Principles of Modern Finance Sample Midterm
Principles of Modern Finance Spring 2013 Sample Midterm
February 22, 2012
Instructions
• You have 1 hour and 40 minutes. • The exam is out of 25 points. • There are 22 multiple-choice questions. 19 questions are worth one point, 3 questions are worth two points and are marked as such. • If you get stuck, move on and come back later.
1
1. A stock is expected to pay a dividend of $10 next year, and this dividend is expected to grow by 5% each year thereafter. What should the price of the stock be if instruments of similar risk are paying 12%? (a) $83.33 (b) $142.86 (c) $150 (d) $200 2. A project has the following cashflows: Year 0 1 2 Cashflow +12000 −7080 −6654 The IRR of these cashflows is 9%. Assets of similar risk pay 5%. Should you accept this project? (a) Yes (b) No 3. I am considering buying a Greek government bond that promises to pay $1210 in two years’ time. However, there is a possibility that the Greek government will default between now and the promised payment. If the government does default, the bond will only pay $500. The probability of default is 0.5. What should the price of the bond be if instruments of similar risk are paying 10%? (a) $1000 (b) $706.62 (c) $413.22 (d) $303.68 4. I am enrolled in a 2-year MBA program, and have just started classes. To pay the tuition and living expenses, I borrow $50,000 per year (paid at the start of the year). The interest rate on the loan is 5%. I am certain to get a job at the end of the two years of study. That job will be guaranteed for ten years (from the date I start work), at a constant salary which will be paid at the end of each year of work. There are no taxes. I estimate that I will be able to save 1/4 of my income, whatever my income is. What is the minimum salary the job must have to allow me to pay off my loans within ten years? (2pts) 2
(a) $43,050 (b) $50,000 (c) $55,752 (d) $61,339 5. A credit card company offers me a card with 20% APR, compounded daily. I make purchases of $3,000 on
February 22, 2012
Instructions
• You have 1 hour and 40 minutes. • The exam is out of 25 points. • There are 22 multiple-choice questions. 19 questions are worth one point, 3 questions are worth two points and are marked as such. • If you get stuck, move on and come back later.
1
1. A stock is expected to pay a dividend of $10 next year, and this dividend is expected to grow by 5% each year thereafter. What should the price of the stock be if instruments of similar risk are paying 12%? (a) $83.33 (b) $142.86 (c) $150 (d) $200 2. A project has the following cashflows: Year 0 1 2 Cashflow +12000 −7080 −6654 The IRR of these cashflows is 9%. Assets of similar risk pay 5%. Should you accept this project? (a) Yes (b) No 3. I am considering buying a Greek government bond that promises to pay $1210 in two years’ time. However, there is a possibility that the Greek government will default between now and the promised payment. If the government does default, the bond will only pay $500. The probability of default is 0.5. What should the price of the bond be if instruments of similar risk are paying 10%? (a) $1000 (b) $706.62 (c) $413.22 (d) $303.68 4. I am enrolled in a 2-year MBA program, and have just started classes. To pay the tuition and living expenses, I borrow $50,000 per year (paid at the start of the year). The interest rate on the loan is 5%. I am certain to get a job at the end of the two years of study. That job will be guaranteed for ten years (from the date I start work), at a constant salary which will be paid at the end of each year of work. There are no taxes. I estimate that I will be able to save 1/4 of my income, whatever my income is. What is the minimum salary the job must have to allow me to pay off my loans within ten years? (2pts) 2
(a) $43,050 (b) $50,000 (c) $55,752 (d) $61,339 5. A credit card company offers me a card with 20% APR, compounded daily. I make purchases of $3,000 on