ADM2350_FinalExam_Practice_NoSolutions

pdf

School

University of Toronto *

*We aren’t endorsed by this school

Course

ADM3360

Subject

Finance

Date

Jan 9, 2024

Type

pdf

Pages

Uploaded by AgentTroutPerson130

1. You want to save for retirement by making 20 equal annual contributions of $20,000/year starting next year. Unfortunately, you had to miss your 8 th contribution. To compensate for this, you have decided to increase your contributions for the remaining 12 years (from t=9 till t=20). By how much you will have to increase your future contributions so that you will accumulate the same amount on your retirement account. Assume the annual interest rate (with annual compounding) is 8%. a) $1,666.67 b) $3,480.29 c) $2,037,04 d) $2,653.90 2. You want to save for retirement by making equal annual contributions over the next 40 years and use your retirement savings to make equal withdrawals for 30 years after retirement. Assume you make your first withdrawal exactly 1 year after your last deposit. At t=15 you received a one-time bonus of $30,000 that you add to your retirement account in addition to your regular contributions. Assume you still plan to make 30 equal withdrawals. By how much your annual retirement withdrawals have been increased because of this extra contribution? Assume the annual interest rate (with annual compounding) is 8%. a) $2,664.82 b) $8,453.27 c) $18,249.97 d) Cannot be determined from the available information 3. Find the Present Value of growing perpetuity with the first payment of $1000 at t=6 and a growth rate of 3%. No payments are made in years 1-6. Assume the annual interest rate (with annual compounding) is 8%. a) $12,603.39 b) $13,611.66 c) $14,924.31 d) $15,670.52 4. You just took a 30-year $416,979.04 mortgage with $2,500 monthly payments and APR=6% (compounded monthly). What will be your balance 20 years from now (right after you’ll pay your 240 th payment? a) $138,993 b) $196,318 c) $208,490 d) $225,184

5. By taking advantage of your current saving account and credit line promotions, you were able to borrow $100,000 at 2.5% APR compounded quarterly and deposit this money into a saving account that generates 2.5% APR compounded monthly. How much money will you have in 1 year after you withdraw money from your saving account and repay your debt? a) Less than $10 b) Between $10 and $50 c) Between $50 and $100 d) More than $100 6. How an increase in interest rate affects bond prices? a) It increases the price of premium bonds and decrease the price of discounted bonds b) It decreases the price of premium bonds and increase the price of discounted bonds c) It increases the price of both premium and discounted bonds d) It decreases the price of both premium and discounted bonds 7. What can you say about a bond with YTM>YTC a) Most likely, it is underpriced. b) Most likely, it is overpriced. c) Most likely, it will be called. d) Most likely, it will not be called. 8. What can you say about a bond if its price has increased since last year while its YTM remained the same? a) The bond is risky b) The bond is risk-free c) The bond is selling at a discount d) The bond’s rating has been improved 9. Consider a stock that is expected to pay $2 dividends next year, $3 dividends in 2 years, $4 dividends in 3 years, and, after that, the dividends are expected to grow at a constant rate of 6% per year forever. The stock’s required return is 14%. Find the current stock price. a) $42.54 b) $37.81 c) $47.29 d) $44.16

10. Consider a stock that is expected to pay $2 dividends next year, $3 dividends in 2 years, $4 dividends in 3 years, and, after that, the dividends are expected to grow at a constant rate of 6% per year forever. The stock’s required return is 14%. Find the capital gain yield (rounded to the nearest percent) during the first year. a) 6% b) 8% c) 9% d) 14% 11. Consider a stock that is expected to pay $2 dividends next year, $3 dividends in 2 years, $4 dividends in 3 years, and, after that, the dividends are expected to grow at a constant rate of 6% per year forever. The stock’s required return is 14%. Find the dividend yield during the seventh year. a) 6% b) 8% c) 9% d) 14% 13. The expected return on the stock of SafeComp is equal to 14% and its beta coefficient is equal to 0.8. Find the expected return on the stock of RiskyComp if its beta coefficient is equal to 1.2 and the risk-free interest rate is 5% a) 21% b) 18.5% c) 9.3% d) Cannot be determined from the available information. 14. Find the NPV of the project that requires a $100,000 initial investment, generates $20,000 annual revenue for 10 years starting next year, and requires an additional expense of $10,000 to close the project at the end of the tenth year. Assume the required rate of return is 12% a) $3,004 b) $9,785 c) $13,004 d) $14,157

