Fe101 Final Review

School of Management

FE101

Summer 2015

Final Exam

Before beginning the examination please provide the information on the Student Enrollment Sheet: In the section for I.D. Number, please make the first two numbers correspond to the Identifier number for your section:

Follow your section identifier with the eight digits of your BU ID number.  For example, a student in section A2 would make the first two numbers 02.  If her ID number was 82829595, she would fill in the ten spaces for ID Number with 0282829595 and neatly bubble the spaces underneath.  

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Version A

1. A university issues a bond with a  face value of $10,000 and a coupon rate of 5.65% that matures on 7/15/2025.  The holder of this bond receives coupon payments of $282.50.  How frequently are coupon payments made in this case?

1. monthly
2. quarterly
3. semiannually
4. annually

1. Consider a zero-coupon bond with a $1,000 face value and ten years left until maturity.  If the bond is currently trading for $459, then the yield to maturity on this bond is closest to:

1. 7.5%
2. 10.4%
3. 9.7%
4. 8.1%

1. What is the coupon rate of a two-year $10,000 bond with semiannual coupons and a price of $9543.45 if it has a yield to maturity of 6.8%?

1. 4.32%
2. 2.16%
3. 5.45%
4. 10.92%

1. Which one of the following bonds will trade at a premium?

1. A zero coupon bond that was purchased before interest rates fell sharply
2. A bond with a coupon of 8.6% and a yield to maturity of 9.0%
3. A zero coupon bond that was purchased before interest rates increased sharply
4. None of the bonds above will trade at a premium

1. Given the table above which shows typical yields for 5 years bonds of varying credit ratings, what is the most likely credit rating of your company if your 5-year, semiannual bonds with a face value of $5,000 and a coupon rate of 7% are trading at a price of $5,483.86?

1. AAA
2. AA
3. A
4. BBB

1. Which of the following bonds is the most sensitive to a change in interest rates.  Each bond is semiannual, $10,000 face value.

Coupon Rate                Maturity

1. Bond A              4.3%                  8 Years
2. Bond B              6.0%                  8 Years
3. Bond C              5.2%                  7 Years
4. Bond D             15.0%                  7 Years

1. You purchase a one year U.S. Treasury bill with a face value of $10,000 at a price of $9,600 and hold it until maturity.  Inflation over that year was measured at 3.0%.  What was the real rate of interest that you earned?

1. 1.13%
2. 1.17%
3. 0.29%
4. 1.12%

1. You are attending your first year of college and must borrow $50,000 for tuition. Based solely on interest rate, which loan would you choose to take?

1. 6.00% APR with annual compounding
2. 5.90% APR with monthly compounding
3. 5.95% APR with weekly compounding
4. 6.00% APR with daily compounding

1. A bank pays interest quarterly with an EAR of 8.0%.  How much interest will you receive in the first quarter if you deposit $500 into this account?

1.  $10.00
2. $3.21
3. $9.71
4. $40.00

1. Theresa is saving for a vacation.  She deposits $300 per month into an account that pays 6% APR with monthly compounding.  If her vacation is going to cost $10,000, when will she be able to take this vacation?

1. 33.3 months
2. 25.6 months
3. 18.9 months
4. 30.9 months

1. If a company has an expected return on investment of 4.9% and a cost of equity capital of 4.3%, an increase in the dividend payout ratio would most likely be expected to:

1. Increase the current price of its stock
2. Decrease the current price of its stock

1. If a bank has just introduced a new auto loan with a monthly periodic interest rate of 0.6434%, how will the bank quote this interest rate as an EAR?

1. 8.00%
2. 7.72%
3. 387.07%
4. 0.6434%

1. You have just won the lottery!  This lottery will pay you $1,000 per week forever.  If the interest rate is 11% APR with weekly compounding, what is the present value of your winnings?

1. $472,727
2. $9,091
3. $8,610
4. $497,775

1. A bank offers an account with an APR of 6% and an EAR of 6.167%.  How does the bank compound interest for this account?

1. weekly
2. monthly
3. semiannually
4. quarterly

1. Which of the following statements is FALSE?

1. The investor’s opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term of the cash flows being discounted.
2. Interest rates we observe in the market will vary based on how they are being quoted, the term (length) of the investment, and risk.
3. The opportunity cost of capital is the return that an investor foregoes when the investor chooses to take on a new investment.
4. For investment in which the costs precede the benefits, an increase in the market rate of interest will increase the present value of that investment.

