or the Instructors during the exam,
except in the case of missing pages.
If, for any reason, you think that the correct answer is missing from the multiple
choices, then select the best available answer-- that is, the multiple choice which has
the closest value to the correct answer.
Students are NOT allowed to communicate with anyone during the exam or exam
collection period.
You must sign the identification sheet before leaving.
Closed book. No books or paper notes.
Stop writing immediately upon being told that the exam is over. Students who
continue writing may be subject to a penalty.
3 AFTER THE EXAM
12.
13.
14.
15.
Students may NOT leave the exam hall in the last 15 minutes.
Only the Scantron card MUST be handed in. Only the Scantron responses will be
graded.
Students may keep their copy of the exam paper.
Please remain seated quietly during the exam collection period.
Sections, Questions, Marks and Time
# Questions
Marks
Minutes
Instructions
10
1
1
Short Questions
25
18.75
39
Medium/Long Questions
17
17
80
TOTAL
52
36.75
120
Spring/Summer 2018
BU283 Midterm Exam
3
1 Exam Instructions
(10 Questions worth 0.1 marks each)
1
Which letter should you shade under “Test Form” on your Scantron
card?
A)
A
2
Have you checked that you have a complete exam paper?
A)
Yes
3
How long is the exam?
A)
2 hours
4
How many minutes do you have per mark?
A)
2.50
B)
*2.85
C)
3.15
D)
3.50
5
Can students communicate verbally during the exam or exam collection
period?
A)
No
6
True or False? The Scantron cards are the only item that will be marked
and will be collected by the proctor at the end of the exam.
A)
True
7
True or False? If I fail to write (and shade) my student number on the
front of the scantron card or if I make a mistake on my student number,
then I will earn 0/1 for these instructions.
A)
True
8
True or False? If I am confused about an ambiguous exam question, then
A)
Make an assumption and discuss the question with the Professor
after the exam
9
If the correct answer appears to be missing from the multiple choices
then I should:
A)
Select the best available answer.
10
Can students continue to write after the end of the exam? (For example,
to complete the Scantron card.)
A)
No. Students who continue writing will have their incomplete
Scantron cards collected by the Proctor and will be marked on the
basis of the incomplete card.
Spring/Summer 2018
BU283 Midterm Exam
4
2 Short Questions (25 Questions. 0.75 marks each.)
If you think that the correct answer is missing from the multiple choices, then select the best
available answer.
11
The capital market connects entrepreneurs with ____________.
A)
*People with money
B)
Capitalists
C)
The supply side
D)
The government
E)
Investment bankers
12
What is the maximum maturity of securities that trade on the money
markets?
A)
*1 year
B)
2 years
C)
3 years
D)
30 years
13
True or False. Stocks trade on the capital market and bonds trade on the
money market.
A)
True
B)
*False
14
The primary market is intermediated by _____________ banks, which buy
securities from the issuer and sell them to individuals and funds.
A)
Commercial
B)
*Investment
C)
Central
D)
Retail
E)
Underwriter
15
When you buy from a dealer you pay the ________ price.
A)
Bid
B)
*Ask
C)
Quoted
D)
Market
16
Is the foreign exchange market an auction or a dealer market?
A)
Auction
B)
*Dealer
C)
Neither type
Spring/Summer 2018
BU283 Midterm Exam
5
17
Which of the following is not an important dimension of the liquidity of a
market:
A)
Daily number of trades on the market
B)
Number of traders participating in the market
C)
The quantity of shares available to be traded (depth)
D)
*The number of securities listed on the market
18
The purchase and sale of securities after the original issuance occurs in
the:
A)
Primary market
B)
*Secondary market
C)
Dealer market
D)
Auction market
E)
Liquidation market
19
According to Chapter 1 of CFO, one of the biggest problems in corporate
governance is:
A)
Asymmetric information problems
B)
*Principal-agent problems
C)
Stockholder v. Bondholder Conflicts
D)
Corporate Social Responsibility Problems
E)
Shareholder activism problems
20
Which category of bonds has the largest share of trading volume?
A)
Corporate Bonds
B)
Provincial Bonds
C)
Municipal Bonds
D)
Asset backed (i.e., mortgage) bonds
E)
*Government of Canada bonds
21
Which of the following are correct about amortized loans?
I.
Lenders earn their interest in the payments
II.
Lenders earn their interest by re-investing the payments
III.
The total interest earned by the lender is the sum of the payments
minus the principal.
A)
I
B)
II
C)
III
D)
*I and II
E)
I and III
Spring/Summer 2018
22
BU283 Midterm Exam
6
True or False. The amount of interest in each amortized loan payment is
the same in every payment over the life of the loan.
A)
True
B)
*False
C)
23
You bought a Share of Next Computers Inc. for $15. It immediately
declared and paid a dividend of $0.50. You sold it one year later for $16.
What is the return on your investment?
A)
6.67%
B)
10.00%
C)
*10.34%
D)
10.50%
E)
15.00%
24
Consider a coupon bond that trades at a price above its face value. What
is the relationship between its coupon rate and its yield?
