# Bond and Effective Annual Rate

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AFIN 253 Financial Management

MID-SEMESTER TEST: TUESDAY 10th APRIL 2012 Time allowed: 1 hour 30 minutes plus 10 minutes reading time. Instructions 1. Writing is not permitted in reading time. All pens, pencils and highlighters must be on your desk. 2. Part A - There are 15 multiple choice questions worth 1 mark each. Select the 'one best' answer choice for each question. Answers to these must be recorded on a red-coloured General Purpose Answer Sheet which will be marked by a computer. Please make sure your name and SID is on this sheet. Answers on this test question paper will not be marked. 3. Part B - There are 2 short answer questions. The first is worth 2 marks, the second 3 marks. Show all relevant calculations. Note that only pages 9 and 10 will be marked in this answer booklet. You should not write answers to part B on any other pages. 4. Materials Permitted A non-programmable calculator without text storage capability is permitted. Financial calculators may be used. Dictionaries may not be used. Mobile phones must be turned off and left at the front of the examination room. Bags must be left at the front of the room.

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Part A (15 marks)

Select the one best answer choice for each question.

Question 1: A stock just paid its annual dividend of $9. The share price is $60. The required return of the stock is 10% pa as an effective annual rate. What is the implied growth rate of the dividend? (a) -0.8565 (b) -0.0500 (c) -0.0435 (d) 0.0000 (e) 0.1500

Question 2: A stock is expected to pay a dividend of $15 in one year (t=1), then $25 for 9 years after that (payments at t=2 ,3,...10), and on the 11th year (t=11) the dividend will be 2% less than at t=10, and will continue to shrink every year after that forever. The required return of the stock is 10%. All rates are effective annual rates. What is the value of the stock? (a) $361.78 (b) $236.33 (c) $237.93 (d) $348.69 (e) $223.24

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Question 3: Which of the following statements is incorrect? (a) If a project has a positive NPV, its Profitability Index (PI) will be more than 1. (b) If a project has a negative NPV and the discount rate is zero, then the payback period will be infinite so the project will never pay back its costs. (c) If a project's NPV is zero, then the PI must be 1. (d) If a project has a negative NPV, its IRR will be negative. (e) The NPV and the Average Accounting Return (AAR) are mathematically unrelated. A positive NPV has no bearing on the AAR.

The following data relates to the next two questions. Time 0 1 2 Project Cash Flows -90 30 105

The required return on the project is 10%, given as an effective annual rate. Question 4: What is the Profitability Index (PI) of the project? (a) 1.0862 (b) 1.2672 (c) 1.3143 (d) 1.5333 (e) 1.7783

Question 5: What is the payback period for the project? (a) 0.4286 yrs (b) 1.4286 yrs (c) 1.5714 yrs (d) 2.5714 yrs (e) 2.7500 yrs 3

Question 6: You're considering investment in a particular company. They have preference shares, ordinary shares, senior debt and junior debt. Which is the safest investment? Which will give the highest returns? (a) Junior debt is the safest. Preference shares will have the highest returns. (b) Preference shares are the safest. Ordinary shares will have the highest returns. (c) Senior debt is the safest. Ordinary shares will have the highest returns. (d) Junior debt is the safest. Ordinary shares will have the highest returns. (e) Senior debt is the safest. Junior debt will have the highest returns.

Question 7: You just agreed to a 30 year fully amortising mortgage with monthly payments of $2500. The interest rate is 9% pa which is not expected to change. How much did you borrow? After 10 years, how much will be owing on the mortgage? The interest rate is...

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