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    35 Comm 308 Final Exam (Fall 2018)- Solution (1)

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    14 views12 pages

    35 Comm 308 Final Exam (Fall 2018) - Solution

    Uploaded by

    Carl-Henry Francois

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    © All Rights Reserved
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    Hesnesiaia Vere Important (READ THIS) You should put your eight-digit ID in the above example) on both the exam and the bubble sheet Examination Cover Sheet ‘Print Family Name: ‘Print Given Name: | ID Number: > > > COURSE ‘NUMBER ‘SECTIONS: A, B, CD, F, Ad, BB | Fuance COMM 308 ‘EXAMINATION DATE TIME: Shours | # OF PAGES 16 Final Exam December, 14,2018 | 19:00 1 22:00 | Including this cover and VERSION BLUE EveningNigh) | Formula sheets INSTRUCTOR: Circle your Professor ‘DIVISION it John Molson School of Business Jan Rakita aad Jassim Aoran Zhang | Concontia Universi June Riley Behoush Shakeri Jennifer Yang Hamidreza Roohian, INSTRUCTIONS: Please read these carefully 1. Please ensure you have 16 pages (including this cover page and Formula sheet) inthis exam. 2. ForPart of this exam (Multiple Choice Questions): All answers must be recorded IN PENCIL on the computer sheet. Only the computer sheet will be graded, For Part: Show your calculations to ear part marks. Label clearly 4. ForPart Il: All answers must be recorded ININK within this exam, 5. Inthe event the exact answer is not provided, choose the CLOSEST response. MATERIALS ALLOWED: | 1. You must submit a BLUE computer answer sheet 2. You are allowed to bring one or more calculators (ENCS sticker not necessary 3. You are allowed to bring one language dictionary (no finance/ mathemeticsleconomies ete dictionary) _ meq [at ae Total Max mars: 75 D 3 300 Marks awarded Blue Version Page 1 of 12 I: Multiple Choice Questions (30 Oui 0 Only MCQ answers IN PENCIL on the computer answer sheet (scantron) will be graded. 1. Which of te following statements is most correct? 4 One of the ways in which firms can mitigate or reduce agency problems between bondholders and stockholders is by increasing the amount of debt inthe capital structure. . The threat of takeover is one way in which the agency problem between stockholders and ‘managers can be alleviate, © Managerial compensation can be structured to reduce agency problems between stockholders and managers @sineneis wc we core : Allofte semen hove ae cones 2. Which ofthe following staternents is most correct? ‘4. Ifannual compounding is used, the effective annual rate equals the quoted APR. ', Iftwo year compounding is used, the effective annual rate is less than the quoted APR, © Tfaloan has a 12 pereent nominal rate with semiannual compounding. its effective annual rate is equal to 11.66 percent Qrtnaanaean suse © Statenents and ae cnet 3. Today, Bruce and Brenda each have $150,000 in an investment account. No other contributions will be made to their investment accounts. Both have the same goal: They each ‘want their account to reach $1 milion, at which time each will retire, Bruce has his money invested in risk-free securities with an expected monthly return of 0.41 percent. Brenda has her money invested in a stock fund with an expected semi-annual return of 4.9 percent. How many years after Brenda retires will Bruce retire? Choose the closest response. a 126 Pye $1 se vr0 EMR, = So39~2 on, > 39.64 yo @ 190 Fv 2b hament CAs ors og, aa 3ze4 met aoe ce 199 A> ome! (eon? aan 219 € 294 By 2 498 ESE BSS Insufficient Information 4. Which of the following statements is most corre? &. Alllelse equa, ifa bond's expected yield to maturity decreases, its price will fll. . Allelse equal, ifa bond’s yield to maturity increases, its current yield will all. © Ifa bond's yield to maturity exceeds the coupon rate, the bond will sll ata premium over par Allofthe statements above are correct. } ‘None of the statements above is correct. Blue Version Page 2 of 12 5. An account was opened with $1,000 three years ago. Today, the account balance is $1,150. If ‘the interest is compounded annually, how much longer will it take for the account to have cared a total of $300 in interes”? j gue nse 4 Less than one more yea cee oe 1, Between one and two more years a7 eed hence