1. A stock is bought for $22.00 and sold for $26.00 one year later, immediately after it has paid a dividend of $1.50.  What is the cost of equity capital for this stock?

1. 26.83%
2. 21.15%
3. 25.00%
4. 1.25%

1. Sampson & Team Inc. had share price at the start of the year of $26.20, paid a dividend of $0.56 at the end of the year, and has an equity cost of capital of 17.0%.  What share price would you expect Sampson to have at the end of the year, just after it pays its dividend?

1. $30.09
2. $26.20
3. $30.65
4. $31.21

1. A company has an expected earnings growth rate of 8% forever.  If its dividend payout rate is 40%, what rate of return must the company be earning on its new investments?

1. 5.00%
2. 13.33%
3. 20.00%
4. 7.50%

1. A company with a cost of equity capital of 14% has reduced its dividend and invested in projects with returns of 12.0%.  The new projects have the same risk as the company’s existing investments.  Which of the following statements is true?

1. The company’s earnings will grow.
2. The company’s stock price would be expected to decrease.
3. The company’s cost of equity capital should stay the same.
4. All of the above are true.

1. You expect TMZ Industries will have earnings per share of $5.00 this year and will pay out $2.00 of these earnings to shareholders in the form of a dividend.  TMZ’s cost of equity capital is 17.0% and its share price is $50.00.  What growth rate in earnings is the market expecting?

1. 13%
2. 7%
3. 6.5%
4. 10%

1. Reddit Corp. is expected to pay a dividend of $1.20 at the end of the coming year.  It is expected to sell for $42.00 at the end of the year.  If its equity cost of capital is 14%, what is the expected capital gain from the sale of the stock at the end of the coming year?

1. $5.30
2. $4.11
3. $37.89
4. $5.16

1. You take out a new loan.   At the beginning of the first year, the outstanding principal is $600.  At the end of the first year, there is $450 principal outstanding.   Your monthly payments are $15.   How much interest did you pay in the first year?

1. $45
2. $180
3. $30
4. There is not enough information to determine the interest paid

1. A C corporation earns $12.85 per share before taxes and pays a dividend of $8.50 per share. The corporate tax rate is 42%, the personal tax rate on dividends is 21%, and the personal tax rate on non-dividend income is 28%. How much would an individual pay in taxes on the dividend?

1. $1.79
2. $2.38
3. $6.12
4. $6.71

1. A C corporation has a dividend payout ratio of 30% and earns $4.30 per share before taxes.  The corporate tax rate is 39%, the personal tax rate on dividends is 21% and the personal tax rate on non-dividend income is 32%.   What is the after-tax amount that an individual would receive from the dividend?

1. $1.29
2. $0.79
3. $0.62
4. $1.02

1. ABC Corp will have earnings per share of $60 this year and expect that they will pay out $20 of these earnings to shareholders in the form of a dividend.   ABC’s stock is currently trading for $171.43 and their equity cost of capital is 25%.   What return must the company be earning on its new investments?

1. 40%
2. 20%
3. 35%
4. -10%

1. Summer Vacations To Go, Inc (“SVTG”) is expected to pay a dividend of $3 in one year and a dividend of $6 in two years.  In two years, the stock is expected to sell for $60 right after it pays the $6 dividend.   If their equity cost of capital is 12%, which of the following would you expect to be the closest to the current price of a share of SVTG’s stock?

1. $61.61
2. $55.29
3. $55.01
4. $52.61

The following  questions are worth the number of points indicated.  Partial credit may be given.  Work neatly and show all your work.  Show either the formula used or the calculator inputs used to work the problem.  

Your answer will be marked incorrect if:

• you do not show your work
• we cannot find your answer
• we cannot read your answer
• we don’t know which number is your answer

1. (4 points)   You have agreed to set up a fund for your nephew that will pay him $100 today, $200 one year from today, $300 two years from today and $400 every year (forever) beginning three years from today?  Assuming an interest rate of 8%, what will it cost to fully fund these payments today?

$100 + $200/1.08 + [$300 + $400/.08]/1.082  =  $4,829.08

1. (6 points)  You are buying your first house and must take out a $250,000 loan to purchase it.  You choose a 30 year loan with monthly payments and an interest rate of 4.0% EAR.

A) How much is your monthly payment? (2 points)

N=360  I/Yr = (1.04^(1/12) – 1) * 100 = 0.32737   PV=250,000  FV=0

PMT=$1,183.25