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ADM 2350B October 2, 2013
Midterm Examination Name: __________________________ Version #1 Student ID #: _____________________
Statement of Academic Integrity The Telfer School of Management does NOT condone academic fraud, an act by a student that may result in a false academic evaluation of that student or of another student. Without limiting the generality of this definition, academic fraud occurs when a student commits any of the following offences: plagiarism or cheating of any kind, use of books, notes, mathematical tables, dictionaries or other study aid unless an explicit written note to the contrary appears on the exam, to have in his/her possession cameras, radios (radios with head sets), tape recorders, pagers, cell phones, or any other communication device which has NOT been previously authorized in writing. Statement to be signed by the student: I have read the text on academic integrity and I pledge NOT to have committed or attempted to commit academic fraud in this examination. Signed:______________________________________ Note: an examination copy or booklet without that signed statement will NOT be graded and will receive a midterm exam grade of ZERO. General Instructions: 1. 2. 3. 4. 5. 6. 7. 8. Please SIGN the academic integrity statement above. Please put your Name and Student ID# on ALL SEVEN pages of this exam. This is an open book and open notes exam. Notes are any handwritten or printed materials, including but NOT limited to, previous assignments, quizzes, and exams plus their solution sets. The use of scientific and financial calculators is encouraged. Laptop computers or any other devices that can be used for communication are NOT permitted. Please do NOT take apart the pages of this exam. You have 1 hour and 10 minutes to work this exam. Good Luck!
ADM 2350B October 2, 2013
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Name _____________________________ Student ID# ________________________
Part I: There are FIVE multiple-choice problems in this part of the exam. Each problem counts 3 marks for a total of 15 marks for this part of the exam. Credit is given only for the correct answer. There is NO requirement to show your work. You are STRONGLY advised to spend NO more than 8 minutes per problem (total 40 minutes) so that you will have sufficient time to work Part II of the exam. 1. Richard wants to borrow $50,000 for investment purposes. ScotiaBank offers Richard a rate of 4% per year with an amortization period and term of 5 years. The bank tells him that his annual payments will be $11,231.36. Since the loan is for investment purposes, interest on the loan will be tax deductible. Richard has figured out that he will pay 4% x $50,000 = $2,000 in interest in the first year of the loan. He has asked you to calculate the interest that will be paid in year two. What is his interest paid in year two? a. b. c. d. e. $2,000.00 $3,630.75 $1,630.75 $1,550.75 None of the above
ADM 2350B October 2, 2013
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Name _____________________________ Student ID# ________________________
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James and Melissa wish to purchase a home in Tofino, BC. The home costs $500,000. Island Co-op Financial is willing to lend James and Melissa 80% of the purchase price or $400,000. Fortunately, James and Melissa have $100,000 in savings to satisfy the Co-op’s required down payment of 20%. The Co-op offers a quoted annual interest rate of 3% based on semiannual compounding for a term of 5 years with a 20-year amortization period. James and Melissa want to make semimonthly payments. That is, they will be making 24 payments per year. What will be the semimonthly payment? a. b. c. d. e. $1,108.69 $3,589.86 $1,106.65 $3,591.66 None of the above
ADM 2350B October 2, 2013 3.
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Name _____________________________ Student ID# ________________________
Marie wants to accumulate $150,000 over the next 10 years. If she can invest at 10% per year, how much must she deposit today to achieve her goal? a. b. c. d. e. $135,793.04 $ 57,831.49 $ 15,000.00 $389,061.37 None of the above
ADM 2350B October 2, 2013
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Name _____________________________ Student ID# ________________________
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Assume that Frank needs $100,000 in his account on his 18th birthday to fund withdrawals for his university education over the next 4 years. Suppose the interest rate is 4% per year and his parents could make annual payments of $6,655.22 starting 1 year from his current birthday and ending on his 18th birthday. How old is Frank today? a. b. c. d. e. 12 7 11 6 None of the above
ADM 2350B October 2, 2013
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Name _____________________________ Student ID# ________________________
5. Abbey will need $20,000 per year for 4 years for her university education. These withdrawals will be on her 18th, 19th, 20th, and 21st birthdays. How much money must be in Abbey’s savings account on her 17th birthday to fund these $20,000 annual withdrawals if Abbey can earn 5% per year on her account? a. b. c. d. e. $86,202.50 $70,919.01 $74,464.96 $80,000.00 None of the above
ADM 2350B October 2, 2013
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Name _____________________________ Student ID# ________________________
Part II: There are FIVE multiple-choice conceptual questions in this part of the exam. Each question counts 2 marks for a total of 10 marks for this part of the exam. You are STRONGLY advised to spend NO more than 4 minutes per question (total 20 minutes).
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Which of the following is a TRUE statement? a. b. c. d. e. An APR is the interest rate per period divided by the number of periods per year. When comparing investments, it is best NOT to rely solely on quoted rates. Compounding will typically NOT lead to differences between quoted and effective rates. The APR on a loan requiring monthly payments is the annual interest rate you actually pay. With monthly compounding, the APR will be larger than the effective annual rate.
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You are overconfident. Which one of the following BEST illustrates an error that you might make? a. b. c. d. e. Assume that a new project will be profitable since similar projects in the past were successful. Overestimate the best outcome expected from a project and underestimate the probability of a loss. Listen to the advice of subordinates with whom you agree while ignoring the advice of others. Assume your expectations of a project’s outcomes are more accurate than the expectations of others. Downplay the cost of future failure of an existing project since the project has already paid for itself.
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The PRIMARY goal of financial management is defined as the: a. b. c. d. e. Maintenance of a steady stream of dividends to the existing shareholders. Minimization of the outstanding debt owed by the firm to third parties. Maximization of the current profits per share of the firm. Minimization of the risks associated with company ownership. Maximization of the current value per share of the outstanding stock.
9.
Which of the following is a type of agency cost? a. b. c. d. e. The cost of buying insurance on the firm's assets. The cost of an audit of the firm's financial statements. Salaries paid to the firm's managers. The costs of financing the firm. The cost of a corporate jet needed to keep tabs on foreign operations.
10. General rules used as the basis for decision-making are referred to as: a. b. c. d. e. Narrow framing Confirmation bias Heuristics Self-attribution A loss aversion technique 