Name______________________________

University of Massachusetts
Isenberg School of Management
Department of Finance

FOMGT 301, Corporation Finance,

Exam #1: Mahar Auditorium
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Directions: Provide the best answer to the following questions worth a total of 100 points.
You have 75 minutes to finish the exam. You may use one sheet of paper with writing on
both sides, but cannot use any other outside materials during the exam, including books,
notes, cell phones, or any electronic devices. You may not share a calculator.

A few items of note:

1. Unless specified otherwise, the stated interest rate is an annual rate that compounds
once per year.
2. For best results, work all calculations using at least four decimal places of accuracy.
3. Numbers that appear in parentheses are negative values.
4. The profit or loss calculation in option problems includes the premium.
5. In option problems, assume that options that are in-the-money are exercised prior to
maturity, and options that are either at-the-money or out-of-the-money are not
exercised.
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Work Space

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Note to Finance 301 Students: This is an actual recent exam given to a cohort much like
yours. There is an answer key at the end. A more complete solutions guide will be
presented to you as a video to be received in your @umass email account just after class
on Monday February 26. My strong recommendation is to work on this exam only after
you feel confident with all of the material.

This exam is provided as a study tool, and not meant to be a facsimile to the exam that
you’ll see on February 28th. No one exam can practically ask questions about every
query in the required material.
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Work Space
CollegeLottery.com provides the following awards. Use the information below to answer the
following 5 problems:
Award 1: $100 today
Award 2: $150 to be received at the end of year 5
Award 3: $200 to be received at the end of year 10

1. Which comes closest to the present value of Award 2 if the interest rate is 2%?
A. $132.09
B. $137.53
C. $133.29
D. $139.39
E. $135.86

2. Which comes closest to the future value of Award 1 at the end of year 3 if the interest rate of
2% is compounded monthly?
A. $109.41
B. $107.73
C. $106.98
D. $119.67
E. $106.18

3. Suppose you win Award 1 and immediately invest this lump sum in an account that earns 2%
interest. Which comes closest to the amount of time it’ll take for this account to grow to
$130?
A. 15.38 years
B. 11.30 years
C. 13.25 years
D. 12.88 years
E. 14.69 years

4. Suppose you win Award 1 and immediately trade it for the lump sum of $125 to be received
at the end of year 2. Which comes closest to the interest rate earned on the trade?
A. 10.74%
B. 10.26%
C. 11.05%
D. 11.80%
E. 7.72%

5. At an interest rate of 2%, which comes closest to the value of Award 3 at the end of Year 3?
A. $173.01
B. $172.62
C. $174.11
D. $175.98
E. $172.14
6. Which of the following comes closest to the present value of receiving $900 in 9 months if the
interest rate is 9%?
A. $ 868
B. $ 853
C. $ 844
D. $ 835
E. $ 828

7. What amount comes closest to the value in 20 years of investing $100 today if the interest
rate is 9% compounded continuously?
A. $605
B. $600
C. $594
D. $581
E. $560

8. Suppose that $100 is to be received at the end of each year for 10 consecutive years,
beginning in one year, with one exception. The amount received at the end of year 3, and
only in year 3, is $500 instead of $100. What comes closest to the value of these amounts at
the end of year 10 if the interest rate is 2%?
A. $1,667
B. $1,577
C. $1,554
D. $1,500
E. $1,595

9. What comes closest to the value today of a stock that will pay a dividend of $1 per share at
the end of each year forever if the required rate of return is 5%?
A. $50.00
B. $33.33
C. $25.00
D. $20.00
E. $16.67

10. What comes closest to the value today of a stock that just paid a dividend of $1 and expects
to grow that dividend by 2% per year forever if the required rate of return is 5%?
A. $34.66
B. $34.00
C. $33.66
D. $33.33
E. $30.00
11. What comes closest to the value today of a stock that just paid a dividend of $1 and expects
to grow that dividend by 10% per year in year 1 and year 2, and then grow each dividend
beginning in year 3 by 2% forever if the required rate of return is 5%?
A. $39.46
B. $38.85
C. $38.53
D. $38.16
E. $37.93

12. A prize pays to the winner the amount of $100 to be received at the end of each year for 10
consecutive years. However, the first amount is not received until the end of year 5 such
that the payments stretch from year 5 through year 14. Which comes closest to the present
value of this prize if the interest rate is 2%?
A. $898.26
B. $829.85
C. $788.99
D. $804.86
E. $811.50

