COM 240 – Midterm Exam
Name: ____________________________________________
V-Number: ________________________________________
Instructions: For Multiple Choice or True/False questions, please circle the letter corresponding
to your answer. For Short Answer questions, please follow the instructions provided in the
question, and answer with as much detail as possible. Multiple Choice and T/F questions are
marked 1 point each, and the Short Answer question is marked out of 3 points.
Multiple Choice and T/F (1 point each):
1) A firm offers an 8% coupon bond with semiannual payments and a yield to maturity of 12.48%.
The bonds mature in 17 years. What is the market price per bond if the face value is $1,000?
A) $742.31
B) $653.10
C) $890.41
D) $686.87
E) $547.08
F) None of the above.
2) The limitations within a bond indenture agreement that prohibit certain actions by a firm are
called:
A) Debenture provisions.
B) Call provisions.
C) Negative covenants.
D) Seniority requirements.
E) Sinking fund provisions.
F) None of the above.
3) The price of security C has tripled over the past nineteen years. Determine the rate of growth
over this time period.
A) 11.34%
B) 7.60%
C) 8.75%
D) 6.70%
E) 5.95%
F) None of the above.
4) Which of the following best defines Working Capital management?
A) Planning and managing the firm’s current assets and current liabilities.
B) Planning and managing the firm’s long-term assets and liabilities.
C) Planning the firm’s current and long-term assets.
D) Planning and managing the firm’s anticipated big, strategic, future projects.
E) Planning the firm’s current and long-term liabilities.
F) None of the above.
5) Shareholders can force a corporation into bankruptcy for not paying dividends.
A) True
B) False
6) You wish to deposit an amount now that will accumulate to $165,000 in 25 years. How much
more would you have to deposit if the rate of interest was 7.5% compounded annually versus
quarterly?
A)
B)
C)
D)
E)
F)
$1,427.49
$1,309.83
$1,327.49
$1,603.40
$1,389.22
None of the above.
7) A firm pays quarterly dividends of $2.50 dividend and will maintain this policy forever. What price
should you pay for one share of preferred stock if you want a quarterly return of 2.85% on your
investment?
A)
B)
C)
D)
E)
F)
$87.72
$90.91
$80.00
$92.21
$78.21
None of the above.
8) Bonds at B-rated and higher are considered investment grade.
A) True
B) False
9) Security A and Security B both provide semi-annual payments of $75 over 5 years. The annual
rate of return for both securities is 8%. Both securities will provide the same number of
payments, but the payments for Security A occur at the beginning of the month and the
payments for Security B occur at the end of the month. What is the difference in the present
value of these two sets of payments?
A) 28.92
B) 24.33
C) 21.09
D) 37.78
E) 30.27
F) None of the above.
10) A business formed by two or more individuals who each have unlimited liability for business
debts is called a:
A)
B)
C)
D)
E)
General Partnership
Limited Partnership
Corporation
Limited Liability Company
Sole Proprietorship
11) A loan quotes a 9% APR, and quarterly payments are required. What is the EAR?
A)
B)
C)
D)
E)
F)
9.38%
8.49%
6.22%
9.31%
9.00%
None of the above.
12) The expression for the future value factor = 1/(1 + r)^t
A) True
B) False
13) A firm plans on saving money to buy some new equipment. The firm is opening an account
today with a deposit of $10,000 and expects to earn 5% interest. After 3 years, the firm wants to
add an additional $40,000 to the account. At the point of when the firm makes its second
deposit, if the account continues to earn 4% interest, how much money will the firm have in
their account five years from now?
A) $66,872.96
B) $64,454.61
C) $72.329.79
D) $55,784.87
E) $78,413.06
F) None of the above.
14) If an investor requires an 8% real rate of return, and the expected inflation rate is 2%, what
is the nominal rate?
A) 1.85%
B) 10.16%
C) 11.95%
D) 9.16%
E) 7.84%
F) None of the above
15) What would you pay for a share of stock today if the next dividend will be $2.10 per share,
your required return on equity investments is 10%, and the stock is expected to be worth
$115 one year from now?
A) $100.26
B) $95.50
C) $120.10
D) $106.45
E) $115.21
F) None of the above.
16) A firm has 6.75% coupon bonds outstanding with a current market price of $765.24. The yield
to maturity is 10.60% and the face value is $1,000. Coupons are paid semiannually. How many
years are there until these bonds mature?
A) 10.64 years
B) 10.06 years
C) 20.13 years
D) 18.53 years
E) 9. 53 years
F) None of the above.
17) A firm will pay a $7 dividend next period, and dividends will grow at a constant rate of 5% per
year. The required return is 18%. What is the capital gains yield on this investment?
A) 13%
B) 18%
C) 5%
D) 7%
E) 10%
F) None of the above.
18) You plan on making monthly payments for the next ten years in order to accumulate
$120,000. If the rate of return is 10%, what are the monthly payments?
A) $485.81
B) $546.81
C) $946.81
D) $585.81
E) $646.81
F) None of the above.
Short Answer (3 pts):
19) (Short Answer) The most recently recorded dividend payment of a firm was $3. The
dividend payments are expected to increase by 8.5% in year one, 12.78% in year two, and
8.765% in year three. After that, dividends are expected to grow at a constant growth rate of
5.5% forever. Stocks of similar risk yield 10%. What is the present value of this stock?
Part 1) What are the dividend payments?
Part 2) Calculate PV for the stock