Qvancatamsimemeyan =o Exactly three more years Le ne FO Od, ibe ce ye Lowe 6. Insufficient information. Bae ye 6s pean mer 6. Karen and her twin sister, Kathy, are celebrating ther 30th bthey today. Karen has been saving for her retirement ever since their 25h birthday. On ther 25th birthday, she made a $5,000 contribution oer retirement account. Every year threat on ther birt, she has added anater $5,000 othe account. Her plan sto continue contributing $5,000 every year ‘ontheir bithday. Her Ast, and fl $5,000 contrbuton will occur on tet 6Sth bid So far, Kathy has not saved anything for her retirement but she wants to begin today. Kathy's plan is to also contribute a fixed amount every year. Her frst conteibuion will oceur today, and her 36th, and final, contribution will oceur on their 6Sth birthday. Assume that both investment accounts ear an annual retum of 10 percent (EAR). How large does Kathy's annual contribution have to befor her to have the same amount in her account at age 65, as Karen will have in her account at age 65? {sree me poo NSH! a. $9,000.00 S897" geo seer ot 7 @swiss6o ay ee oe c. $7,398.08, ae a =? a. sasor20 ? FY (onen) 42, 429,957r06 > FU) 9D Preps = BIH 62 7. Your uncle has agreed to deposit $3,000 in your brokerage account atthe beginning of each of the next five years (= 0, = 1, t= 2,1 =3 and t=4). You estimate that you ean eam 9 percent year on your investments. How much will you have in your account four years from now (at = 4)? (Assume that no money is withdrawn from the account until t= 4) jose 37 72S ggpo THRO 2 81371939 je pane Tre @sroae | STI © 51950 gs og a. sz1oas esmasn PRY, git ase? eae Blue Version Page 3 of 12 8. Sampson, Inc. invested $1.325 million in a project that eared an 8.25% (EAR) rate of return Sampson sold their investment for $3,713,459, How much sooner could Sarapson have sold the company ifthey only wanted $3 million from the project? @2069 years PV > 43287000 b 333 years yy BCR / © sityeas YES RBAST =? TF EHOM yy 2.69 yet b Goren py, kewne Ts (03 — 1031 years 9. Assume that you wish to purchase a 20-year bond that has a maturity value of $1,000 and ‘makes semiannual interest payments of $40. If you require a 10 percent effective annual return fon your investment, what is the maximum price you should be willing to pay for the bond’ (pick the closest number) 4 ve foruse a $614 4 b S701 ae ne - e a $828 ese. tty 2 a8? sa = = 902 Py, 916-35 10. Allother things equal, which ofthe following would be most sensitive o a 1% change in the interest rate? 2 AxOyerbont wits Wk copon ding dou @ Ror Page yids than b. 30 year bond with a 10% coupon, trading at premium". jy -mon Semrihine Wan & 30 year bond with a 9% coupon, Wading a at VC aen best © S pen ch i ,_A.30 year 20 coupon bond i tration Weld oe CA Treaah Phas drsh Shae suenle \ermodion « 11. An investor who expects declining interest rates would masimize their capital gain by puch ton tht hs a coupon ands testy he & Ww bme a Lint, Dehua mate 2 Drvler orkr mee Seal b. high; shor. bona g. tition 25 Bem Gouber, lens. maionby 4.) zero; long — — Capital gain a tock pie conep and ence he investor mst vet n stocks ad ot tone Blue Version Page 4 of 12 12. A stock's dividend is expected to grow at a constant rate of S percent a year. Which of the following statements is most correct? 4. Teeny atnon te dot 5 pce yn 2, Teas ded yield 3 pec metic ee moo sept we pan oe 4. sume ane econ Aloft tates shore const 13. Which ofthe following statements is most correct? 1. Assume thatthe required rate of return on a given stock is 13 percent. Ifthe stock's dividend is growing ata constant rate of 5 percent, its expected dividend yield is 5 percent 8 well ‘The dividend yield on a stock is equal to the expected return les the expected capital sain, ‘© Astock’s dividend yield can never exceed the expected growth rate, 4. Allofthe answers above are correct, Answers b and ¢ are comet 14, Which ofthe following statements is most correct? 4. Preferred stockholders have priority over bondholders. Bb. A big advantage of preferred stock is that prefered stock dividends are tax deductible for the issuing corporation. @ Preferred stock holders have lower rsk than common stocks Statements a and b are correct Statements a and ¢ are correc. 