A)
*Coupon Rate > Yield
B)
Coupon Rate < Yield
C)
Coupon Rate = Yield
25
If a medium maturity coupon bond is issued at a discount, then, over its
first year, its price will __________ . Assume that interest rates don’t
change.
A)
*Rise
B)
Fall
C)
Remains Unchanged
26
A US Government 4% coupon bond has 25 years remaining to maturity.
The bond pays annual coupons and the next coupon is due in one year.
The face value of the bond is $100. The bond is currently trading for
$100. Calculate your capital gain return if you buy the bond today, hold
it for one year and sell it after the next coupon. (Assume that yields are
expected to remain constant at the current level over the bond's life.)
A)
*0%
B)
0.6%
C)
1.6%
D)
2.6%
E)
4%
Spring/Summer 2018
7
BU283 Midterm Exam
Consider the following information on bonds and answer the three questions
that follow:
Bond
Issuer
Rating
Coupon
Yield
Maturity
A
Government of Canada
Risk Free
7%
7.42%
10 years
B
Government of Canada
Risk Free
6%
7.90%
30 years
C
B.C. Provincial Gov’t
AAA
7.5%
7.77%
10 years
D
Royal Bank
AAA
8%
7.87%
5 years
27
The yield on the B.C. Gov’t bond exceeds the yield on a 10 year
Government of Canada bond because of:
A)
A liquidity premium
B)
*Credit or default risk
C)
Different coupon rates
D)
Not enough information.
28
Which bond’s price is MOST sensitive to changes in interest rates?
A)
A
B)
*B
C)
C
D)
D
29
The yield on the 30-year Government of Canada Bond is higher than the
yield on the B.C. Gov’t bond because of:
A)
A liquidity premium
B)
Default risk premium
C)
Different coupon rates
D)
*An upward-sloping yield curve
30
If the market value of a stock is greater than the intrinsic value, then you
should _____________.
A)
Buy
B)
*Sell
C)
Hold
D)
Margin
Spring/Summer 2018
BU283 Midterm Exam
8
31
True or False. Under the constant growth dividend model, the stock price
grows at the same rate as the dividends (ceteris paribus).
A)
*True
B)
False
32
Which type of repurchase is most common?
A)
*Open Market
B)
Fixed-Price
C)
Dutch Auction
33
If a company’s P/E ratio (using today’s stock price) is larger than its P/E
constant then the shares are ________________ and you should
___________.
A)
Overvalued, Buy
B)
*Overvalued, Sell
C)
Undervalued, Buy
D)
Undervalued, Sell
E)
Fairly valued, Hold
34
All of the following are characteristics of common stock EXCEPT:
A)
Claims on income and assets which are subordinate to the
creditors of the firm
B)
That there is no fixed payment obligation
C)
Voting rights which permit selection of the firm's directors
D)
*Dividends are tax-deductible for the corporation.
35
Assuming g will stay constant, the dividend yield is a good measure of
the required return on a common stock under which of the following
circumstances?
A)
g>0
B)
g<0
C)
*g = 0
D)
Never
Spring/Summer 2018
BU283 Midterm Exam
9
3 Medium and Long Questions (17 Questions. 1 mark
each.)
If you think that the correct answer is missing from the multiple choices, then select the best
available answer.
36
How many years does it take to double your money at an interest rate of
4.16%?
A)
16
B)
*17
C)
18
D)
19
E)
20
37
At the beginning of Year 1, you purchased a unit in a mutual fund for
$10. The year-end prices and returns for the ensuing three years are
shown in the table, below. Calculate the average return (arithmetic or
garden variety) and the compound average return (geometric mean).
Which of the following is true?
Year
Price
1
2
3
A)
B)
C)
38
11
12
10
Return
10.0%
9.1%
-16.7%
*Arithmetic > Geometric
Arithmetic = Geometric
Arithmetic < Geometric
The Saco Bay Savings Bank pays interest on its savings account
compounded daily with a nominal rate of 2.94%. The Nonesuch Bank
offers a savings account with a nominal rate of 2.9835% but no
compounding (within the year). Which savings account is better?
A)
Saco Bay
B)
Nonesuch
C)
*Saco Bay = Nonesuch
Spring/Summer 2018
39
BU283 Midterm Exam
10
Based on the table of bond prices, below, what is the shape of the yield
curve? ($100 face value.)
maturity
1
2
3
4
A)
B)
C)
D)
price
95.24
90.70
86.38
82.27
*Flat
Upward sloping
Downward sloping
Not enough information
Maturity (Years)
1
2
3
4
5
Yield
2.75%
3.25%
3.65%
4.00%
4.15%
40
The current yields for zero-coupon bonds with varying maturities are
outlined in the table above. Find the forward rate from the end of year 2
to the end of Year 3.
A)
*0.0445
B)
0.0454
C)
0.0475
D)
0.0506
E)
0.0722
41
The nominal rate of interest is 6% and the real rate of interest is 3%.
What is the expected inflation rate?
