Name

Student #

ADM 2350, Section P, Quiz #1, Winter 2010

January 27, 2010, Version #1 Solutions

Statement of Academic Integrity

The 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 quiz.

Signed:______________________________________

Note: an examination copy or booklet without that signed statement will not be graded and will
receive a quiz grade of zero.

GENERAL INSTRUCTIONS: Put your Name and Student ID# on each of the 7 pages of
this exam. Use only the space provided in the exam for your answers and calculations. This
is an open book and open notes exam. The use of calculators is permitted, however the use of
microcomputers is NOT permitted. Please do NOT take the pages of this exam apart. The
time limit for this quiz is forty five minutes. GOOD LUCK!

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Student #

Part I - Multiple Choice Questions (6 Marks)

There are six multiple choice questions in this part. Each question counts 1 mark. Circle
the ONE answer that is the BEST answer to each question. No credit is given for (a) no
answer, (b) more than one answer, or (c) an answer other than the best answer to a
question.

1. Suppose that 90 days ago the spot rate to buy U.S. dollars with Canadian dollars was
CAD1.125/USD. Suppose that the spot rate today to buy U.S. dollars with Canadian
dollars is CAD 1.100/USD. Over the last 90 days,

a. The Canadian dollar STRENGTHENED against the U.S. dollar.

b. The U.S. dollar STRENGTHENED against the Canadian dollar..
c. The Canadian dollar WEAKENED against the U.S. dollar.
d. The U.S. dollar WEAKENED against the Canadian dollar.
e. b. and c.
f. a. and d.

2. Agency costs include all of the following EXCEPT:

a. Providing stock as part of management's compensation.

b. Bonding expenditures.
c. Flotation costs.
d. Expenditures to monitor management's actions.
e. None of the above, as each one is a type of agency cost.
f. a., b., c., and d., as none of them are agency costs.

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Student #

3. Financial intermediaries include

a. trust companies.
b. pension funds.
c. chartered banks
d. mutual funds.
e. insurance companies.
f. All of the above.

4. When using a present value of an annuity table (e.g.,Table IV on p. 711 of the book),

a. Payments are assumed to be made at the BEGINNING of each period.

b. PVIFA factors DECREASE with an INCREASE in the interest rate.
c. PVIFA factors INCREASE with an INCREASE in the number of periods.
d. PVIFA factors INCREASE with an INCREASE in the interest rate.
e. PVIFA factors DECREASE with an INCREASE in the number of periods.
f. b. and c.
g. d. and e.

5. When a loan is amortized with equal annual total payments over a five year term, the

a. Rate of interest is REDUCED each year.

b. Principal payment is REDUCED each year.
c. Balance is paid as a balloon payment in the fifth year.
d. Interest payment is REDUCED each year.
e. Both a. and d. above.
f. Cannot tell from the information provided.

6. Shareholder wealth is measured by the ________ of the shareholders' common stock

holdings.

a. Compound value
b. Book value
c. Historic value
d. Market value
e. All of the above.
f. None of the above.

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Student #

Part II - Multiple Choice Problems (4 Marks)

There are two multiple choice problems in this part. Each problem is worth 2 marks. To
receive credit, you must show your work . Each problem is on a separate page and
an additional blank work page is provided for each problem. If you are using a financial
calculator, show your keystrokes and specify the brand and model number.

7. Ms. Jones is 30 years old today and is beginning to plan for her retirement. She wants to
set aside an equal amount at the END of each of the next 30 years so that she can retire at
age 60. She expects to live to the maximum age of 85 and wants to be able to withdraw
$40,000 per year from the account on her 61st through 85th birthdays. The account is
expected to earn 8 percent per annum for the entire period of time. To the nearest ten
dollars, determine the size of the annual deposits that must be made by Ms. Jones.

a. $4,070
b. $13,620
c. $426,990
d. $3,770
e. $461,150
f. None of the above.

Step 1

Calculate the PV at t = 60 of an ordinary annuity of $40,000 per year for 25 years.

Using Table IV, p. 711,

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Student #

Additional Space Provided Here for Problem 7

Using a scientific calculator, one obtains

With a financial calculator in the END mode, set P/Y = C/Y = 1, N = 25, I/Y = 8.00%, PMT =
$40,000, and FV = $0. Then CPT PV = -$426,991.05

Step 2

Calculate the 30-year ordinary annuity payments that will generate the lump sum future amount
calculated in Step 1 above as a lump sum present value.

To the nearest $10 using Table III, p. 710,

To the nearest $10 using a scientific calculator,

Using a financial calculator, you should NOT clear your previous calculations. With your
previous result of -$426,991.05 still displayed, press FV to obtain FV = -$426,991.05. Enter PV
= 0 and N = 30. Then CPT PMT = $3,770 to nearest $10.

Partial Credit

A student will receive partial credit of 1 mark if the student gets the correct answer to Step 1.

A student will receive partial credit of 1 mark if the student correctly calculates a Step 2
payment that is based on an incorrect answer to Step 1.

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Student #

8. Ajax Powder Company has purchased equipment costing $100,000. It is expected to

generate a eight-year stream of benefits amounting to $22,285 per year. Determine the
rate of return Ajax expects to earn from this equipment to the nearest 0.1%.

a. 15.0%
b. 62.7%
c. 10.0%
d. 21.2%
e. 22.3%
f. None of the above.
The procedure for solving this problem is discussed on p. 150 in the Section Solving for the
Interest Rate.

From Table IV, p. 711, the factor value of 4.487 for 8 periods corresponds to an interest rate of
15%.

Using a financial calculator in the END mode, set P/Y = C/Y =1, N = 8, PV = $100,000, PMT =
-$22,285, and FV = 0. Then CPT I/Y = 15.00%.
Partial Credit
No partial credit will be awarded to students who attempted to greatly simplify this problem by
treating it as an ROI calculation, which requires the firm’s earnings after taxes or net income
instead of cash flows (i.e. benefits).
If a student using a scientific calculator finds the correct value for the PVIFA but is then unable
to obtain the correct answer, the student will earn one mark.

If a student using a financial calculator accidently left the calculator in the BGN mode, then the
student would CPT I/Y = 21.22%. Thus, one mark will be awarded to students who made this
mistake.

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Student #

Additional Space is Provided Here for Problem 8

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