Question

QUESTION 1

All of the followings are the rights and privileges of a Common Stockholders EXCEPTING:

	a.	Voting/Proxy Rights
	b.	Right to Dividends
	c.	Residual Right
	d.	Pre-emptive Right
	e.	Right to Interest Payments

10 points   

QUESTION 2

Your best friend's parents want to buy a home in the Worcester County, but they don’t know the exact amount of money that they can afford to borrow. They can afford monthly payments of $ 1,800. A friendly bank in Worcester has indicated that they can borrow money at 6% fixed rate  for 30 years with monthly payments. They can afford to borrow:

	a.	$300,225
	b.	$142,305
	c.	$ 50,029
	d.	$ 648,000
	e.	$  24,777

10 points   

QUESTION 3

Fine prints on a Credit Card state that the all unpaid balances will be charged at an annual percentage rate (APR) of 24%. The effective annual rate (EAR) with monthly compounding is:

	a.	24.75%
	b.	28.01%
	c.	26.8%
	d.	24.0%
	e.	21.7%
	f.	27.1%

10 points   

QUESTION 4

This is a type of financial market where Securities are sold for the first time:

	a.	Auction Market
	b.	Primary Market
	c.	Bond Market
	d.	Secondary Market
	e.	Dealer Market
	f.	Stock Market

10 points   

QUESTION 5

Net Future value (NFV) of the following Cash Flows (CF) is:
YR	0	1	2	3	4
CF	100	50	30	60	20
	Discount Rate =		10%

	a.	$ 264
	b.	$300
	c.	$ 286
	d.	$260
	e.	$ 335
	f.	$235

10 points   

QUESTION 6

Smart Sammy tripled his money in just 3 years in the recent stock market boom. His average annualized return was:

	a.	200%
	b.	67%
	c.	25%
	d.	100%
	e.	300%
	f.	44%

10 points   

QUESTION 7

Financial Management Goal of a Corporation is to:                                            

                                                                                                                                            

	a.	Maximize Stockholders' Wealth
	b.	Maximize Net Sales
	c.	Maximize Market Share
	d.	Maximize Profit
	e.	Minimize Income Taxes
	f.	Minimize Operating Expenses

10 points   

QUESTION 8

The financial instrument that promises to pay the same amount of money at the beginning of each month for a given no of months is:

	a.	Preferred Stock
	b.	Perpetuity
	c.	Common Stock
	d.	Ordinary Annuity
	e.	Annuity Due

10 points   

QUESTION 9

Supposing ,you just graduated from WSU and got a nice high paying job with a Finance Company. You are planning to buy a Lexus car that sells for $55,000. Your plan is to accumulate 20% down payment for the Lexus Car by making monthly deposits of $ 600 in an account that promises to earn at an annual rate of 12%. No of months it would take to meet this objectives is:

	a.	17
	b.	20
	c.	18
	d.	10
	e.	25
	f.	19

10 points   

QUESTION 10

At a Discount Rate of 9.5%, a plot of land that promises to generate a cash flow of $ 12,000 per year forever Is worth:

	a.	$ 201,316
	b.	$ 126,316
	c.	$120,850
	d.	$ 179,325
	e.	$ 429,250
	f.	$ 339,235

10 points   

QUESTION 11

You are scheduled to receive $13,000 in two years. When you receive it, you

will invest it @ 8% per year. At the end of 8 years you will have:

	a.	$     24,062
	b.	$     20,629
	c.	26,000
	d.	$ 21,315
	e.	$     21,320
	f.	$     19,240

10 points   

QUESTION 12

The day Little Joey was born his smart Grand Parents opened an Investment Account that promised to pay 8% per year with a lump sum of $10,000. In addition, they had been investing $100 per month in the same account. Today Joey turned 18 and his Grand Parents liquidated this investment account and gave the total proceed to Joey for his college education.  The amount of total proceeds was:

	a.	$90,014
	b.	$ 47,728
	c.	$84,900
	d.	$43,705
	e.	$ 101,239
	f.	$ 99,729

10 points   

QUESTION 13

One of your best friends, who is in 20% marginal tax bracket, is planning to buy a Condo selling for $ 140,000. Your friend’s plan is to make a down pmt of 20% and finance the balance from a Bank in Worcester MA at a fixed rate of 4.99% over 30 years with monthly payments. He needs your help in figuring out his first year tax savings if he decides to buy this home.

	a.	$5,551
	b.	$1,110
	c.	$1,118
	d.	$1,441

10 points   

QUESTION 14

Joe & Moe, both 65, just retired and each received a check from their Retirement Plan. Joe & Moe both have been contributing $ 5,000 each year in their retirement plans since the age of 25. Retirement portfolio of Joe and Moe has been exactly the same with one difference. Joe started contributing at the beginning of each year and Moe at the end of each both year. The average annualized returns  both portfolios has been exactly the same, 5% py.  Joe is retirement check is greater than Moe’s  by:

	a.	$30,200
	b.	98,775
	c.	$0
	d.	$5,250

10 points   

QUESTION 15

Lucky  Ed, 70,  just won a Power Ball Lotto worth $120 million. He has two options collect his winnings:

Option #1: Annuity Option: One Pmt per year. In all 20 pmts

Option # 2: Cash Option: Lotto Commission would use a Discount Rate of 10% to calculate this value.