15. Given the following forecasts, what is the expected return for a portfolio that has $1,500 invested in Sock A and $4,500 invested in Stock B? Tiaioofihe | Probabilty of | Stock A Sock Economy | Occurence | Expected Retum_| Expected Retum Expansion 25% 35% Stable 139% 25% Recession 5% 15% ASE a ag. 27 Bas a 120% eae a * a ) - Hoes Coico E (has O2K0-90 HOSKO WHO PH(—e o% > d. 14.2% > NR e Noneofthestove &g\> 15% Fry eo RN 4 OTE we 192 Page 5 of 12 Blue Version 16, A share of preferred stock pays a quarterly dividend of $2.50. Ifthe price of this prefered stock {is currently $50, what isthe nominal annual rate of retum (APR compounded Quarterly)? 2% De BQO 2 = 2 b. 18% 60 £80 = On ft uxsae > 280 23% $ea. Gob duke, = x! «. 28% 17. Suppose you own a two-security portfolio. You have 35 percent of your money invested in ‘Security X and the remainder in Security Y. The standard deviations of Securities X and Y are 10 percent and 15 percent. What isthe correlation between the two securities ifthe portfolio variance i 0.013225? a a nose 2 35%. T2108 GB 2 00/82 oe 5 ». 00137 Bye 8% Cae! 36 558 5s 2363 Oris Es iG EIS a. 0.9148 ae BO yg Tm Fy — None of the above 18, You are given the following data: (1) The risk-fee rates $ percent @) The required etum on the market is 8 percent. 2) _ The expected growth rate forthe firm is 4 percent (4) The last dividend paid was $0.80 per share. (9) Betais 13. Now assume the following changes occur: (1) An increased degree of risk aversion causes the roqured return on the market to go to 10 percent after adjusting forthe changed inflation premiums. (2) The expected growth rate increases to 6 percent. 3) Beta rises tS. ‘What will be the change in price pr share, assuming the sock was in equilibrium before the changes? Orn Bye 2h EON ya Px(EOn) Hy) = 99%. S487 28% Ps LROKVOS pyres $ 16-93 ° Wap © 486.28 24% 4 i697 F fo.go Erma) = 1284- 5828 BL ps Re 8/2 oS ~ Blue Version Aa > f-592 Page 60f12 19, You ae lng tos tht hs beta of 2.0 and is cent in euriom, The required ‘eum onthe sock 15 prea, ade masa eta 10 poet What wou be he Feranng hangein ho amon sok ifthe net ou sad WP pe we Bessie an 5 panos A) OH? 2. a 420% " om b 30% E0n)2 /S% Fn) indnand by 702 oy BHM). bx 10% 182 QD EO) 102. gyre) = S£4.2x(83-S%) = BNA © 10% 8 Chany os 20) = BESS 2 yee 20. Maximum benefits of diversification with two stotks decur when jy i ao ht ©: os © 05 21, Walter Jesper curently manages a $500,000 portfolio. Hes expecting to receive an additional $25.00 fom anew cen. The eng porto hs rege! ea 1075 pce. The ‘kcfrecrateiselpezcnt andthe retum on the market i 9 perce. If Wale wants the required retum on the new portfolio to be 115 percent, what should be the average beta forthe new stocks added tthe porlio? oa ae ee 210 By 2 10-4562 1% + A, W(9% ~ 7%) 229A, > bas Bo gala f SE, Aig = (U8 1) ag -43) «187 gr = BSuoro SPER IB sh (8 2 Foe gt gga BF rhs 2 22. Which ofthe following statements is most correct conceming a projet with normal cash flows {i.e, a cash outflow in Year 0 followed by cash inflows in all suosequent years)? A It the NPV of a project is positive then the payback period rule will always accept the project , Ifthe NPV ofa project is negative, then the profitability index ofthe project will always be ‘greater than one, € Ifthe Pl of a project is greater than one, then the IRR will always be less than the project's cost of eapital LAE Ifthe NPV of a project is zero, then the IRR ofthe project wil be equal tothe discount rate forthe project. Both A and D. Blue Version Page Tol 2 22, Which of he lowing is TRUE tou dversitation? By divesting pono sk can be rede o 20 © Thee o ent on erection it conalation oe i . The variance the weighed average te individual secur’ variances 4, Ifthe covariance between two securities is negative, then the portfolio’ standard deviation can be reduced to zero. None of the above 24, Which ofthe following statements is most correst? _Av Semistrong-form market efficiency means that stock prices reflect all public information, A® Anindividual who has information about pas stock prices should not be able to profit from ‘his information in a weak-form efficient market, An individual who has inside information atout a publicly traded company should be able {o profit fom this information ina semi-strong form efficient market, A Slatemanis a nd care come. © Ate sateen above are comet. 