FIN 515 Week 4 Midterm Exam _Version 2_

FIN 515 Week 4 Midterm Exam (Version 2)
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1. (TCO A) Which of the following statements is CORRECT? (Points : 10)
2. (TCO G) Which of the following statements is CORRECT? (Points : 10)
3. (TCO G) LeCompte Corp. has $312,900 of assets, and it uses only common equity capital
(zero debt). Its sales for the last year were $620,000, and its net income after taxes was
$24,655. Stockholders recently voted in a new management team that has promised to
lower costs and get the return on equity up to 15%. What profit margin would LeCompte
need in order to achieve the 15% ROE, holding everything else constant? (Points : 10)
4. (TCO B) You want to buy a new sports car three years from now, and you plan to save
$4,200 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 third
deposit, three years from now? (Points : 10)
5. (TCO B) You sold a car and accepted a note with the following cash flow stream as your
payment. What was the effective price you received for the car assuming an interest rate of
6.0%?
Years: 0 1 2 3 4
|-----------|--------------|--------------|--------------|
CFs: $0 $1,000 $2,000 $2,000 $2,000 (Points : 10)

6. (TCO B) Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in five equal
installments at the end of each of the next five years. How much interest would you have to
pay in the first year? (Points : 10)
7. (TCO D) A 15-year bond with a face value of $1,000 currently sells for $850. Which of the
following statements is CORRECT? (Points : 10)
8. (TCO D) Garvin Enterprises’ bonds currently sell for $1,150. They have a six-year
maturity, an annual coupon of $85, and a par value of $1,000. What is their current yield?
(Points : 10)
9. (TCO C) Niendorf Corporation's five-year bonds yield 6.75%, and five-year T-bonds
yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for five-year
bonds is IP = 1.65%, the default risk premium for Niendorf's bonds is DRP = 1.20% versus
zero for T-bonds, and the maturity risk premium for all bonds is found with the formula
MRP = (t - 1) x 0.1%, where t = number of years to maturity. What is the liquidity premium
(LP) on Niendorf's bonds? (Points : 10)
10. (TCO C) Assume that to cool off the economy and decrease expectations for inflation, the
Federal Reserve tightened the money supply, causing an increase in the risk-free rate, rRF.
Investors also became concerned that the Fed's actions would lead to a recession, and that
led to an increase in the market risk premium, (rM - rRF). Under these conditions, with
other things held constant, which of the following statements is most correct? (Points : 10)
11. |-----------|--------------|--------------|--------------|
CFs: $0 $1,000 $2,000 $2,000 $2,000 (Points : 10)
12. (TCO B) Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in five equal
installments at the end of each of the next five years. How much interest would you have to
pay in the first year? (Points : 10)
13. (TCO D) A 15-year bond with a face value of $1,000 currently sells for $850. Which of the
following statements is CORRECT? (Points : 10)
14. (TCO D) Garvin Enterprises’ bonds currently sell for $1,150. They have a six-year
maturity, an annual coupon of $85, and a par value of $1,000. What is their current yield?
(Points : 10)
15. (TCO C) Niendorf Corporation's five-year bonds yield 6.75%, and five-year T-bonds
yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for five-year
bonds is IP = 1.65%, the default risk premium for Niendorf's bonds is DRP = 1.20% versus
zero for T-bonds, and the maturity risk premium for all bonds is found with the formula
MRP = (t - 1) x 0.1%, where t = number of years to maturity. What is the liquidity premium
(LP) on Niendorf's bonds? (Points : 10)
16. (TCO C) Assume that to cool off the economy and decrease expectations for inflation, the
Federal Reserve tightened the money supply, causing an increase in the risk-free rate, rRF.
Investors also became concerned that the Fed's actions would lead to a recession, and that
led to an increase in the market risk premium, (rM - rRF). Under these conditions, with
other things held constant, which of the following statements is most correct? (Points : 10)