**Baruch College FIN 3000 Midterm I Exam Fall, 2017**

Name:____________ Section: ___________

**Please, read carefully:** the exam has 30 questions, but will be graded out of 28 points. In practice this means you can “choose your own extra credit”. Write your answers both on this front sheet and on the Scranton. If you do not understand a question, raise your hand and ask me. Many answers are rounded, pick the closest: using different digits precision is not supposed to have any effect on your answers.

If something looks too hard, most likely there is another way to do it. Think, pay attention to the text of the exercise, and REMEMBER TO CHECK THE SETTINGS/MEMORY OF YOUR CALCULATOR. Good Luck!

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**Baruch College FIN 3000 Midterm I Exam**

**Fall, 2017**

Name:____________

1. A common problem for closely held corporations is:

A. the lack of access to substantial amounts of capital

B. the restriction that shareholders receive only one vote each

C. the separation of ownership and management

D. an abundance of agency problems

2. The principal participants in the financial markets are

I. Dealers, brokers, regulators

II. Businesses, banks, government

III. Mutual funds, hedge funds, investment banks

IV. Borrowers, savers, financial institutions

A. I

B. II

C. III

D. IV

3. Corporate managers are expected to make corporate decisions that are in the best interest of:

A. the corporation’s management

B. the corporation’s board of directors

C. the corporation’s shareholders

D. all corporate employees

4. To purchase a car, you borrow from a bank $7,500 to be repaid with 24 equal monthly payments, the first of which to be made immediately.

The annual interest rate is 12%. What is the amount of your monthly payment?

A. $253.05

B. $289.43

C. $349.55

D. $353.05

5. Corporations that issue ﬁnancial securities such as stock or debt obligations to the public do so primarily to:

A. increase sales

B. increase profitability

C. increase their access to funds

D. avoid double taxation of their profits

6. You currently own a level perpetuity making $1,000 payments every year.

Your friend Proposition Joe offers to purchase it from you, and pay for it with 5 equal yearly payments, the first of which to happen a year from now.

If the interest (discount) rate is 5%, what is the minimum yearly payment that Proposition Joe has to offer for you to accept?

A. $ 3620.0

B. $ 4312.5

C. $ 4503.5

D. $ 4619.5

7. You are about to sign a 3-year rental contract for a new apartment in Astoria, Queens. According to the lease contract you will have to pay $3,200 per month at the beginning of each month, for 36 months.

However, it would be more convenient for you to pay at the end of each month, instead of at the beginning. But, since your landlord has taken FIN3000, he says that if you desire to pay at the end of the month some adjustment has to be made to the monthly rent payment.

If the interest (discount) rate your landlord is using is 6% annual (0.5% per month) what is the minimum you expect your landlord to ask you in order to let you pay at the end of each month?

(Pick the closest)

A. $3191

B. $3216

C. $3225

D. $3233

8. Which one of the following would be considered a capital budgeting decision?

A. Planning to issue common stock rather than issuing preferred stock

B. Deciding to expand into a new line of products, at a cost of $5 million

C. Repurchasing shares of common stock

D. Issuing debt in the form of long-term bonds

9. Bruce and Sheila are talking about their savings accounts. Bruce says that his account pays 10% annual interest compounded yearly, and that Sheila should move her savings to his bank, since hers only offers a (stated) annual percentage rate (APR) of 9.8%.

Sheila however argues that it would make no sense to do so, since her bank account compounds monthly and hence it actually provides better interest payments. Who is right?

A. Bruce

B. Sheila

C. The two accounts are exactly equivalent

D. Not enough information is provided

10. Henry is assessing his retirement strategy, as he plans to retire 10 years from now; currently he has $300,000 in a savings account paying 4% annual interest, compounded quarterly.

He also knows that he will receive $200,000 as termination payout from his life insurance 5 years from now, and he plans to add this money to his savings account until the moment when he retires.

If everything goes according to his plan, how much will Henry have in savings 10 years from now, when he will be retiring?

(pick the closest)

A. $646,659

B. $687,403

C. $690,697

D. $740,122

11. Which ones of the following statements are FALSE? I. Investment banks are similar to commercial banks except that they invest deposits in stocks and bonds rather than loans.

II. Under Federal Law, Insurance Companies can only invest their reserves in interest paying bank accounts

III. Mutual Funds and ETFs both offer to investors a cheap way to diversify their risk without having to buy many individual stocks A. I and II only

B. I and III only

C. II and III only

D. I, II, and III

12. Suppose you must make 5 annual $1,000 payments, the first one at the beginning of year 5 (end of the 4th year from now). To accumulate the money to make these payments, you will make three equal deposits into an investment account, the first to be made one year from today. Assuming a 10% interest rate on the investment account, what is the amount of these three deposits?

