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Introduction to Finance

Final Exam

May 2021

Section A

Each MCQ has only one correct answer. Each MCQ is worth 2 points. If you get a         number that is slightly different from all the options (probably due to approximation of fraction), choose the nearest option.

Question 1

Weihan purchased 100 shares of Apple Inc. ’s stock. His shares have increased in value from the $22 a share he originally paid to today's market value of $53 a share. Assume Apple Inc. goes bankrupt and owes $10 billion more in debts than the firm can pay after liquidating all of its assets. What is the maximum loss per share Weihan will incur on this investment?       (Reminder: Apple Inc. is a Corporation.)

A.  $22 / share

B.  $27.5 / share

C.  $37.5 / share

D.  $43 / share

E.  $53 / share

Question 2

Consider the following prices from Weihan’s sports bar:

Lemonade

£1.5

Fish and Chips

£6

Ice Cream

£1.5

Weihan’s sports bar also offers a meal deal consists of a lemonade, a fish and chips, and an   ice cream.  Assuming that there is a competitive market for this bar's food and drink items, at what price must this meal deal sell to ensure the absence of an arbitrage opportunity and        uphold the law of one price?

A) £8

B) £8.5

C) £9

D) £9.5

E) £7.5

Question 3

 

Security

Term (years)

Yield

(%)

Treasury

20

3. 1%

AAA Corporate

20

7.7%

BBB Corporate

20

10.5%

B Corporate

20

12.6%

The credit spread on AAA-rated corporate bonds is:

A) 4.1%

B) 4.6%

C) 5.1%

D) 7.4%

E) 9.5%

Question 4

In 2006, a firm had EBIT of $22 million, interest income of $1 million, taxes of $3 million. In 2006, this firm had price per share of $4.5, and shares outstanding of 10 million.

In 2006, this firm’s price-earnings ratio is closest to:

A) 2.25

B) 2.50

C) 2.81

D) 2.67

E) 2.43

Question 5

In 2018, a firm had total liabilities of $15 million, current assets of $3 million, and fixed assets of $19 million.

In 2018, this firm had market-to-book ratio of 6 and price-earnings ratio of 17.

In 2018, this firm’s net income was closest to:

A) 3.47

B) 2.88

C) 3.29

D) 2.62

E) 2.47

Question 6

There is an investment opportunity which has cost of $1500 today. After 9 years, it will bring cash flow of $6500 without any risk. If the risk-free interest rate is 4%, the NPV of this          investment opportunity is closest to:

A) $2689.96

B) $3066.81

C) $2347.34

D) $2825.91

E) $3236.83

Question 7

If the current rate of interest is 7%, then the present value of a perpetuity that pays $100 every year (starting from next year) is closest to:

A) $2000

B) $1666.67

C) $1428.57

D) $1805.32

E) $1767.58

Question 8

Suppose the current zero-coupon yield curve for risk-free bonds is as follows:

Maturity (years)

1

2

3

4

5

YTM

3.78%

3.90%

4.50%

4.87%

5.40%

The price per $1000 face value of a three-year, zero-coupon, risk-free bond is closest to:

A) $886.44

B) $883.89

C) $881.35

D) $878.82

E) $876.30

Question 9

Use the following information to answer the question below.

Maturity (years)

1

2

3

4

5

Zero-Coupon YTM

 

3.15%

 

3.50%

 

3.80%

 

4.15%

 

4.40%

The price today of a two-year default-free security with a face value of $100 and an annual coupon rate of 11% is closest to:

A) $112.38

B) $114.28

C) $116.19

D) $115.72

E) $118.93

Question 10

Interests on a savings account are compounded monthly at an effective annual rate of 7%. The APR on this saving account is closest to:

A) 3.93%

B) 4.89%

C) 5.84%

D) 6.78%

E) 7.72%

Question 11

A company’s bonds bear a coupon rate of 7.5 percent, payable annually. The bonds mature in 12 years, sell at par, and have a $10,000 face value. What is the yield to maturity?

A) 5.5%

B) 6%

C) 6.5%

D) 7%

E) 7.5%

Question 12

Earlier today, a common stock has just paid a dividend of $3. The dividend will increase by 6 percent annually.

What is the stock worth? The discount rate is 7.50%.

A) $212

B) $159

C) $127.2

D) $106

E) $90.86

Question 13

You are considering investing in a startup project. You don’t need to pay anything today, but this project will cost you $150 in one year. This project will return $440 to you in eight years.

The IRR for this project is closest to:

A) 16.24%

B) 16.62%

C) 16.99%

D) 17.36%

E) 17.72%

Question 14

Use the following information to answer the question below. Company A, B, C, D, and E are Company F’s competitors.

