Name______________________________

University of Massachusetts School of Management Department of Finance and Operations Management FOMGT 301, Corporation Finance, Exam 1 Spring Semester 2011, February 23, 2011 -----------------------------------------------------------------------------------------------------------------------------------------Directions: Circle the best answer to the following 26 questions worth a total of 100 points. You have 75 minutes to finish the exam. A picture ID may be checked at any time. You are not to use any outside materials during the exam, including books, notes, cell phones, or any electronic devices. You may not share a calculator. A student found to be sharing information with any other student will have their test taken away and will receive a zero on the exam. Unless specified otherwise, the stated interest rate is an annual rate that compounds once per year. For best results, work all calculations using at least four decimal places of accuracy. -----------------------------------------------------------------------------------------------------------------------------------------Work Space

Work Space

Part 1: 3-Point Problems (total of 30 points in this part) 1. Which of the following comes closest to the present value of $100 to be received in 14.5 years if the interest rate is 3%? A. $65.14 B. $56.63 C. $49.29 D. $42.96 E. $37.49

2. What amount comes closest to the future value in 14.5 years of $100 invested today if the interest rate is 3%? A. $176.60 B. $202.88 C. $232.77 D. $266.73 E. $153.51

3. Bob deposits in his account the amount of $100 today (year 0) and plans to deposit in the same account the amount of $200 one year from today and finally plans to deposit the amount of $300 in the same account two years from today. If the interest rate is 3%, what amount comes closest to how much will Bob have accumulated in his account three years from today? A. $672 B. $630 C. $641 D. $651 E. $662 4. Which comes closest to the present value of 180 consecutive monthly payments of $100 beginning in one month if the interest rate is 3%? A. $12,646 B. $11,850 C. $11,126 D. $14,481 E. $13,519

5. Which comes closest to the future value of 180 consecutive monthly payments of $100 beginning in one month if the interest rate is 3%? A. $22,697 B. $24,609 C. $26,729 D. $29,082 E. $31,696

6. Sally won a lottery prize that pays $100 next year and then grows by 2% each year forever. If the discount rate is 3%, what comes closest to the present value of Sallys prize? A. $5,000 B. $3,333 C. $2,500 D. $4,200 E. $10,000

7. At 3% interest, approximately how long does it take a deposit of $139 to triple in value? A. 28 years B. 23 years C. 19 years D. 16 years E. 37 years

8. Sams investment of $500 has grown to $560 in 3 years. Which of the following comes closest to Sams annual rate of return? A. 1.63% B. 3.85% C. 2.87% D. 2.29% E. 1.91%

9. Which of the following comes closest to the present value of a perpetuity that pays to the holder the amount of $100 beginning at the end of year 10 and then continuing forever (year 11, year 12, and so on without stopping)? Use a required rate of return of 3% A. $770 B. $2,555 C. $1,756 D. $1,289 E. $987

10. Joanne and John both have $5,000 to invest today for one year. Joannes bank offers her the interest rate of 3.05% compounded monthly. Johns bank offers the interest rate of 3% compounded daily. How much better off is Joanne versus John? A. $1.87 B. $0.00 C. $2.38 D. $2.26 E. $2.09

Part 2: 4-Point Terms and Concepts (total 40 points in this part) 11. Which of the following class examples was used to illustrate the economic principle of diminishing marginal return? A. The view that stakeholders (e.g. Ben and Jerrys) lower returns B. The notion that taxes make returns lower C. The idea that the happiness from eating ice cream goes down as you eat more D. The use of bid and asked spreads that investors must pay when buying stocks E. The determination of where to stop investing

12. Shareholders desire to have their share price as high as possible. Managers desire high salaries and good benefits. What term in finance is used to describe the resources utilized to align the goals of these two constituents to the corporation? A. Information asymmetries B. Efficient markets C. Diminishing utility D. Agency costs E. Collaboration convergence

13. The stripping of Treasury bonds is a good example of what term introduced in Chapter 1? A. Externalities B. Contractual rights C. Diminishing marginal return D. Conservation of value E. Separation

14. A bond that was issued at its face value a year ago now has a price that is below its face value. Based only upon this information which of the following is true? A. The bonds yield to maturity is greater than the bonds coupon rate B. The bonds yield to maturity is equal to the bonds coupon rate C. The bonds yield to maturity is less than the bonds coupon rate D. The bonds yield to maturity is greater than zero but less than the coupon rate E. The bonds yield to maturity is equal to zero

