Fin 5200 Sample Exam

Name:

Student number:

Answers

FINE 5200

Managerial Finance

Winter 2016, Professor Yelena Larkin

Sample Midterm Exam

Part 1: Multiple choice (30 points). Circle the correct answer on this question paper.

1.  Equity with differential voting rights and/or dividend payment claims is called: 

A. Dual class stock.
B. Preemptive right stock.
C. Preferred stock.
D. Common stock.

2. You just won the lottery. You and your heirs will receive $25,000 per year forever, beginning one year from now. If the present value of the lottery is $416,667, what is the discount rate used to value this perpetuity? 
A. 4.0%
B. 5.0%
C. 6.0%
D. 7.0%
E. 8.0%

3.        If operating cash flow is negative, then __________________.

        A)        the firm is bankrupt

        B)        the firm can pay no dividends

        C)        cash flow to bondholders must be negative

        D)        cash flow to stockholders must be positive

                E)       cash flow from assets may be positive

4. A corporation, potentially, has infinite life because: 

1. it is a legal entity
2. of separation of ownership and management
3. it has limited liability
4. all of the above

5.  The yield to maturity on a 20-year corporate bond is determined by:

I.   the real rate of interest

II.  the term structure of interest rates

III. the default risk premium

IV. expected future inflation

1. I only
2. I and II only
3. I, II and III only
4. All four factors

6.  The legal document that includes the basic terms and details of a bond is called the: 
A. Indenture agreement.
B. Call provision.
C. Debenture agreement.
D. Registration form.
E. Articles of incorporation.

7. Which one of the following statements is true concerning bond ratings? 

A. Bond ratings are based on both the risk of default and the interest rate risk.
B. A bond rated BBB or lower is considered a junk bond.
C. All else equal, a bond rated BB should pay a higher return than a bond rated B.
D. Bond ratings are based only on the risk of default.
E. By mutual agreement, DBRS and Standard & Poor's issue comparable ratings on all bonds.