Assume Ed to be 40% Marginal Tax bracket.  On Your advice, Ed has decided to take the Cash Option.

Based on your calculation Joe would, under Cash Option, receive a Lump Sum of:

Note: The answers are rounded to Zero Decimal points.

		$30m
		$72m
		$34m
		$31m

10 points   

QUESTION 16

Supposing you are responsible for setting the policy on Effective Annual Rates (EAR) on all loans for a bank in Worcester MA, You have decided that all loans given to people with Credit Score between 500 and 600 should be charged an EAR of 18%. A customer with Credit Score of 540 wants to borrow $200,000 to buy a Condo. The Truth in Lending Act of 1968 AKA Regulation Z requires that cost of borrowing must be quoted in Annual Percentage Rate (APR). According to your calculations, this APR rate is:

	a.	14.99%
	b.	16.72%
	c.	18.00%
	d.	16.56%
	e.	15.99%
	f.	15.95%

10 points   

QUESTION 17

You would like to retire in 50 years as a millionaire. If you invest $10,000 today. What rate of return do you need to achieve your gaol?

		10% per yr
		9.65% per yr
		198% per yr
		1.98%

10 points   

QUESTION 18

Car Leasing Problem

Car Price = $22,500

Dn Payment = $2,500

Lease Duration = 3 years

Leasing Rate = 2.99%

Residual Value of Car at the end of 3 years = $12,500

Approximate Monthly Payments for this Lease are:

	a.	$250.00
	b.	715.00
	c.	320.00
	d.	$ 280

10 points   

QUESTION 19

Currently the IVY League Colleges cost about $ 50,000 per year for the 4 year college education, while the WSU Costs only about $ 15,000. . These costs are going up each year by about 4.5%.  In 18 years time, the difference between the Ivy League and WSU would be approximately:

	a.	$ 77,300
	b.	$ 35,000
	c.	$63,350
	d.	$940,000

10 points   

QUESTION 20

In how many years your money would double in a Bank account that pays @ 0.1% per year?

	a.	69 years
	b.	7,200 years
	c.	6,932 years
	d.	690 years

10 points   

QUESTION 21

Supposing you are in-charge for investing surplus cash of a Firm, which one of the following bank would maximize your return?

Bank	APR	m
1	20.00%	1
2	19.90%	12
3	19.80%	365
4	19.75%	Continuous

Note: m = No of Compoundings in a year

	a.	Bank # 3
	b.	Bank # 4
	c.	Bank # 2
	d.	Bank # 1

10 points   

QUESTION 22

Following Table lists the estimated CFs for the two Mutually Exclusive Projects.

Yr	P1	P2
0	$   (215.00)	$ (215.00)
1	$     104.00	$      75.00
2	$        93.00	$      86.00
3	$        79.00	$      96.00
4	$        72.00	$   105.00

First Calculate the NPVs of the two Projects starting at a starting DR of 0% and increasing it by 3% to 24% and than Plot a Graph between the DRs and the calculated NPVs of the two Projects .

Submit your Graph in the Blackboard.

Attach File

10 points   

QUESTION 23

All of the following statements regarding IRR true, EXCEPT:

	a.	There may be more than one Right Values of IRR for a given project.
	b.	IRR is the best method for selecting a Mutually Exclusive Project
	c.	IRR assumes that the CFs generated each year are being re-invested at the same rate of return as the IRR.
	d.	IRR is the DR at which NPV = 0

10 points   

QUESTION 24

If the going Market Interest is 1.2% , then price of a Bond that has coupon rate of 6.00 % and remaining maturity of 12 years must be:

$1,593.85

  

		$ 2,185.79
		$1,593.85
		$ 1,278.93
		$1,000.00
		$1,600.29
		$2,251.62

10 points   

QUESTION 25

If a Bond with Coupon Rate of 8.5% and remaining maturity of 10 years is selling at a price of $1,222.00, then Yield to Maturity on this Bond Must be

		8.5%
		5.89%
		13.25%
		6.63%
		2.95%
		4.27%

Answer 1

1)

Right to Interest Payments

Interest payments are made to bondholders and not common stockholders.

2)

Number of periods = 30 * 12 = 360

Rate = 6% / 2 = 0.5%

Present value = Annuity * [1 - 1 / (1 + r)ⁿ] / r

Present value = 1800 * [1 - 1 / (1 + 0.005)³⁶⁰] / 0.005

Present value = 1800 * 166.791614

Present value = $300,225

3)

effective annual rate (EAR) = (1 + APR/12)ⁿ - 1

effective annual rate (EAR) = (1 + 0.24/12)¹² - 1

effective annual rate (EAR) = (1.02)¹² - 1

effective annual rate (EAR) = 1.268 - 1

effective annual rate (EAR) = 0.268 or 26.8%

4)

Primary Market

Primary markets are where securities are sold for the first time.