# Midterm Exam

Pages: 5 (1066 words) Published: January 27, 2012
NAME: _______________________________

Midterm Exam
I. Multiple Choices (40%)

( b)1.The primary goal of financial management is to:
a.maximize current dividends per share of the existing stock.
b.maximize the current value per share of the existing stock.
c.avoid financial distress.
d.minimize operational costs and maximize firm efficiency.
e.maintain steady growth in both sales and net earnings.

( c ) 2.The interest rate expressed as if it were compounded once per year is called the _____ rate.
a.stated interest
b.compound interest
c.effective annual
d.periodic interest
e.daily interest

( b )3.You are comparing two investment options. The cost to invest in either option is the same today. Both options will provide you with \$20,000 of income. Option A pays five annual payments starting with \$8,000 the first year followed by four annual payments of \$3,000 each. Option B pays five annual payments of \$4,000 each. Which one of the following statements is correct given these two investment options?

a.Both options are of equal value given that they both provide \$20,000 of income.
b.Option A is the better choice of the two given any positive rate of return.
c.Option B has a higher present value than option A given a positive rate of return.
d.Option B has a lower future value at year 5 than option A given a zero rate of return.
e.Option A is preferable because it is an annuity due.

( d )4.Your parents are giving you \$100 a month for four years while you are in college. At a 6% discount rate, what are these payments worth to you when you first start college?
a.\$3,797.40
b.\$4,167.09
c.\$4,198.79
d.\$4,258.03
e.\$4,279.32

( c )5.The time value of money concept can be defined as:
a.the relationship between the supply and demand of money.
b.the relationship between money spent versus money received.
c.the relationship between a dollar to be received in the future and a dollar today.
d.the relationship of interest rate stated and amount paid.
e.None of the above.

( b)6.Marko, Inc. is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of \$5,000, \$9,000, and \$15,000 over the next three years, respectively. After that time, Marko feels ABC will be worthless. Marko has determined that a 14% rate of return is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.?

a.\$19,201.76
b.\$21,435.74
c.\$23,457.96
d.\$27,808.17
e.\$31,758.00

( b)7.What is the effective annual rate if a bank charges you 7.64% compounded quarterly?
a.7.79%
b.7.86%
c.7.95%
d.7.98%
e.8.01%

( a)8.A General Co. bond has an 8% coupon and pays interest annually. The face value is \$1,000 and the current market price is \$1,020.50. The bond matures in 20 years. What is the yield to maturity?

a.7.79%
b.7.82%
c.8.00%
d.8.04%
e.8.12%

( a)9.Wine and Roses, Inc. offers a 7% coupon bond with semiannual payments and a yield to maturity of 7.73%. The bonds mature in 9 years. What is the market price of a \$1,000 face value bond?

a.\$953.28
b.\$963.88
c.\$1,108.16
d.\$1,401.26
e.\$1,401.86

( a)10.What is the net present value of a project that has an initial cash outflow of \$12,670 and the following cash inflows? The required return is 11.5%.

YearCash Inflows
1 \$4,375
2 \$ 0
3 \$8,750
4 \$4,100
a.\$218.68
b.\$370.16
c.\$768.20
d.\$1,249.65
e.\$1,371.02

II. Essays/Calculations (60%)

1. You are planning to save for retirement over the next 30 years. To do this, you will invest \$1,000...