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FIN 301 – Spring 2018 Exam 2 Print Your Name

27 questions @ 10 points each Please tuck your scantron inside your exam.

1. For corporations, maximizing the value of owner’s equity can also be stated as maximizing the firm’s:
a. Stock price
b. Net income
c. Market share
d. Retained earnings
e. Earnings per share

2. What is the PV of a 9-year $999 annuity if the discount rate is 9% and its first payment occurs at the end of year 4?
a. $4,243
b. $4,625
c. $4,854
d. $5,555
e. $5,989

3. Assuming the deposits remain invested after the payments end, what is the FV at t=10 of a 7-year regular annuity of
$7,000 whose first payment comes at the end of the current year (t=1) if the interest rate is 7%?
a. $60,578
b. $74,211
c. $79,406
d. $96,715
e. $103,485

4. You won the jackpot and must choose one of two payment options:
Option A: take all $1 million today and immediately pay 20% taxes.
Option B: receive $100,000 at the beginning of each of the next 20 years and pay 20% taxes upon receipt.
Using a 8% required rate of return, which of the options is more valuable and what is the difference in dollars?
a. Option A: $14,548
b. Option A: $48,288
c. Option B: $48,288
d. Option B: $14,548
e. The two options are equally valuable

5. A $1,000 par value bond has a 12% coupon rate (paid annually). It has 10 years remaining to maturity. Bonds of
similar risk and maturity currently yield 8%. What should this bond’s price be?
a. $1,268.40
b. $1,000.00
c. $957.87
d. $851.50
e. $805.20

6. Which of the following statements is most correct?

a. Holding a large diversified portfolio of stocks will not impact investors’ risk.
b. Investors are able to eliminate virtually all market (systematic or non-diversifiable) risk through diversification.
c. Investors are able to eliminate virtually all firm-specific (unique or diversifiable) risk through diversification.
d. Holding a large portfolio of similar stocks from the same industry will reduce risk more than a diversified
portfolio of stocks.
e. None of the above.
7. Your current portfolio has a beta of 1.90 and an expected return of 19%. If you replace 25% of that portfolio with a
stock whose beta is 0.60 and expected return of 6%, what will be the new portfolio’s beta and expected return?
a. 2.50 and 25.0%
b. 1.83 and 18.3%
c. 1.58 and 15.8%
d. 1.43 and 14.3%
e. 1.25 and 12.5%

8. A 6.78% coupon bond with 9 years left to maturity is currently priced $1,000. What are current yield and yield to
maturity of this bond? Use semi-annual compounding.
a. 6.28% and 6.14%
b. 6.26% and 6.68%
c. 6.78% and 6.78%
d. 7.76% and 6.88%
e. 8.52% and 7.69%

9. Investors expect Firm X to pay its first dividend of $2.00 at the end of year 5. They expect those dividends to grow
thereafter at a constant rate of 3%. What is its current price using a required return is 9%.
a. $33.33
b. $24.32
c. $23.61
d. $22.31
e. $21.66

10. Firm Y’s last dividend was $10. Future dividends are expected to grow at a constant rate of –2% (decline). What is
its current price if your required rate of return is 7%.
a. $109
b. $111
c. $113
d. $196
e. $200

11. Hastings beta is 0.80, the market return is expected to be 9% and the current risk-free rate is 3.7%. What is Hasting’s
required return?
a. 4.2%
b. 5.3%
c. 6.7%
d. 7.2%
e. 7.9%

12. The following information applies to the next 2 problems. You are considering 30-year MNOCo bonds that are
priced to yield a fair (equilibrium) interest rate of 7.15%. They have no special covenants. The Wall Street Journal
reports that 1-year T-bills are currently earning 1.90%. The real risk-free rate is 0.85%, the liquidity risk premium is
1.05%, and the maturity risk premium is 2.40%. What is the expected inflation premium?
a. 3.55%
b. 2.75%
c. 1.80%
d. 1.05%
e. 0.95%

13. Using the information laid out in the preceding problem, what is the bond’s default risk premium?
a. 3.55%
b. 2.75%
c. 1.80%
d. 1.05%
e. 0.95%
14. Five years ago, the S&P500 Index stood at 1,360, today it stands at 2,680. What was the market risk premium during
that time span if the average annual Treasury yield during that time was 3%?
a. 11.5%
b. 14.5%
c. 16.4%
d. 17.5%
e. 94.1%

15. You client’s marginal tax bracket is 20%. A municipal bond has a 5.5% yield of maturity and a similar-risk corporate
bond offers an 7.0% yield to maturity. What is the municipal bond’s equivalent taxable yield and which bond should
you choose for your client?
a. 4.40%; choose the municipal bond
b. 5.60%; choose the corporate bond
c. 6.88%; choose the corporate bond
d. 8.75%; choose the corporate bond
e. 8.75%; choose the municipal bond

16. An 8.4% coupon bond matures in 13 years and it is callable in 4 years for a call premium of one year of coupon
payments. If the bond is trading for $988, what is the bond’s yield to maturity? Use semi-annual compounding.
a. 10.52%
b. 8.76%
c. 8.55%
d. 5.26%
e. 4.28%

