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FIN 515 Week 4 Midterm Exam Answers

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1. (TCO A) The distinguishing feature of a corporation is that: (Points : 10)
there is no legal difference between the corporation and its owners.
it is a legally defined, artificial being, separate from its owners.
it spreads liability for its corporate obligations to all shareholders.
provides limited liability only to small shareholders.

Question 2.2. (TCO A) You overhear your manager saying that she plans to book an ocean-view room on her upcoming trip to Miami for a meeting. You know that the interior rooms are much less expensive, but that your manager is traveling at the company’s expense. This use of additional funds comes about as a result of: (Points : 10)
an agency problem.
an adverse selection problem.
a moral hazard.
a publicity problem.

Question 3.3. (TCO A) If Company A and Company B are in the same industry and use the same production method, and Company A’s asset turnover is higher than that of Company B, then all else equal, we can conclude that (Points : 10)
Company A is more efficient than Company B.
Company A has a lower dollar amount of assets than Company B.
Company A has higher sales than Company B.
Company A has a lower ROE than Company B.

Question 4.4. (TCO B) If we use future value rather than present value to decide whether to make an investment, (Points : 10)
we will make a bad decision, since the future value will always be higher if the discount rate is positive.
we will make a bad decision, since the future value will always be lower if the discount rate is positive.
we will make the same decision using either future value or present value.
there is not enough information given to answer the question.

Question 5.5. (TCO D) Which of the following statements is FALSE? (Points : 10)
Bonds are securities sold by governments and corporations to raise money from investors today in exchange for promised future payments.
By convention, the coupon rate is expressed as an effective annual rate.
Bonds typically make two types of payments to their holders.
The time remaining until the repayment date is known as the term of the bond.

Question 6.6. (TCO D) Which of the following statements is FALSE? (Points : 10)
We should use the general dividend discount model to value the stock of a firm with rapid or changing growth.
As firms mature, their growth slows to rates more typical of established companies.
The dividend discount model values the stock based on a forecast of the future dividends paid to shareholders.
The simplest forecast for the firm’s future dividends states that they will grow at a constant rate, g, forever.

1. (TCO A) Suppose that Novak Company experienced a reduction in its ROE over the last year. This fall could be attributed to what factor? Explain in details. (Points : 20)

1. (TCO B) A certain investment will pay $10,000 in 20 years. If the annual return on comparable investments is 8%, what is this investment currently worth? Show your work.(Points : 20)

2. (TCO B) You take out a 4-year car loan for $18,000. The loan has a 4% annual interest rate. The payments are made monthly. What are the monthly payments? Show your work. (Points : 20)

3. (TCO D) A particular bond has 8 years to maturity. It has a face value of $1,000. It has a YTM of 7% and the coupons are paid semiannually at a 10% annual rate. What does the bond currently sell for? Show your work. (Points : 20)

4. (TCO D) A bond currently sells for $1,000 and has a par of $1,000. It was issued two years ago and had a maturity of 10 years. The coupon rate is 7% and the interest payments are made semiannually. What is its YTM? Show your work. (Points : 20)

5. (TCO D) A stock has just paid a dividend and declared an annual dividend of $2.00 to be paid one year from today. The dividend is not expected to grow. The return on equity for similar stocks is 12%. What is P0? Show your work. (Points : 20)

6. (TCO D) A stock has just paid a dividend and has declared an annual dividend of $2.00 to be paid one year from today. The dividend is expected to grow at a 5% annual rate. The return on equity for similar stocks is 12%. What is P0? Show your work. (Points : 20)

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