University of Guelph Lang School of Business and Economics Department of Economics and Finance FIN*2000: Introduction to Finance Instructor: N. Bower MIDTERM 1 – Sample NOTE: Answers will not be provided 1. Which of the following is a disadvantage of a corporation? A. Ownership cannot be easily transferred B. The life of the corporation is limited to the life of the management C. Corporate income faces double taxation D. Owners of the corporation have unlimited liability E. Corporations have limited access to raising money in capital markets 2. Which of the following is the most appropriate goal of a corporation? A. Maximize profits B. Maximize market share C. Eliminate debt D. Maximize the market value of the firm E. Maximize dividends paid 3. When a public corporation has a seasoned issue of securities, they are sold in the: A. Private equity market B. Primary market C. Secondary market D. Money market E. Derivatives market 4. Suppose you purchased shares of Enterprise Corp. for $20 two years ago and sell them today for $30. Which of the following is true? A. Enterprise receives $30 and you receive nothing B. Enterprise receives $20 and you receive $10 C. Enterprise receives $10 and you receive $20 D. Enterprise receives nothing and you receive $30 E. The distribution of cash between Enterprise and you depends on what the interest rates have been over the past two years 5. Which of the following is not true about the statement of financial position? A. The statement of financial position shows the book value of the firm’s assets, liabilities, and shareholders’ equity B. The firm’s fixed assets are recorded as the purchase price net of accumulated depreciation. C. The value of the firm’s assets is equal to the value of the firm’s liabilities plus the shareholders’ equity. ECON*2560: Midterm 1 – Sample 2 Winter 2020 D. Shareholders’ equity is equal to the total assets minus the total liabilities. E. The statement of financial position represents the activities of a firm over a period of time. 6. An individual investor faces the highest tax burden from which of the following? A. $100 of interest income B. $100 of dividend income C. $100 of capital gains income D. A and B, since Interest and dividend income are taxed at the same rate, while capital gains income is taxed at a lower rate E. A, B, and C, since Interest, dividend, and capital gains income are all taxed at the same rate 7. Mario just sold his house for $850,000. If he bought the house 20 years ago for $200,000, what annual rate of return did he earn on the investment? A. 1.18% B. 3.80% C. 7.50% D. 16.25% E. 21.25% 8. If you use more frequent compounding, the annual return (APR) in the previous problem will be: A. greater. B. less. C. the same. D. greater or less depending on inflation. E. not possible to determine. 9. You are planning to buy a car. The dealer offers you a financing deal where you will pay $800 per month for the next 5 years (first payment one month from now). If the interest rate is 12% per year, what will the car cost you? A. $27,236 B. $34,606 C. $35,964 D. $42,857 E. $48,000 10. If, in the question above, the interest rate decreases, then the car will cost: A. more. B. less. C. the same. D. more or less depending on inflation. E. more or less, but which cannot be determined. 11. Your bank tells you that they pay an effective annual rate (EAR) of 6.2% based on monthly compounding. What is the annual percentage rate (APR) being offered? A. 2.15% B. 6.03% ECON*2560: Midterm 1 – Sample 3 Winter 2020 C. 6.18% D. 6.20% E. 6.38% 12. To determine the amount you need to pay if you want to pay off a loan early, you should: A. subtract the sum of the payments already made from the initial amount of the loan. B. sum the remaining payments. C. subtract the sum of the present values of the payments already made from the initial amount of the loan. D. sum the present values of the remaining payments. E. subtract the sum of the present values of the remaining payments from the present values of the payments already made. 13. What is the price of a 7% coupon bond with semi-annual payments, a face value of $1,000, and 12 years to maturity, if the current yield is 6%? A. $583.33 B. $857.14 C. $919.71 D. $1,084.68 E. $1,166.67 14. Which of the following does not change over the life of a bond? A. Coupon rate B. Current yield C. Yield to maturity D. Annual rate of return E. Bond rating 15. What is the price of a 9% coupon bond with semi-annual payments, a face value of $1,000 and 10 years to maturity, if the yield to maturity is 6%? A. $669.49 B. $754.38 C. $1,223.16 D. $1,338.97 E. $1,500.00 16. The James Corporation issued bonds several years ago. Today those bonds are selling at a premium. If market