College of Business and Finance
The MBA Program
Financial Management (FINC 501)
1st Semester (2012/2013)
Instructor: Dr. Wajeeh Elali
Date: December 13, 2012
Time: 6:00pm -8:00pm
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□ This is a CLOSED BOOK examination.
□ You are allowed TRANSLATION dictionaries ONLY.
□ You are permitted noiseless, non-programmable CALCULATORS.
□ You may use the opposite side of the paper for any rough work.
□ This ...view middle of the document...
Chapter 18 of this text has more to say on this topic.
This means it is morally right for managers to strive to maximize shareholder wealth, or the stock price, and morally wrong not to do so. When managers shirk their duties, or consume excessive perks, this is morally wrong. Maximizing shareholder wealth subject to ethical constraints is more than just a good idea—it is the right thing to do.
2 What are sunk costs? Give an example. Should we include sunk costs in the cash flow forecasts of a project? Why or why not?
In economics and business decision-making, sunk costs are retrospective (past) costs that have already been incurred and cannot be recovered. Thus, should not be included in the cash flow forecasts. Example: Marketing Research.
3. The market prices of several corporate bonds with face values of $1000 are summarized in the following table:
|Corporate Bond |Price |Trading Status |
|IGA |$1,090.75 |? Premium Bond |
|CISCO |$976.50 |? Discounted Bond |
| BMB |$1,000 |? Par Bond |
|TNN |$858.25 |? Discounted Bond |
For each bond, state whether it trades at a discount, at par, or at a premium.
Answer: Bond IGA trades at a premium. Bonds CISCO and TNN trade at a discount. Bond BMB trade at par.
Multiple Choice (45 marks)
Show ALL CALCULATIONS. Answers without supporting calculations will be deemed a guess and will not receive any credit.
1. You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective annual rate of interest (EAR)?
a. GPR Bank; 12% with annual compounding.
b. ABS Bank; 12% with monthly compounding.
c. RBC Bank; 12% with quarterly compounding.
d. CBC Bank; 12% with daily compounding
By inspection, we can see that d dominates a, b, and c because, with the same interest rate, the account with the most frequent compounding has the highest EAR. Thus, the correct answer must be d.
a. = (1+0.12/1)1 – 1 = 6.000%
b. = (1+0.12/12)12 – 1 = 6.167%
c. = (1+0.12/4)4 – 1 = 6.061%
d. = (1+0.12/365)365 – 1 = 6.183%
2. A firm with a minimum attractive rate of return (MARR) of 13% is evaluating four engineering projects. The internal rates of return (IRR) are as follows:
|Project |IRR |
|1 |12% |
|2 |15% |
|3 |14% |
|4 |10% |
The firm should
a. Accept project 3 and 1, and reject 2 and 4.
b. Accept project 1, 2,...