17. An 8.4% coupon bond matures in 13 years and it is callable in 4 years for a call premium of one year of coupon
payments. If the bond is trading for $988, what is the bond’s yield to call? Use semi-annual compounding.
a. 10.52%
b. 8.76%
c. 8.55%
d. 5.26%
e. 4.28%

18. You own $200 of HH stock that has a beta of 3.0; $300 of GG stock that has a beta of 2.0; and $500 of FF stock that
has a beta of 1.0. What is the beta of your portfolio?
a. 1.50
b. 1.70
c. 1.90
d. 2.10
e. 2.30

19. Firm X has a beta of 1.30, the expected market return is 11%, Treasury bills are priced to yield 3.5%. Based on the
CAPM, what is the firm X’s risk premium?
a. 14.30%
b. 13.25%
c. 11.00%
d. 9.75%
e. 7.50%

20. Estimate the required return of equity for a firm whose beta is 2.10. The only other information you have is that the
firm has 6% annual coupon bonds that are currently priced at $1,150 that mature in 9 years.
a. 10%
b. 9%
c. 8%
d. 7%
e. 6%
 Use the adjoining
information to
answer the next five
problems

21. What is the systematic risk of the portfolio in the preceding table?
a. 0.124
b. 0.274
c. 0.866
d. 1.470
e. 1.500

22. What’s the expected return of the portfolio in the preceding table?
a. 0.124
b. 0.274
c. 0.866
d. 1.470
e. 1.500

23. Which stock in the preceding table would be most risky to hold by itself?
a. Z
b. Y
c. X
d. Insufficient information provided to answer this question.
e. The stock with the lowest coefficient of variation.

24. If you had $8,000 to invest and wanted to adopt the weights in the preceding table, how much would you invest in
stock X, Y and Z (in that order)?
a. $1,500; $6,000; $2,500
b. $1,400; $4,600; $2,000
c. $1,300; $4,800; $2,500
d. $1,200; $4,800; $2,000
e. $1,100; $5,000; $3,000

25. Rank (from most to least desirable) the three stocks in the preceding table using their coefficients of variation.
a. A then B then C
b. A then C then B
c. B then A then C
d. B then C then A
e. C then A then B

26. Which of the following causes common stock prices to increase?

a. A lower required rate of return.
b. A lower dividend growth rate.
c. A higher required rate of return.
d. A smaller current dividend.
e. None of the above.

27. Which of the following events would make it more likely that a company would choose to call its outstanding bonds?
a. A reduction in market interest rates.
b. The company’s bonds are downgraded.
c. An increase in the default risk premium.
d. An increase in the inflation rate.
e. None of the above.
On my honor, I will neither give nor accept any unauthorized aid on this exam. (sign)
FIN 301 – Spring 2018 Exam 1 Print Your Name
27 questions @ 10 points each (max: 250 pts) Tuck scantron inside exam when you submit.
1. An employee stock option plan is:
a. An employee penalty for poor performance.
b. A perk usually only given to the board of directors as compensation.
c. A plan that only partnerships can use to defer compensation to partners.
d. A way to align the interests of employees with those of the owners.
e. All of these answers are correct.

2. The biggest DISADVANTAGE of the sole proprietorship is:

a. Total control.
b. Agency conflicts.
c. Unlimited access to capital.
d. Unlimited liability.
e. Double taxation.

3. For corporations, maximizing the value of owner's equity can also be stated as maximizing the firm’s:
a. Net income.
b. Market share.
c. The stock price.
d. Earnings per share.
e. Retained earnings.

4. XCo.’s 2017 EBIT is $5,550,000 and their

taxable income is $3,500,000. Using the
adjoining tax schedule, the firm’s taxes paid,
their average tax rate, and their marginal tax
rates are:
a. $113,900; 19.63% and 39.00%
b. $170,000, 39.10% and 34.00%
c. $1,076,100, 31.38% and 35.00%
d. $1,190,000; 34.00% and 34.00%
e. $1,942,500; 38.00% and 34.00%

5. Refer again to the preceding tax table. What is YCo.’s tax liability if in addition to EBIT of $500,000, they
have $320,000 of taxable income, the firm received $205,000 of interest on state-issued bonds, and
$140,000 of dividends on common stock it owns in ZCo.?
a. $108,050
b. $122,680
c. $123,080
d. $124,680
e. $182,780
6. WCo. has an ROE of 17.56%, equity multiplier of 1.40, and a profit margin of 16.50%. What are the
total asset turnover and the capital intensity?
a. 0.13; 7.97
b. 7.97; 1.06
c. 0.08; 1.06
d. 0.04; 24.59
e. 0.76; 1.32

7. ACo.'s profit margin is 10%, total assets are $30 million, a total asset turnover ratio of 1.3, and their debt to
equity ratio (D/E) is 1.5. What is the firm’s ROA and the ROE (in that order)?
a. 13.0%, 32.5%
b. 13.0%, 16.9%
c. 10.0%, 13.0%
d. 7.7%, 17.7%
e. 7.7%, 10.0%

