FINA 2303 Financial Management

Spring 2019 ~ Mock Midterm Exam 2 ~ L2 & L3

Name:____________________________________________

Student ID:__________________

Answer the following 30 multiple-choice questions by picking which of the proposed choices best
answers the question (only one answer is correct). You have 120 minutes (2 hours) to complete the
exam. The exam counts for 18% of your final letter grade for the course. Answer directly on the
bubble answer sheet by darkening the letter for your chosen answer. You are allowed to use one
two-sided, A4-size cheat-sheet (of your design), one calculator with no more than 5MB memory
capacity (without communication capability), and a pencil with eraser. No other electronic devices
are allowed. Return the entire questionnaire with your completed bubble answer sheet when you are
done. Scrap paper is provided but it will not be graded.

You must display your original student ID card during the exam; these will be checked by the
proctors to ensure identification compliance. Mobile phones, PDAs, laptops, and all electronic
devices except for your permissible calculator must be turned off and stowed away during the exam.
As per University regulations, all bags and other disallowed personal items must be stashed at the
front of the classroom during the entire exam and removed only as you exit the exam venue for good.
You may leave the exam venue once you are done but you may not return. You must leave the area
(do not linger or congregate near the exam venue) and do not communicate with students who are
still taking the exam. Toilet visits (max one 5-min visit) are one person per gender at once and not
allowed in the last 30 minutes of the exam. If you need to use the restroom, ask permission from a
proctor first. Absences beyond 5 minutes from the exam venue will be considered a permanent
departure from the exam venue and you will not be allowed back in except to reclaim your
belongings at the end of the exam.

Do not look at anyone else’s answers or let anyone look at your answers – both of these actions are
cheating and lead to immediate expulsion from the exam venue and failure in the course. For fairness,
you may not ask questions to the instructor or the proctor during the exam.

Good luck.

Note: This mock midterm only contains 16 questions (not 30 questions as on the real midterm).
01. A bond has a coupon rate of 6.29%, makes semiannual payments, and there are 5 months to the
next coupon payment. The clean price is $995 and the par value is $1,000. What is the invoice
price?
a. $1,026.45
b. $968.79
c. $989.76
d. $1,000.24
e. $963.55

02. A $1,000 par-value zero-coupon bond has a YTM of 6.15 percent and time-to-maturity of 16
years. If we assume semiannual compounding, what is the price of this bond?
a. $364.20
b. $379.39
c. $384.84
d. $366.75
e. $369.91

03. A 15-year, semiannual coupon bond sells for $942.01. The bond has a par value of $1,000 and a
yield to maturity of 7.17 percent. What is the bond's coupon rate?
a. 4.90%
b. 6.53%
c. 6.21%
d. 5.88%
e. 3.27%

04. Assume that a 10-year Treasury bond has a 12 percent annual coupon, while a 15-year Treasury
bond has an 8 percent annual coupon. The yield curve is flat; all Treasury securities have a 10
percent yield to maturity. Which of the following statements is most correct?
a. The 10-year bond is selling at a discount, while the 15-year bond is selling at a premium.
b. The 10-year bond is selling at a premium, while the 15-year bond is selling at par
c. If interest rates decline, the price of both bonds will increase, but the 15-year bond will have a
larger percentage increase in price.
d. If the yield to maturity on both bonds remains at 10 percent over the next year, the price of the
10-year bond will increase, but the price of the 15-year bond will fall.
e. Statements c and d are correct.

05. A bond’s yield-to-maturity:

a. Is its face value plus the internal rate of return (IRR) on its stream of periodic coupons.
b. Is unrelated to the credit risk of the bond or the credit spreads prevailing in the market.
c. Is the rate of return demanded by investors on bonds of equal risk and maturity.
d. Is the number of coupon periods remaining in the life of the bond until it collapses.
e. Is the annualized (effective) coupon rate divided by the current price of the bond.

06. A project that will last for 12 years is expected to have equal annual cash flows of $104,500. If
the required return is 8.2%, what maximum initial investment would make the project
acceptable?
a. $779,424.31
b. $738,837.10
c. $2,006,786.07
d. $740,815.26
e. $689,581.30
07. Blink of an Eye Company is evaluating a 5-year project that will provide cash flows of $36,900,
$68,190, $62,690, $60,590, and $43,690, respectively. The project has an initial cost of $166,240
and the required return is 8.6 percent. What is the project's NPV?
a. $13,804.10
b. $12,549.19
c. $46,982.37
d. $15,912.69
e. $20,640.07

08. A project with an initial cost of $29,350 is expected to generate cash flows of $7,200, $9,300,
$9,400, $8,300, and $8,000 over each of the next five years. What is the project's payback
period?
a. 3.63 years
b. 2.63 years
c. 3.42 years
d. 3.80 years
e. 3.53 years

09. Which of the following statements is most correct?

a. The NPV method assumes that cash flows will be reinvested at the cost of capital, while the IRR
method assumes reinvestment at the IRR.
b. The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR
method assumes reinvestment at the IRR.
c. The NPV method assumes that cash flows will be reinvested at the cost of capital, while the IRR
method assumes reinvestment at the risk-free rate.
d. The NPV method does not consider the inflation premium.
e. The IRR method does not consider all relevant cash flows, particularly, cash flows beyond the
payback period.

