Corporate Finance Quiz
IMBA -FIN 6425 – Quiz 1 Corporate Finance - Solution– Nimalendran
This is an individual quiz and you should submit the answers on-line by the scheduled date.
You are allowed to use any resources EXCEPT help from any other person. You are allowed to use EXCEL for the calculations.
1. Barkley Credit Union sets a low annual percentage rate (5%) for all its credit card customers instead of basing the interest rates on the customers’ credit scores. Consequently Barkley is exposed to ______________.?
a. Moral Hazard
b. Screening
c. Adverse Selection
d. Signaling
Answe C
2. Bob, an environmental economist, has struggled for a year to write a paper that will be read by 50 people at most to show that, in case he must search for a job, he has remained intellectually active. Which term best describes Bob’s activity?
a. Moral Hazard
b. Screening
c. Adverse Selection
d. Signaling
Answer D
3. A three-year bond has 8.0% coupon rate and face value of $1000. If the yield to maturity on the bond is 10%, calculate the price of the bond assuming that the bond makes semi-annual coupon interest payments. (Chapter 2)
a. $857.96
b. $949.24
c. $1057.54
d. $1000.00
Response: PV = (40/1.05) + (40/(1.05^2)) +. . . + (1040/(1.05^6)) = $949.24
Answer B
4. Cisco will pay a dividend of $5 per share next year, and the dividends payout ratio is 50%. Dividends are expected to grow at a constant rate of 8% forever and the required rate of return on the stock is 13%. Calculate the present value of the growth opportunity. (Chapter 4)
a. $100
b. $76.92
c. $23.08
d. None of the above
Response: EPS= (5/0.5)=$10; No Growth Value = 10/0.13 = 76.92;
Dividends next year = 0.5
Growth Value = 5/(0.13-0.08) = 100; PVGO = 100 -76.92 = 23.08
Answer C
5. Driscoll Company is considering investing in a new project. The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for
This is an individual quiz and you should submit the answers on-line by the scheduled date.
You are allowed to use any resources EXCEPT help from any other person. You are allowed to use EXCEL for the calculations.
1. Barkley Credit Union sets a low annual percentage rate (5%) for all its credit card customers instead of basing the interest rates on the customers’ credit scores. Consequently Barkley is exposed to ______________.?
a. Moral Hazard
b. Screening
c. Adverse Selection
d. Signaling
Answe C
2. Bob, an environmental economist, has struggled for a year to write a paper that will be read by 50 people at most to show that, in case he must search for a job, he has remained intellectually active. Which term best describes Bob’s activity?
a. Moral Hazard
b. Screening
c. Adverse Selection
d. Signaling
Answer D
3. A three-year bond has 8.0% coupon rate and face value of $1000. If the yield to maturity on the bond is 10%, calculate the price of the bond assuming that the bond makes semi-annual coupon interest payments. (Chapter 2)
a. $857.96
b. $949.24
c. $1057.54
d. $1000.00
Response: PV = (40/1.05) + (40/(1.05^2)) +. . . + (1040/(1.05^6)) = $949.24
Answer B
4. Cisco will pay a dividend of $5 per share next year, and the dividends payout ratio is 50%. Dividends are expected to grow at a constant rate of 8% forever and the required rate of return on the stock is 13%. Calculate the present value of the growth opportunity. (Chapter 4)
a. $100
b. $76.92
c. $23.08
d. None of the above
Response: EPS= (5/0.5)=$10; No Growth Value = 10/0.13 = 76.92;
Dividends next year = 0.5
Growth Value = 5/(0.13-0.08) = 100; PVGO = 100 -76.92 = 23.08
Answer C
5. Driscoll Company is considering investing in a new project. The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for