8. What is BCo.’s market to book ratio if their balance sheet lists current assets of $460, current liabilities of
$420, fixed assets of $750, and long-term debt of $380. The price of their common stock is $6.34 per share
and they have 100 shares outstanding.
a. 2.90
b. 2.55
c. 2.12
d. 1.55
e. 0.98

9. What is the sustainable growth rate of a firm whose ROE=17.6%, ROA=8.8%, and dividend payout
ratio=25%?
a. 15.2%
b. 13.2%
c. 10.8%
d. 7.1%
e. 6.6%

10. What is the internal growth rate of a firm whose ROE=17.6%, ROA=8.8%, and dividend payout
ratio=25%?
a. 15.2%
b. 13.2%
c. 10.8%
d. 7.1%
e. 6.6%

11. TCo.’s market-to-book ratio is currently 1.5 times and their PE ratio is 6.25 times. TCo.'s common stock is
currently selling at $12.00 per share. What is TCo.’s book value per share and earnings per share?
a. $12.00; $1.00
b. $4.17; $1.20
c. $6.25; $1.50
d. $8.00; $1.92
e. $12.00; $6.25
12. What is the PV of an 18-year annuity of $18,000 if the discount rate is 18%?
a. $91,749
b. $94,917
c. $97,491
d. $100,122
e. $112,002

13. What is the PV of an 18-year annuity of $18,000 if the discount rate is 18% and its first payment occurs at
the beginning of year 1?
a. $91,749
b. $94,917
c. $97,491
d. $100,122
e. $112,002

14. What is the PV of an 18-year annuity of $18,000 if the discount rate is 18% and its first payment occurs at
the end of year 3?
a. $57,769
b. $68,168
c. $80,438
d. $94,917
e. $97,491

15. What is the FV at t=18 of an 18-year annuity of $18,000 if the discount rate is 18%?
a. $1,867,325
b. $1,894,396
c. $1,942,883
d. $2,006,387
e. $2,203,444

16. What is the FV at t=20 of an 18-year annuity of $18,000 if the discount rate is 18%?
a. $2,203,444
b. $2,568,823
c. $2,600,063
d. $2,639,303
e. $3,068,075

17. The PV of a 9-year regular annuity is $9,000, the discount rate is 9%, what is the PV of the same annuity
DUE?
a. $8,257
b. $9,810
c. $12,811
d. $17,933
e. $19,547

18. The PV of a 4-year annuity DUE is $4,000, the discount rate is 4%, what’s the PV of the same regular
annuity?
a. $3,774
b. $3,846
c. $4,000
d. $4,200
e. $4,499
19. Using a 4% interest rate, compute the future value at the beginning of year 4 of an $800 deposit at the
beginning of year 7 plus a $600 deposit at the end of year 9.
a. $1,158
b. $1,185
c. $1,204
d. $1,233
e. $1,275

20. Using a 0% interest rate, compute the future value at the end of year 10 of an $800 deposit at the beginning
of year 3, a $600 deposit at the end of year 5, and a $750 deposit at the end of year 8.
a. $2,111
b. $2,150
c. $2,121
d. $2,310
e. $2,511

21. What is the effective annual rate (EAR) of a credit card that offers monthly payments with 18% APR?
a. 18.67%
b. 18.75%
c. 19.56%
d. 19.67%
e. 19.75%

22. What is the effective annual rate (EAR) of a credit card that offers daily payments with 19% APR?
a. 19.70%
b. 19.91%
c. 20.22%
d. 20.58%
e. 20.92%

23. How are present values (PVs) affected by the number of compounding periods per year?
a. One would need to know the stated interest rate in order to determine the impact.
b. The lower the number of compounding periods, the larger the present value will be.
c. The higher the number of compounding periods, the larger the present value will be.
d. Present values are not affected the number of compounding periods.
e. One would need to know the future value in order to determine the impact.

24. What's the present value of $123 payments made forever if the discount rate is 8.0%?
a. $1,753.50
b. $1,573.50
c. $1,537.50
d. $1,375.50
e. $1,357.50

25. What is the present value of an annuity that makes 40 payments of $500 if the first payment comes at t = 6
and the discount rate is 7%?
a. $6,666
b. $5,753
c. $5,085
d. $4,753
e. $4,442
26. How many years are needed for a 12% annual rate of return to increase a $3,000 deposit to a future value of
$6,000?
a. 5 years
b. 6 years
c. 7 years
d. 8 years
e. 9 years

27. You won the jackpot and must choose one of two payment options.
Option 1: take all $1,111,111 today and immediately pay taxes of 35%.
Option 2: receive $77,777 at the beginning of each of the next 40 years (first payment received today). Pay
35% taxes on the amount received each year.
Your interest rate is 7%. Which option will you choose and how much more valuable is it relative to the
alternative (expressed in current dollars)?
Hint: First, determine how much will you have left for each cash flow after paying taxes.
Second, evaluate both options at t=0.
Third, choose the most valuable option.
Fourth, subtract the PV of the least attractive option from the value of the better option.
a. Option 1; $1,058
b. Option 1; $1,628
c. Option 1; $48,237
d. Option 2; $387,261
e. Option 2; $314,678