15. Which of the following is TRUE of the progressive tax system in the U.S. for couples filing a joint return? A. The highest rate of taxation is attached to the lowest level of income B. For almost all couples, the average tax rate is less than the marginal tax rate C. Couples with higher income almost always pay less tax compared to lower income couples D. Total tax paid divided by total income earned is equal to the highest marginal tax rate E. The marginal tax rate is the rate of tax paid on the average dollar of income

16. An experiment is conducted whereby the performance of a portfolio of stocks chosen at random is compared with the performance of portfolios chosen on the basis of perceived skill. This experiment illustrates what concept of our course? A. Auction markets B. Efficient markets C. Expert markets D. Secondary markets E. Experienced markets 17. According to the information in text on types of business organizations (Window 1.1 on page 8), which of the following is NOT true? A. Compared with sole proprietorships and partnerships, corporations require little paperwork and regulations B. Corporations account for a minority percentage of total U.S. businesses but account for a majority of total U.S. business receipts and profits C. Sole proprietorships must usually rely on bank loans and personal savings for investment funds D. Partnerships are simple to organize E. Profits earned through corporations are taxed twice; once at the corporate level, and again at the personal level if and when they are moved down to the personal level 18. Which of the following best describes the term limited liability? A. The notion that ethical decisions are limited and applied based upon rights B. The notion that benefits and costs from an activity are limited to those directly involved in the transaction C. The notion that the corporation is limited to those who contract through it D. The notion that owners losses are limited to the amount of their original investment E. The notion that the corporation is influenced only by those who lent money

19. A bond that was issued one year ago and has 12 more years until it matures has a yield to maturity equal to 6.5%. This same bond has a coupon rate equal to 6.5%. Based only upon this information which of the following is true? A. Market interest rates have gone up over the previous year B. Market interest rates have gone down over the previous year C. Market interest rates have not changed over the previous year D. Market interest rates are equal to 0% E. There is not enough information to know if market interest rates have gone up, down, or stayed the same over the previous year

20. What do we call an annuity whose payments begin at the beginning of each period? A. An ordinary annuity B. An annuity due C. A regular annuity D. An end-of-period annuity E. An inverse annuity

Part 3: 5-Point Problems (total of 30 points in this part) Use the 20-year time line below to answer questions 21 and 22 0 1 2 3 4 5 6 7 8 9 10 $10 $10 $10 $10 $0 $10 $10 $10 $10 $0 11 12 13 14 15 16 17 18 19 20 $10 $10 $10 $10 $10 $10 $10 $10 $10 $70

21. What comes closest to the present value of the cash flows if the interest rate is 3%? A. $166 B. $148 C. $133 D. $120 E. $109

22. What comes closest to the value at the end of year 20 of the cash flows if the interest rate is 3%? A. $300 B. $325 C. $354 D. $386 E. $423

23. The Nokia bond was first issued exactly 7 years ago with an original maturity of 20 years, a coupon rate of 5.25%, and promises to return the face value of $1,000 at maturity. Now, 7 years later and with 13 years remaining to maturity, the bonds yield to maturity is 3%. Which of the following comes closest to the price of the bond? A. $1,023 B. $934 C. $882 D. $1,239 E. $1,125

24. Joe and Linda are married with annual taxable income of $150,000. They pay income tax according to the following schedule: Over $0 $43,850 $105,950 But Not Over $43,850 $105,950 $161,450 Tax Rate 15% ??? 31%

If the total personal income tax they pay is $34,516, which of the following comes closest to the second tax bracket. A. 21% B. 22% C. 23% D. 24% E. 25% 25. Jerry and Jane Wilson are saving for their retirement by placing the amount of $250 per month, beginning in one month, into a retirement account for the next 35 consecutive years. At that point, at retirement (35 years from now), the couple will draw a monthly annuity from their retirement account, beginning in one month, for 25 consecutive years. Which of the following comes closest to the size of this annuity if the interest rate is 3%? A. $2,295 B. $3,182 C. $879 D. $1,206 E. $1,660

26. Karen is a trusted employee whose productivity declines as she works more and more hours each day. After careful observation of her work performance, her manager prepared the following chart. Listed first is the daily number of hours worked by Karen, and listed second is the total numbers of work units completed (for example, 1/100 means that one hour of work produces 100 completed work units). 1/100 2/190 3/270 4/340 5/400 6/450 For how many hours should the firm hire Karen to work each day if Karen's total cost to the firm is $11 per hour, and each work unit completed is worth $0.21 to the firm? A. B. C. D. 2 hours 3 hours 4 hours 5 hours 6 hours

E.

Exam Key 1. A 2. E 3. B 4. D 5. A 6. E 7. E 8. B 9. B 10. C 11. E 12. D 13. D 14. A 15. B 16. B 17. A 18. D 19. C 20. B 21. A 22. A 23. D 24. C 25. C 26. D