interest rates are not expected to change over the next year, which of the following will be the largest? A. The coupon rate B. The yield to maturity C. The current yield D. The one-year rate of return E. It is impossible to know without more information 17. You purchased a 12% coupon bond with a face value of $1,000, and 6 years to maturity a year ago for $975. If you sell it today for $985, what rate of return do you earn on your investment? ECON*2560: Midterm 1 – Sample A. B. C. D. E. 4 Winter 2020 11.17% 12.18% 12.31% 13.19% 13.33% 18. According to the Liquidity-Preference Theory about term structure of interest rates: A. the yield curve will always be upward sloping. B. the forward rate must be higher than the expected future spot rate. C. the expected future spot rate must be higher than the forward rate. D. the forward rate must equal the expected future spot rate. E. the relationship between the forward rate and the expected future spot rate depends on expectations about future short-term interest rates. 19. The stock listing for Canadian Tire lists a closing price of $149.45, a Market Capitalization of $9.811 Billion, EPS of $10.81, and a Forward Dividend of $4.15. What would be the Dividend Yield? A. 0.91% B. 2.78% C. 13.83% D. 38.39% E. 61.61% 20. Which of the following is true about the dividend discount model? A. Using an infinite horizon dividend discount model will always yield a higher price than using a finite horizon dividend discount model for the same stock since the finite horizon model does not include any dividends past the horizon period. B. You should use the no-growth version of the model if you get a negative result using the constant growth version of the model. C. The price of the stock does not depend on the horizon chosen in the finite horizon model. D. For a preferred stock you should use the constant growth model with a growth rate equal to the inflation rate. E. If you get a negative value for price using the constant-growth dividend discount model, then price is equal to the absolute value of your result. 21. Kinney Corp. is expected to pay a dividend of $2.00 per share next year. The stock is selling for $45 per share. You expect dividends to grow steadily at a rate of 3% per year. What is the expected rate of return on the stock? A. 1.44% B. 4.44% C. 4.61% D. 7.44% E. 13.00% 22. Under a sustainable growth rate model, Increasing the plowback ratio will: A. always increase both the growth rate and the price of the stock. ECON*2560: Midterm 1 – Sample B. C. D. E. 5 Winter 2020 always increase the growth rate and decrease the price of the stock. always increase the price of the stock and may increase or decrease the growth rate. always increase the growth rate and may increase or decrease the price of the stock. have an indeterminate effect on both the growth rate and the price of the stock. 23. Hi-Tech Corp. is expected to pay dividends of $1.00, $2.00, and $2.50, in each of the next three years, and thereafter dividends are expected to grow at a rate of 4% per year. If the expected return on the stock is 9%, what will be the price of Hi-Tech stock? A. $42.08 B. $43.14 C. $44.68 D. $48.12 E. $55.21 24. Geothermal Corp. just announced good news: its earnings have increased by 20%. Most investors had anticipated an increase of 25%. What will happen to Geothermal’s stock price when the announcement is made? A. It will increase B. It will decrease C. It will not change D. The effect on stock price cannot be determined since stock prices follow a random walk E. The price will change in the same direction as the market index 25. Metatrend’s stock will generate earnings of $5 per share this year. Investors’ required rate of return is 15% and the rate of return on reinvested earnings is 20%. What will be the price of the stock if the company reinvests 60% of its earnings in the firm? A. $18.18 B. $33.33 C. $42.86 D. $66.67 E. $166.67 Therese Andrews has just been hired as a corporate financial analyst and has received her first assignment. Therese is to take the $5 million in cash received from a recent divestiture and use part of these proceeds to retire outstanding debt. The current interest rate is 6 percent. a. (3 marks) The company has asked Therese to retire a perpetual bond that pays $150,000 each year. How much of the available cash will be used to retire this bond (i.e., what is the present value of the bond?) b. (3 marks) The company will also be making a payment of $1 million in 5 years to pay off an additional debt. How much cash needs to be set aside today to make this payment? c. (4 marks) Any remaining cash will be paid out to shareholders as a ten-year annuity. What annual payments will the company be able to make?
