Name: Answer KeyFIN 6406- Corporate Finance

Fall 2013- Quiz 1

1. Suppose you just won the state lottery, and you have a choice between receiving $2,500,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.a. 7.12%b. 7.49% c. 7.75% (N=20 PV= -2,500,000 PMT=250,000 FV=0 I/YR=? 7.75%)d. 8.26%e. 8.67%

2. What is the present value of the following cash flow stream at a rate of 6.25%?

Years: 0 1 2 3 4| | | | |

CFs: $0 $75 $200 $0 $300

a. $411.57b. $433.23c. $456.03d. $483.15 (0=CF0 75=CF1 225=CF2 0=CF3 300=CF4 I/YR=6.25% SHIFT NPV=? 483.15)e. $505.30

3. What’s the future value of $1,400 after 5 years if the appropriate interest rate is 6%, compounded semiannually?a. $1,719b. $1,881 (N=5*2=10 PMT=0 I/PERIOD=6%/2=3% PV=-1,400 FV=? 1,881.48)c. $2,016 d. $2,117e. $2,223

4. Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.50%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan?a. 8.24%b. 8.45%c. 8.77% (NOMINAL I/YR=8.5% PERIODS/YR=4 EFF%= (1+(rNOM/N)) N − 1= 8.77%) d. 8.99%e. 9.10%

5. Suppose you borrowed $13,230 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years. How large would your payments be?a. $3,704.02b. $3,889.23c. $4,083.69 (N=4 I/YR=9% FV=0 PV=-13,230 PMT=? 4,803.69)d. $4,287.87

B

e. $4,502.26

6. Suppose a State of New York bond will pay $1,000 ten years from now. If the going interest rate on these 10-year bonds is 5.5%, how much is the bond worth today?a. $585.43 (N=10 I/YR=5.5% PMT=0 FV=1,000 PV=? 585.43)b. $614.70c. $645.44d. $677.71e. $711.59

7. Suppose the U.S. Treasury offers to sell you a bond for $788.77. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price? a. 4.37%b. 4.86% (N=5 I PV= -788.77 PMT=0 FV=1,000 I/YR=? 4.86%)c. 5.40%d. 6.00%e. 6.60%

8. Wendy has $2,500 invested in a bank that pays 3% annually. How long will it take for her funds to double?a. 23.45 (I/YR=3% PV=-2,500 PMT=0 FV=5,000 N=? 23.45)b. 25.26c. 26.58d. 27.98e. 29.46

9. You want to buy a new sports car 3 years from now, and you plan to save $4,000 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the 3rd deposit, 3 years from now?a. $11,973b. $12,635 (N=3 I/YR=5.2% PV=0 PMT=4,000 FV=? 12,634.82)c. $13,267d. $13,930e. $14,626

10. You have a chance to buy an annuity that pays $550 at the beginning of each year for 3 years. You could earn 2% on your money in other investments with equal risk. What is the most you should pay for the annuity?a. $1,412.84b. $1,487.20c. $1,565.48d. $1,617.86 (BEGIN MODE N=3 I/YR=2% PMT=550 FV=0 PV=? -1,617.86)e. $1,725.94

B

11. Which of the following statements is correct?

a. It is generally more expensive to form a proprietorship than a corporation because, with a proprietorship, extensive legal documents are required.

b. Corporations face fewer regulations than sole proprietorships.c. One disadvantage of operating a business as a sole proprietorship is that the firm is subject

to double taxation, at both the firm level and the owner level.d. One advantage of forming a corporation is that equity investors are usually exposed to less

liability than in a regular partnership.e. If a regular partnership goes bankrupt, each partner is exposed to liabilities only up to the

amount of his or her investment in the business.12. The primary operating goal of a publicly-owned firm interested in serving its stockholders is

a. Maximize the stock price per share over the long run, which is the stock’s intrinsic value.

b. Maximize the firm's expected earnings per share (EPS).c. Minimize the chances of losses.d. Maximize the firm's expected total income.e. Maximize the stock price on a specific target date.

13. You recently sold 100 shares of your new company, XYZ Corporation, to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following statements best describes this transaction?a. This is an example of an exchange of physical assets.b. This is an example of a primary market transaction.c. This is an example of a direct transfer of capital.

d. This is an example of a money market transaction.e. This is an example of a derivatives market transaction.

14. You recently sold to your brother 200 shares of Disney stock, and the transfer was made through a broker, and the trade occurred on the NYSE. This is an example of:a. A futures market transaction.b. A primary market transaction.c. A secondary market transaction.

d. A money market transaction.e. An over-the-counter market transaction.

15. U.S. Treasury announces plans to purchase $50 billion of existing bonds. The announcement was not expected. What effect, other things held constant, would that have on bond prices and interest rates?a. Prices and interest rates would both rise.b. Prices would rise and interest rates would decline.c. Prices and interest rates would both decline.d. There would be no changes in either prices or interest rates.e. Prices would decline and interest rates would rise.

B

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