 

Company

Price per

Share

Earnings per Share

Book Value per Share

Company A

$67.32

$10.26

$21.23

Company B

$40.78

$7.57

$12.45

Company C

$41.52

$6.79

$9.37

Company D

$71

$6.51

$19.26

Company E

$36.25

$3.81

$10.86

Assuming that Company F has an EPS of $7.2, based upon the average P/E ratio for its competitors, Company F's stock price is closest to:

A) $65.59

B) $60.81

C) $57.62

D) $55.42

E) $53.80

Question 15

A company has issued a zero-coupon bond with a two-year maturity. The face value of each bond is $1,000.

Investors believe that this company will default for sure on these bonds. Due to the default, investors will receive only 60 cents per dollar they are owed. Investors require an 7% return on their investment in these bonds. (Reminder: this is the applicable discount rate).

The yield to maturity on these bonds (assume annual compounding) is closest to?

A) 35.55%

B) 36.85%

C) 38. 14%

D) 39.43%

E) 40.72%

Question 16

Company A increases its annual dividend by 3.5 percent annually. Earlier today, Company A has just paid its annual dividend.

Company A’s stock commands a market rate of return of 10 percent and sells for $126.07 a share. The amount of annual dividend this company has just paid was closest to:

A) $9.22

B) $8.57

C) $7.92

D) $7.27

E) $6.64

Question 17

Company A’s coupon bond will reach its maturity date in half a year’s time.

This coupon bond pays coupon semi-annually. There are only the final coupon payment and the face value to be paid.

One unit of Company A’s coupon bond has face value of $1000 and coupon rate of 7%. The current price of this bond is $1025.

Then currently, this bond has Yield to Maturity of:

A) 4.95%

B) 3.94%

C) 2.94%

D) 1.95%

E) 0.97%

Question 18

Company A increases its annual dividend by g percent annually. Later today, Company A will pay its latest annual dividend of $10.

The company A’s stock currently has market price of $180, and the discount rate is 10%.

The annual dividend growth rate g is closest to:

A) 2.94%

B) 3.89%

C) 4.83%

D) 5.78%

E) 6.72%

Question 19

Luke can afford monthly payments of £40 for 4 years, starting 4 months from now. The annual interest rate is 6 percent. How much can he afford to borrow to buy a laptop?

A) £1715.39

B) £1677.92

C) £1641.51

D) £1606.14

E) £1571.76

Question 20

Four years ago, a company issued 25-year bonds with a coupon rate of 6 percent and           semiannual payments. The face value of each bond is $2000 and the yield to maturity when the bonds were issued was 8.1 percent. The first coupon payment will be paid after six        months.

Later today, you will receive another coupon payment from this bond. The yield to maturity is now 7.8 percent. What is the current price of each bond?

A) $2375.34

B) $2263.00

C) $1968.29

D) $1691.01

E) $1469.56

Section B

Answer all three questions. Show ALL steps. You    will be awarded points for correct steps. (Question 1 is worth 15 points, and Question 2 is worth 20           points, and Question 3 is worth 25 points.)

Long Question 1

Consider the following investment alternatives:

 

Investment

 

APR

 

Compounding

A

3.72%

Semiannual

B

8.91%

Quarterly

C

10.21%

Annual

D

22.31%

Monthly

E

4.96%

Daily

Calculate the Effective Annual Rate (EAR) for each investment alternative.

Long Question 2

Earlier today, company A has just paid dividend of $2 for each share of its stock.

The dividend each share is expected to grow at 11% for 6 years, then it will grow at 4.6% in perpetuity. The discount rate is always 12%.

After one year’s time, just before the next dividend is paid, what will be one share of Company A’s stock worth?

Long Question 3

There are four securities, Security A, B, C, and D. All securities are traded on normal markets.

Security D is equivalent to the portfolio of one unit of Security A, one unit of Security B and one unit of Security C: Security D has the same cash flow as Security A, Security B, and       Security C combined.

Security A is an investment that has cost of $200 today. Then after three years, this security will provide $100 each year for 10 years.

Security B is a share of Company X’s stock. Company X’s stock pays no dividend today.    After four years, it will pay its first dividend of $5 per share. The dividend will then grow at 5% for 3 years, and then it will grow at 3% in perpetuity.

Security C is a newly-issued 15-year coupon bond with face value of $1000 and coupon rate of some percent. Its coupon is paid annually.

Suppose Security A, B, and C are all risk-free. The risk-free interest rate is 6% (which is also the discount rate for all these three securities.)

Suppose the current price of Security D is $1703.95. What is the coupon rate of Security C?