10. The HKMA’s analysis of its decision to purchase floors in the IFC building:
a. Is technically correct but the decision itself reflects political considerations.
b. Properly separates investment and financing decisions, which is theoretically sound.
c. Benchmarks the IRR against the yield on Exchange-Fund Bills as a suitable hurdle rate.
d. Uses a payback period of 30 years in computing an NPV of HK$10.96 billion.
e. Concerns two mutually exclusive decisions: Buy or lease the floors it wants.

11. Bubbly Waters currently sells 510 Class A spas, 660 Class C spas, and 410 deluxe model spas
each year. The firm is considering adding a mid-class spa and expects that if it does, it can sell
585 units per year. However, if the new spa is added, Class A sales are expected to decline to 330
units while the Class C sales are expected to increase to 685. The sales of the deluxe model will
not be affected. Class A spas sell for an average of $16,100 each. Class C spas are priced at
$8,100 and the deluxe models sell for $19,100 each. The new mid-range spa will sell for $10,100.
What annual sales figure should you use in your analysis?
a. $3,213,000.
b. $2,695,500.
c. $8,604,000.
d. $5,908,500.
e. $9,009,000.
12. Brummitt Corp., is evaluating a new 4-year project. The equipment needed for the project will
cost $2,500,000 and can be resold for $301,000 at the end of the project. The equipment falls into
the 5-year fiscal depreciation category, that allows annual tax deductions from depreciation as
follows: 20.00%, 32.00%, 19.20%, 11.52%, and 11.52%. The corporate tax rate is 35 percent.
What is the after-tax salvage value of the equipment?
a. $346,850
b. $301,000
c. $195,650
d. $246,050
e. $255,150

13. Jasper Metals is considering installing a new molding machine which is expected to produce
operating cash flows of $71,500 per year for 9 years. At the beginning of the project, inventory
will decrease by $31,200, accounts receivables will increase by $28,600, and accounts payable
will increase by $20,700. At the end of the project, net working capital will return to the level it
was prior to undertaking the new project. The initial cost of the molding machine is $306,000.
The equipment will be depreciated straight-line to a zero book value over the life of the project.
The equipment will be salvaged at the end of the project creating an after-tax cash flow of
$86,000. What is the net present value of this project given a required return of 11.9 percent?
a. $122,515
b. $135,690
c. $131,031
d. $117,188
e. $140,718

14. A company is considering a proposed expansion to its facilities. Which of the following
statements is most correct?
a. In calculating the project's operating cash flows, the firm should not subtract out financing
costs such as interest expense, since these costs are already included in the cost of capital, which
is used to discount the project’s net cash flows.
b. Since depreciation is a non-cash expense, the firm does not need to know the depreciation rate
when calculating the operating cash flows.
c. When estimating the project’s operating cash flows, it is important to include any opportunity
costs and sunk costs, but the firm should ignore cash flows from externalities since they are
accounted for elsewhere.
d. Statements a and c are correct.
e. None of the statements above is correct.

15. In the Baldwin application,

a. The firm is considering whether to run a marketing study at a cost of $250,000.
b. The analysis fully reflects any synergies with or erosion of its existing product lines.
c. Dividend payments should not be treated as incremental project cash flow.
d. Baldwin’s lease on an empty warehouse expires in 5 years, so the analysis ends then.
e. The incremental cash flows must include the salaries of its current maintenance staff.
16. APEX forecasts earning an ROE of 20% this year and 10% afterwards. Its payout ratio is 100%.
APEX has no debt; the book value of its shareholders’ equity is $100. Treasuries are yielding 5%
for all maturities. The equity-risk premium on APEX’s stock is 500 bps above the risk-free rate at
every point along the yield curve. APEX has 100 shares of stock outstanding. Find its current
market price per share and price-earnings (PE) ratio (using this year’s forecasted earnings).
a. $1.26 per share; 6.28 times earnings.
b. $1.17 per share; 5.87 times earnings.
d. $1.26 per share; 6.22 times earnings.
c. $1.35 per share; 6.74 times earnings.
e. $1.09 per share; 5.45 times earnings.