13. A couple borrows $200,000 for a mortgage that requires fixed monthly payments over 30
consecutive years. The first monthly payment is due in one month. If the interest rate on the
mortgage is 9%, which of the following comes closest to the monthly payment?
A. $ 1,625
B. $ 1,609
C. $ 1,583
D. $ 1,701
E. $ 1,647

14. Mary will make deposits of $100 at the end of each month over the next 25 consecutive
years, beginning one month from today, to support her retirement. If the account earns an
interest rate of 9%, which amount comes closest to the value of these deposits at the end
of year 25?
A. $112,112
B. $101,610
C. $115,475
D. $116,110
E. $92,825

15. Jane believes that she can "beat the market" on a consistent basis by basing her trades on the
pattern of prices that now exist. If true, what would Jane's trading pattern violate?
A. Real markets
B. Efficient markets
C. Volatile markets
D. Dealer markets
E. Primary markets
16. What is the implication of positive marginal utility of wealth for the financial manager?
A. Invest up to the point where marginal revenue is less than marginal cost
B. Always engage in mergers and acquisitions
C. Make the stock price as high as possible
D. Maximize agency costs
E. Minimize cash flows

17. Which of the following terms describes “separation” as it relates to financial management
A. Revenues are not equivalent to costs
B. The owners of the firm and the managers of the firm are different constituent groups
C. Managers should not distinguish shareholder wealth maximization from stakeholder
wealth maximization
D. Time and risk are held as different dimensions
E. Some cash flows occur at the beginning of each period, others at the end

18. A bond that was issued one year ago and has 12 more years till maturity, a yield to maturity
(YTM) of 6.5%, and a price of $945. The bond’s par value of $1,000 is returned at maturity.
Which of the following is true of the coupon rate of this bond?
A. The coupon rate, defined as the YTM times the price, must be 6.45%.
B. The coupon rate is above the YTM because the bond’s price is below the par value.
C. The coupon rate equals the YTM because the bond’s price is below the par value.
D. The coupon rate, defined by the bond price divided by the par value, is 94.5%.
E. The coupon rate is below the YTM because the bond’s price is below the par value.

19. Which of the following statements best describes the term “limited liability”?
A. Protection against losing more than their original investment
B. The difference between the book value of assets and the book value of the liabilities
C. An abstraction from reality
D. Resources utilized to align managerial goals with shareholder goals
E. An alternative foregone because a particular course of action is pursued

20. Marjorie is a trusted employee whose productivity declines as she works more and more
hours each day. After careful observation of her work performance, her manager prepared
the following chart. Listed first is the daily number of hours worked by Marjorie, and listed
second is the total numbers of work units completed (for example, 4/340 means that four
hours of work produces 340 completed work units).
0/0 1/100 2/190 3/270 4/340 5/400 6/450
For how many hours should the firm hire Karen to work each day if Marjorie’s total cost to
the firm is $11 per hour, and each work unit completed is worth $0.21 to the firm?
A. 2 hours
B. 3 hours
C. 4 hours
D. 5 hours
E. 6 hours
21. You are trying to price two bonds that have the same maturity and par value but different
coupon rates. Both bonds mature in 8 years and at maturity both bonds return the par value
of $1,000. Bond A has a coupon rate of 5% and a yield to maturity of 3%. Bond B has a coupon
rate of 3% and a yield to maturity of 5%. Which of the following is true of the prices of these
bonds?
A. Bond A’s price is greater than Bond B’s price by approximately $270
B. Bond A’s price is greater than Bond B’s price by approximately $27
C. Bond B’s price is greater than Bond A’s price by approximately $27
D. Bond B’s price is greater than Bond A’s price by approximately $270
E. The prices of both bonds are the same

22. A particular stock currently pays no dividend. However, two years from today, the dividend
is expected to be $1.50, and the dividend is then expected to grow annually by 1% per year
forever. The required rate of return is 10%. According to the dividend discount model, which
of the following comes closest to the price of the stock today?
A. $16.67
B. $15.00
C. $14.64
D. $15.15
E. $15.50

23. Joe and Linda are married with annual taxable income of $140,000. They pay income tax
according to the following schedule:
Over But Not Over Tax Rate
$0 $50,000 15%
$50,000 $100,000 ???
$100,000 31%

If the total personal income tax paid is $31,400, which of the following comes closest to the
second tax bracket.
A. 25%
B. 21%
C. 22%
D. 23%
E. 24%
Exam Key

1. E
2. E
3. C
4. D
5. C
6. C
7. A
8. C
9. D
10. D
11. A
12. B
13. B
14. A
15. B
16. C
17. B
18. E
19. A
20. D
21. A
22. D
23. D