Department of Finance

FNCE10002 Principles of Finance

Semester 2, 2017
Sample Mid Semester Exam 1

This sample exam and the mid semester exam are based on the material covered in weeks 1 – 5. The
exam duration is 60 minutes with no reading time. Suggested answers to this sample exam
will be placed on the LMS in due course. On the mid semester exam, you will be required to enter
your answers on a general purpose answer sheet (GPAS). A sample GPAS is available via the Mid
Semester Exam link. You will also be provided with adequate space for calculations, etc. in the exam
booklet.

Questions 1 through 3 are based on the following information.

You have borrowed $20,000 from a bank for a five-year period. You will be making monthly
payments on this loan and the interest rate on the loan is 12% per annum with interest compounded
monthly.

1. The monthly payment on this loan is closest to:

A. $200.00.
B. $244.89.
C. $444.89.
D. $462.35.
E. None of the above.

2. The principal balance repaid in the first month is closest to:

A. $200.00.
B. $244.89.
C. $444.89.
D. $462.35.
E. None of the above.

3. The effective annual interest rate on this loan is closest to:

A. 1.0% p.a.
B. 12.0% p.a.
C. 12.4% p.a.
D. 12.7% p.a.
E. None of the above.

Sample Mid Semester Exam 1 1

4. LOL Ltd has just issued a perpetual (that is, non-maturing) financial security that is expected
to pay an annual coupon of $120 next year. This coupon will then decline at a rate of 2% per
annum forever. Assuming a required return of 8% p.a., the price of this security today is
closest to:

A. $1,200.
B. $1,500.
C. $2,000.
D. $6,000.
E. None of the above.

5. Which of the following statement(s) for a coupon paying corporate bonds is (are) true?
I. For bonds selling at par the yield to maturity and coupon rate will be equal.
II. For bonds selling at a premium the yield to maturity will be higher than the coupon rate.
III. For bonds selling at a discount the yield to maturity will be lower than the coupon rate.

A. I only.
B. I and II only.
C. I and III only.
D. II and III only.
E. I, II and III.

6. Your friend has won first prize in the Tenth Annual Sumochef Competition and offered one
of the following options. Assuming an interest rate of 10% p.a., which option should your
friend choose? (Assume end-of-the-year cash flows and round your final answers to the
nearest dollar.)

A. $99,000 today.
B. $10,000 per annum for the next 50 years.
C. $160,000 at the end of year 5.
D. $5,000 next year growing at 5% p.a. forever.
E. None of the above.

7. Starz Ltd’s dividends are expected to grow at a rate of 5% p.a. in the foreseeable future.
Starz’s current dividend is $1.00 per share and the required return on stocks in Starz’s risk
class is 10% p.a. Based on this information, Starz Ltd’s current share price should be closest
to:

A. $10.00.
B. $10.50.
C. $20.00.
D. $21.00.
E. None of the above.

8. A bond maturing in eight years with a face value of $10,000 is currently trading at $4,665. If
the bond does not pay a coupon its yield to maturity should be closest to:

A. 8.0% p.a.
B. 9.0% p.a.
C. 10.0% p.a.
D. 11.0% p.a.
E. None of the above.

Sample Mid Semester Exam 1 2

9. Project B has a cost of $23,956 and its expected net cash flows are $6,000 p.a. for the next five
years. If the required rate of return is 10%, what is the net present value of the project?

A. $12,674.60
B. $1,211.80
C. ($1,950.77)
D. ($1,211.80)
E. None of the above

10. Project X has a cost of $53,847 and its expected net cash flows are $12,000 p.a. for the
next eight years. What is the project’s internal rate of return?

A. 13%
B. 12%
C. 15%
D. 9.5%
E. None of the above

11. The current dividend of Vandalay Industries is $1.00 and is expected to grow at 20% p. a.
over the next three years and then grow at 6% p.a. forever. The required rate of return on
stocks in Vandalay’s risk class is 10% p.a. Based on this information, Vandalay’s current
stock price should be closest to:

A. $34.40.
B. $38.00.
C. $45.80.
D. $49.40.
E. None of the above.

12. CMC Co. is experiencing a period of rapid growth in its earnings and profitability. Earnings
and dividends are expected to grow at a constant annual rate over the foreseeable future.
CMC’s most recent dividend per share was $1.00, and the required rate of return on the stock
is 10% p.a. Based on this information the current price of CMC’s shares has been estimated at
$25. The constant annual growth rate in dividends that is implied by this information is
closest to:

A. 4.00%.
B. 4.23%.
C. 5.77%.
D. 6.00%.
E. None of the above.

13. You are saving for retirement. To live comfortably, you decide that you will need $2.5 million
dollars by the time you are 65. If today is your 30th birthday, and you decide, starting today, and on
every birthday up to and including your 65th birthday, that you will deposit the same amount into
your savings account. Assuming the interest rate is 5%, the amount that you must set aside each
year on your birthday is closest to:

A) $71,430
B) $27,680
C) $26,100
D) $26,260
E) None of the above

Sample Mid Semester Exam 1 3

14. Your friend is considering investing $5,000 at the end of year 1 in an investment account with
the cash flow growing at an annual rate of 6%. If the return on the investment is expected to
be 8% p.a., the total amount she will have accumulated at the end of three years is closest to:

A. $22,307.
B. $20,032.
C. $17,174.
D. $10,000
E. None of the above.

Sample Mid Semester Exam 1 4

 ONLY THIS PAGE MAY BE DETACHED FROM THE EXAM BOOKLET

F = P (1+ r)n P = F / (1+r)n

r 72/n re = (1 + r/m)m - 1

P(OA) = (C/r) [ 1- 1/(1+r)n ] F(OA) = (C/r)[(1+r) n – 1]

P(DA) = {(C/r) [ 1- 1/(1+r)n ]}/ (1 + r)n P0 = C(1+g)/(r-g)

P0 = [C/r] P0 = [C/r]/(1 + r)n

P (AD) = C + [C / r][(1 - (1 + r)-(n-1)] Fn-1 (AD) = {C + [C / r][(1 - (1 + r)-(n-1)]}[1 + r ]n-1

Dt
P0 = I kd 1 (1 kd ) n
Pn (1 kd )n Pt 1
ke g
P0 E1
P0 PVGO
E1 ke g ke

ra = [R1 + R2 + ... + Rn]/n rg = [(1 + R1) (1 + R2) …(1 + Rn)]1/ n - 1

FaceValue 365
Annualized Cost of BAB 1 P0 = Fn / [ 1+ (n/365) r]
P0 Costs n
P0 = Fn /[1 + (n/365) r] P0 = DP / k P

n
Ct n
Ct
NPV t
C0 t
C0 0
1 k
t 1 t 1 1 r
D0 (1 g ) C1 C2 Cn F
ke g D 2 n n
P0 1 kd 1 kd 1 kd 1 kd
E D p
k0 ke E V kd D V k0 ke kd kp
V V V
1 Nominal Rate
Real rate 1 Ct ( Rt OCt )(1 tc ) tc Dt
1 Inflation Rate
Average annual earnings 100 Average annual earnings 100
ra % ra %
Initial investment in a project 1 Average investment in a project 1

Sample Mid Semester Exam 1 5