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

15. A project requires a $10,000 initial investment and generates $3,000 annual profit for 8 years. Assume the required rate of return is 12%. Find the EAA of this project. a) $987 b) $613 c) $399 d) $0 16. Which of the following investment criteria is best to use to choose projects from a pool of available projects when you have a fixed budget, can implement several projects simultaneously, and projects are not repeating a) NPV criteria b) PI criteria c) EAA criteria d) Discounted Payback Period criteria 17. Find D/E ratio for a firm with 20% cost of equity, 10% pre-tax cost of debt, and 40% corporate tax rate if the firm’s WACC is equal to 14% a) 0.40 b) 0.43 c) 0.57 d) 0.75 18. A firm that is expected to pay $3 dividends next year, the dividends are expected to grow at a constant rate of 3% per year, and the current price of the firm’s shares is $60. Assume the after- tax cost of debt is 2%. Find the cost of equity. a) 7% b) 8% c) 9% d) 10% 19. Consider a firm that has invested in a 5-year project. It faces a 40% corporate tax rate and its investment belongs to the CCA class with a 30% depreciation rate. A new “take care of equipment” program implemented by the firm allowed it to increase the salvage value of the equipment by $20,000. What was the effect of this program on NPV if the project’s discount rate is 12%? a) $6,809 b) $8,106

c) $9,714 d) $11,349 20. Consider a firm that has invested in a 5-year project. It faces a 40% corporate tax rate and its investment belongs to the CCA class with a 30% depreciation rate. By how much the NPV of the project will increase if the firm would be able to negotiate a $20,000 discount on the equipment it bought? Assume that the salvage value of the equipment stays the same. Assume also that the project’s discount rate is 12%. a) $14,592 b) $12,000 c) $11,349 d) $10,714 21. Consider a firm that has invested in a 5-year project. It faces a 40% corporate tax rate and its investment belongs to the CCA class with a 30% depreciation rate. By how much the NPV of the project will increase if the firm were able to use its inventory more efficiently and reduce the required NWC by $20,000? Assume the project’s discount rate is 12%. a) $12,000 b) $9,974 c) $9,013 d) $8,651 23. You have deposited $1,500 in an account that promises to pay 8% compounded quarterly for the next five years. How much will you have in the account at the end of 5 years? a) $1,598.33 b) $2,228.92 c) $2,203.99 d) $6991.44 24. You just learnt that you are going to receive $300 a year forever. In addition, this amount will increase at the rate of 5% forever. However, these payments will not begin until five years from today. What is the present value of these payments assuming a discount rate of 6%? a) 22,417.75 b) 23,762.81 c) 25,188.58 d) 30,000.00

25. First Bank pays 6.2% interest compounded semi-annually, Second Bank pays 6.1% compounded quarterly, and Third Bank pays 6% compounded monthly. Which bank pays the highest effective annual rate? a) First Bank b) Second Bank c) Third Bank d) There is no single highest effective annual rate 26. Jane has just purchased an apartment for $250,000. Her down payment is $70,000 and the remaining amount of the purchase will be financed using a 20 year mortgage. The bank as quoted her a rate of 5.6% with semi-annual compounding and monthly payments. How much will her monthly payments be? a) $1,725 b) $1,448 c) $1,242 d) $987 27. A cash-strapped young professional offers to buy your car with four, equal annual payments of $3,000, beginning two years from today. Assuming you’re indifferent to cash versus credit, that you can invest at 10%, and that you want to receive $9,000 for the car, should you accept? a) Yes; present value is $9,510. b) Yes; present value is $11,372. c) No; present value is $8,645. d) No; present value is $7,461. 28. What happens when a bond's expected cash flows are discounted at a rate lower than the bond's coupon rate? a) The price of the bond increases. b) The coupon rate of the bond increases. c) The par value of the bond decreases. d) The coupon payments will be adjusted to the new discount rate. 29. What is the rate of return for an investor who pays $1,054.47 for a three-year bond with a 7% coupon and sells the bond one year later for $1,037.19? Assume annual coupon. a) 5.00% b) 5.33% c) 6.46% d) 7.00%