25. Assume that markets re semitrong fom ein, but nt stongfom ecient. Which of the lowing sates is on sone? 1. Each common sock hasan expected retumequa ota ofthe overall market, Bonds and stocks have the same expected ru ¢- Iver can expt ean ems sve tse pti by he SME they have aces Caste rman Oagaamip ences ermsariespecemenmiesencass t intra vc swt Com panic vee Answers b and c are corect 26, Suppose you have an opportunity to invest in a project, which is expected to generate $6,800 in year 1, $7,200 in year 2, and $7,500 in year 3. The appropriate risk-adjusted discount rete for the project is 10.5 percent. The project's initial investment is $15,000. What is the rofibiltyindex? — gqeo 4200 ps0 129 © tr (she 1 ~ 8s 2 ° we + 28%) 4.017 + 1$;000 ‘e. None ofthe above, Blue Version Page 8 of 12 27, Which ofthe flowing statements soe regarding a put writer 2 ie put writer expects the stock to move upward, TE The pt writer expects the stock o remain the same or move down. The pt writer expects the stocko split 4. The pt writer expects dow inthe markt Note of the shove, 28, If the discounted payback period of a project with normal cash-flows is less than is ifespan, then its profitability index is less than I . less than 0. ©) arester than 1 greater than 0 «. Profitability index cannot be inferred from the discounted payback period, Hence insufficient information. 29. Which ofthe following is most likely to occur upon termination of a project? Sunk eost b. Temninal loss © Working capita recapture 4 bande © abe 30, Zalu Siera Printing is ooking at an opportunity of sting up anew production fly, which requires the purchase ofa new prising pres that costs SI millon. The costs to inal the machine ae 60,000. Thenew facility ito bebuil ona piece of lan that the company bought for $150,000 five years ago. The market value of the land is $250,000, The R&D costs aseociated with the investment opportunity are $50,000. In addition, the company wil need to purchase $40,000 ational ventory fr the projec wo. What the ial aor tn cach How associated with the investment opportunity? a ot fWqcr04 £280,008 si2so00 pg) pno,coot phe cred F 4 b. $1,300,000 ° ’ ®31,350.000 @. $1,400,000 6. None ofthe above $1,352,000 pa Blue Version Page 9 of 2 art: Problems (25 Boints Total) ‘+ Answer om this document, inthe space provided. Use the back ofthe sheet you need addtional space. Any work nt labeled clearly wil not be graded ‘© Show all your work. Unsupported statements or numbers will not receive any grade ‘01: (17 points) Magnum Ine. is considering a new project, requiring an inital investment of $10 million today. Assume the asset will be fully depreciated over the life of the project on a straight line’Basis. Revenues less expenses from this project (before taxes and excluding depreciation) are ‘expected to be $3 millon pet year for 6 years. The project requires an immediate $200,000 increase in Net Working Catal The new project fas within Megnuns rain ise of Bsiness (manufacturing car arts) and is no more or less risky than the overal firm, Magnum issued 100,000 15- year 10% semi-annual coupon bonus 6 years ago, with a face value of 1,000 “Magnums Bonds are curently traded at par. Magnum has 10,000,000 shares of tock outstanding and the curent stock price i Tela of Magnum common stock i 1.2. The standard deviation oF 1St: 500 retum 6 18%, the risk premium on the market porto is §%, andthe T- bil rate equals 5%, The effective marginal cofporae ax rae 535%. Dip & Whats Magnum’s cost of equity? (5) —> & What sMapnm's WAC? (2) > © Assume thatthe WACC forthe above project i 10% Caeulate the NPV for his Rinks imttment. Should Magnum implemen ths projet? (Pi ) = 6h 12 x(32J = [yse at oar D a te ead ale ae => Yims Gabon = 102s Jo) 2 feast <— i By = (i+ re (HS yo, ooo 2 foo rll D = J00, 000 x $1,000 ee oso = #90 4 eo, O20, OF ~ Jo, c0qux BF = # 7% : . \pace = 22 x lee + tow eastr( 23) ul > 22 170 \ oe Blue Version 190 . lo428 S ade botins ak gm am aM gm oam 3M O (s-£) pasm basm ban fasn jaym b-™ o.. qemas overs BHD Aten Qajae Boye 2Heer nave _ _ - - — deanna NOE Avy 000 Peecobtom : i pase ISM bysm bam ese C(egtg.y ream wa | v epgne LEE Lag , LIS pase , LI i p Qasr rie pom ~ ev Faxtladiny dp chore Shall

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