A)
4.91%
B)
4.04%
C)
*2.91%
D)
2.51%
E)
3.00%
Spring/Summer 2018
BU283 Midterm Exam
11
42
Assume that the expectations theory holds. The yield on a 1-year bond is
7% and the expected future spot rate (next year) is 6%. What is the yield
on the 2-year bond?
A)
*6.5%
B)
8.0%
C)
7.25%
D)
5.0%
43
You paid $1,055 to buy a coupon bond with 10 years remaining to
maturity and a 5% (annual) coupon rate. What is the yield to maturity of
the bond? (Assume a face value of $1,000.)
A)
*4.3%
B)
4.7%
C)
5.1%
D)
5.2%
E)
5.3%
44
The last dividend on Spirex Corporation's common stock was $4.00, and
the expected growth rate is 10%. If you require a rate of return of 20%,
what is the highest price you should be willing to pay for this stock?
A)
*$44.00
B)
$38.50
C)
$40.00
D)
$45.69
E)
$50.00
Spring/Summer 2018
45
BU283 Midterm Exam
12
Molson Coors has expected earnings per share of $4.47. Financial data
for its two closest competitors are given in the table below. If their
average performance (and valuation) represents the best benchmark for
Molson Coors, then what is the best estimate of Molson Coors' fair stock
price?
Selected Financial Information for selected brewing
companies
Net Income
# Shares Outstanding
EPS
Price
A)
B)
C)
D)
E)
46
Anheuser
Busch
$4,820M
1,590M
3.0314
$54
Heineken
$1,981M
563M
3.5187
$50
$53.46
$79.63
$63.52
$52.00
*$71.56
The BMW 650i Cabriolet has a MSRP of $116,000 (including all
dealership fees). BMW Financial Services offers a loan at 2% per annum.
The price of the car, with sales tax, is $131,080. You choose monthly
payments over 5 years (60 payments). What are the monthly loan
payments?
A)
$2,125
B)
*$2,298
C)
$2,379
D)
$2,844
E)
$3,771
Spring/Summer 2018
BU283 Midterm Exam
13
47
The BMW 650i Cabriolet sells for $131,080 (tax included). BMW financial
services offers a five (5) year loan (with monthly payments) and the
option of a final “balloon” payment at the end of the five year term. BMW
charges 2.0% per annum. How big does the balloon payment have to be
in order for your monthly payments to be $1,000?
A)
$81,206
B)
$81,406
C)
$81,606
D)
*$81,806
E)
$82,006
48
MCAP offers a fixed-rate mortgage with a twenty-five year term at 5.00%.
The mortgage has a twenty-five year amortization period. You want to
borrow $500,000 to purchase a house. You choose monthly payments,
which are $2,908.02. How much interest will you pay over the life of the
mortgage?
A)
$312,251
B)
$342,018
C)
$373,824
D)
*$372,407
E)
$376,885
49
MCAP offers a fixed-rate mortgage with a one-year term at 3.75%. The
mortgage has a twenty-five year amortization period. You want to borrow
$250,000 to purchase a house. You choose monthly payments, which are
$1,281.39. At the end of the one-year term you must renegotiate the
mortgage. How much principal remains outstanding after the twelfth
payment?
A)
$241,814.70
B)
$242,283.51
C)
$242,818.42
D)
*$243,821.24
E)
$243,970.02
Spring/Summer 2018
BU283 Midterm Exam
14
50
You plan to retire at age 65. You plan to make 20 withdrawals of
$100,000 from your savings account every year starting on your 66th
birthday. You expect to pass away some time after your final withdrawal
on your 85th birthday. You think that you can earn 3% on your savings
in retirement. Today is your 26th birthday. You wish to make equal
annual deposits into your savings account on your birthdays (starting
today) and continuing until (and including) your 65th birthday. How
much must you deposit each year if you earn 5% on your investments?
A)
$11,79.35
B)
*$12,315.81
C)
$12,685.29
D)
$13,039.55
E)
$13,143.63
51
Due to strong competition from online toy retailers, FAO Schwartz EFB
will pay no dividends for the next 2 years. Analysts expect that the first
dividend (payable four years from today) will be $2.20 and it is expected
that dividends will grow at a constant rate of 8% perpetually thereafter.
FAO shareholders require a return of 20%. What is the fair price for the
shares today?
A)
$8.84
B)
$9.23
C)
$10.05
D)
*$10.61
E)
$11.46
52
In the year to June 30, 2018 McDonald’s Corp paid out $1.7308B in
dividends and repurchased $4.3983B worth of shares. McDonald’s has
1.12B shares outstanding. Analysts expect total payouts to grow at an
annual perpetual rate of 2% and investors require a 10% rate of return
on McDonald’s shares. What is the Total Payout model estimate of the
stock price on July 1, 2018 assuming that all payouts occur annually on
June 30th?
A)
$50
B)
$55
C)
$60
D)
$65
E)
*$70
Spring/Summer 2018
15
BU283 Midterm Exam
Midterm Exam Formula Sheet
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