(round to nearest dollar)

A. |
$1,098 |

B. |
$1,145 |

C. |
$1,260 |

D. |
$1,389 |

13. An example of a ﬁrm’s ﬁnancing decision would be:

A. |
acquiring a competitive ﬁrm |

B. |
deciding whether or not to increase the price of its products |

C. |
issuing 10-year versus 20-year bonds |

D. |
none of the above |

14. Everything else equal, when the interest rate increases the future value of an annuity ______; this effect will be _______ as the number of periods increases.

A. increases, larger

B. increases, smaller

C. decreases, larger

D. decreases, smaller

15. In the U.S. the largest holders of corporate equities are _________ ; the largest holders of corporate bonds are _______ .

A. Insurance Companies; Pension Funds

B. Households; Insurance Companies and Mutual Funds

C. Foreign Institutions; Pension Funds

D. Pension Funds; Banks and Savings Institutions

16. You are offered two possible investments by a broker.

Investment A can be purchased for $20,000 and will pay you in return $3,000 per year for 20 years (starting a year from now).

Investment B can also be purchased for $20,000 and will pay you in return $2,750 per year for 30 years (also starting a year from now).

The broker argues that investment B is better since “you get a smaller yearly payment, but you will receive payments for 10 more years”. You want to earn *the highest overall return on your initial investment*, so… which one should you choose?

A. The first one

B. The second one

C. You are totally indifferent between the two, they provide the same return

D. You need more information to make this choice

17. Which one of these securities is traded on the money markets?

A. 3-months commercial paper.

B. A share of Microsoft’s Common Stock.

C. A 2-year Corporate Note.

D. A 20-year Corporate Bond.

18. Which ones of the following statements are FALSE? I. Insurance Companies are not financial institutions

II. Preferred Stock is a type of Equity Securities

III. Hedge Funds are not financial intermediaries A. I and II only

B. I and III only

C. II and III only

D. I, II, and III

19. Which of these investments is the least liquid

A. A savings account at Citibank

B. Common stock of Philip Morris

C. 20-year Bonds issued by Exxon Mobil

D. An apartment building in Buffalo, NY

20. Which ones of the following statements are TRUE? I. Everything else equal, the lower the interest rate the higher the value of a perpetuity

II. Among their functions, financial markets provide pricing information

III. Stock options can be used to mitigate agency problems A. I and II only

B. I and III only

C. II and III only

D. I, II, and III

21. Your firm has received a $100,000 loan from a bank. The annual payments are $12,590.19; if the yearly interest rate is 7% how many loan payments must your firm make?

A. 7

B. 8

C. 12

D. 14

22. I want to retire in 20 years, and I want to have an annuity of $100,000 a year for 10 years after retirement. I want to receive the first annuity payment at the end of the 20th year. How much do I need to deposit today in an investment account providing an 8% interest rate in order to afford this retirement annuity? (pick closest)

A. $156,000

B. $168,000

C. $725,000

D. $671,000

23. The principal savers in the financial markets are A. Businesses

B. Individuals

C. Large hedge funds

D. Banks

24. Today, you have taken a 30-year mortgage of $300,000 with an interest rate of 9% and monthly payments of $2,413.867. How much will your outstanding balance be after 10 years of payments? (Hint: this is the same as asking what will at that point be the present value of the remaining payments)

(round to nearest dollar)

A. $167,118

B. $200,000

C. $264,786

D. $268,289

25. Marisa wants to travel extensively in Japan when she graduates, 4 years from now. She expects the trip to cost $12,000. Right now she has of $7,000 in a savings account paying an yearly interest rate of 5%. After sitting down and doing some calculations, she realizes that if she does not do anything she won’t be able to afford the trip by the time she graduates. In fact, she would miss her objective by roughly…

(pick the closest)

A. $3,217

B. $3,491

C. $4,113

D. $6,421

26. (Continues from Q25) In order to be able to afford the trip, she plans then to finance the balance by making yearly deposits (the first of which 1 year from now) into an investment account earning 9% per year. How much does she need to deposit into this investment account each year in order to be able to afford the trip?

(pick the closest) A. $1,065

B. $811

C. $764

D. $464

27. (Continues from Q25-26 above) Marisa comes up with an alternative plan: she could immediately move her $7,000 from her savings account to the investment account with 9% interest rate. Then she would make, if necessary, monthly deposits to this same account until the time when she graduates. If she follows this plan, how much will she need to deposit each month?

(pick the closest)

A. $0 (moving the $7,000 to the investment account is enough to reach the objective)

B. $35

C. $52

D. $209

28. The principal borrowers in the financial markets are A. Businesses

B. Individuals

C. Pension Funds

D. Insurances

29. Which ones of the following statements are FALSE? I. In Sole Proprietorships, the owner has unlimited liability

II. In Corporations, managers own the firm

III. In Partnerships, the owner and the business are taxed separately A. I and II only

B. I and III only

C. II and III only

D. I, II, and III

30. When corporations need to raise funds through stock issues, they rely on:

A. The Commodity Markets

B. The Secondary Market

C. The Primary Market

D. The Foreign Exchange Markets