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

30. What would be the expected price of a stock when dividends are expected to grow at a 25% rate for three years, then grow at a constant rate of 5%, if the stock’s required return is 13% and next year’s dividend will be $4.00? a) 68.63 b) 74.41 c) 79.47 d) 62.10 35. Which of the following would likely have the greatest amount of systematic risk? a) A portfolio made up entirely of Treasury bills. b) The market portfolio (a portfolio of all stocks traded). c) A portfolio half invested in the market portfolio and half invested in Treasury bills. d) A portfolio half invested in the market portfolio and half invested in stocks with betas equal to 1.5 36. Which of the following is a correct statement about diversification? a) Diversification is least effective when security returns are always moving in opposite directions. b) It is possible to form a portfolio with zero risk if two perfectly negatively correlated securities are available. c) When a stock is combined into a portfolio, the standard deviation of that portfolio always remains unchanged. d) There is no limit to the amount of risk that can be eliminated through diversification. 37. If a stock's beta is 0.8 during a period when the market portfolio was down by 10%, then, a priori, we could expect the return on this individual stock to: a) lose more than 10%. b) lose, but less than 10%. c) gain more than 10%. d) gain, but less than 10%. 39. What is a firm's weighted-average cost of capital if the stock has a beta of 1.45, Treasury bills yield 5%, and the market risk premium is 9%? In addition to equity, the firm finances 30% of its assets with debt that has a yield to maturity of 9%. The firm is in the 35% marginal tax bracket. a) 12.66% b) 10.30% c) 9.31% d) 14.39% 40. Which of the following statements is true for a project with $20,000 initial cost, cash inflows of $5,800 per year for six years, and a discount rate of 15%? a) Its payback period is roughly 3 1/2 years.

b) Its NPV is $2,194. c) Its IRR is 10.85%. d) Its profitability index is 0.109. 41. Camp Fortune wants to buy a new chairlift for their hill. After their market research, they have narrowed things down to two possible chairlifts they are considering purchasing. Key information about these options are as follow. Chairlift A costs $695,000, last 7 years and provides an annual profit of $170,000. Chairlift B costs $1,215,000, last 15 years and provides an annual profit of $185,000. Assuming zero tax rate and a discount rate of 10%, which chairlift should Camp Fortune buy? a) Chairlift A because it has the highest EAA b) Chairlift B because it has the highest EAA c) The chairlift with the highest NPV d) The chairlift with the lowest EAA 42. An investor has been invited to invest in a project that will require an initial investment of $10,000. At the end of years 1, 2 and 3 the investment will return $2,000, $4,000 and $6,000 respectively. She figures her Cost of Capital is 7.5%. What is the IRR? a) 8.04% b) 8.21% c) 9.79% d) 10.00% 43. You will use the following information to answer 3 different questions (I will repeat it again, but it is the same information; only the question at the end is different). A project requires the purchase of an asset with an initial cost of $500,000. The project will have a life of 8 years. The asset will be depreciated with a CCA rate of 20% and it is expected to be sold at $60,000 at the end of the project. Sales revenues are expected to be $90,000 per year over the course of the project. Variable costs will be 15% of sales revenue and fixed costs are expected to be $15,000 per year. The firm also needs to invest $20,000 in net working capital at the beginning of the project, which will be recovered when the project ends. $10,000 has been spent in the last month projecting the profitability of the new asset. Assume that the tax rate is 30% and the WACC is 10%. What is the present value of the operating cash flows (i.e., revenues minus costs after tax)? a) $ 229,668.57 b) $ 272,497.43 c) $ 394,917.93 d) $ 428,103.26 44. You will use the following information to answer 3 different questions (I will repeat it again, but it is the same information; only the question at the end is different). A project requires the purchase of an asset with an initial cost of $500,000. The project will have a life of 8 years. The asset will be depreciated with a CCA rate of 20% and it is expected to be sold at $60,000 at the end of the project. Sales revenues are expected to be $90,000 per year over the course of the project. Variable costs will be 15% of sales revenue and fixed costs are expected to be $15,000 per year. The firm also needs to invest $20,000 in net working capital at the beginning of the project, which will be recovered when the project ends. $10,000 has been

spent in the last month projecting the profitability of the new asset. Assume that the tax rate is 30% and the WACC is 10%. What is the present value of the total depreciation tax shield? a) $52,739.20 b) $ 77,973.42 c) $ 89,856.46 d) $94,034.39 45. You will use the following information to answer 3 different questions (I will repeat it again, but it is the same information; only the question at the end is different). A project requires the purchase of an asset with an initial cost of $500,000. The project will have a life of 8 years. The asset will be depreciated with a CCA rate of 20% and it is expected to be sold at $60,000 at the end of the project. Sales revenues are expected to be $90,000 per year over the course of the project. Variable costs will be 15% of sales revenue and fixed costs are expected to be $15,000 per year. The firm also needs to invest $20,000 in net working capital at the beginning of the project, which will be recovered when the project ends. $10,000 has been spent in the last month projecting the profitability of the new asset. Assume that the tax rate is 30% and the WACC is 10%. What is the NPV of this project? a) -$175,235.27 b) -$163,154.38 c) -$96,783.21 d) $23,398.79

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version