FINA2203 L1 & L2

2018-2019 Fall

Quiz solutions

Question 1

Double taxation means that

1. Corporate earnings are taxed at the corporate tax rate, and dividends are taxed again as income to
shareholders
2. Dividends are taxed at the corporate tax rate, and earnings are taxed as income to shareholders
3. Both dividends and earnings are taxed at the corporate tax rate
4. Corporate earnings are tax-exempt, while dividends get taxed with the corporate income tax

Question 2

Which ones of the following tools help shareholders reducing agency problems in a corporation?

1. Threat of hostile takeovers

2. Setting up a board of directors
3. Managerial compensation that does not change with time
4. Limited liability

Question 3

You just landed back in HK from New York City, and you are headed to Singapore.

You have USD 150 left in spare change, and you want to convert this money into Singapore Dollars. You go to
the currency exchange counter, and you observe these quotes for changing your money to and from HK dollar:

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The currency exchange agent tells you that he cannot directly change your USD 150 to Singapore Dollars. He
will take your money, change it to HKD, and then change it back to Singapore Dollars. How many Singapore
Dollars will you have in the end?

.
USD 150 x = SGD 177.0261
.

Question 4

Suppose that you want to have $3400 in three years from now (t=3).

The bank offers you a 16.22% interest on your deposit. How many dollars do you have to deposit today (t=0)?
Round your answer to the first two decimal places.

$ ,
= $2,165.89
( . )

Question 5

You are considering the following project. The project will pay $150 in one year (t=1), $189 in the second year,
and $1,400 in the third year. What is the present value of the project if the interest rate is 3%? Round to the first
two decimal places.

$ $ $ ,
PV = ( )
+( )
+( )
= $1,604.98
. . .

Question 6

Your grandma is considering replacing her car. The cost of gas for her old car is $1,600 a year, while the cost of
gas for the new car she is considering is only $457 a year. If she can achieve these cost savings for six years and
the interest rate is 2.5%, what is the present value of her gas saving? Round to the first two decimal places.

$ , $
x (1 - ) = $6,295.79
. ( . )

Question 7

Alibaba's stock price is USD 156.65. If investors expect Alibaba to pay a dividend of USD 3 next year, and they
expect this dividend to grow at a constant rate starting two years from now. Moreover, investors want a 6.5%
return on their investment. What is the implicit dividend growth rate that investors are assigning to Alibaba's
dividends?

1. 4.58%
2. 4.22%
3. 3.18%
4. 5.72%

= $156.65
( . )

g = 4.58%

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Question 8

Bank A offers you a 5% interest rate on your deposits, compounded annually. Bank B offers you a 1.25%
interest rate, compounded quarterly. Where should you put your money?

1. Bank B, because the EAR offered by Bank B is greater than the EAR offered by bank A
2. Bank B, because the APR offered by Bank B is greater than the APR offered by Bank A
3. Bank A, because the APR offered by Bank A is greater than the APR offered by Bank B
4. One or the other, because the APR is the same for both banks
5. One or the other, because the EAR is the same for both banks

Bank A (EAR): 5%

Bank B (EAR): (1.0125) = 5.09%

Effective Annual Rate: Bank B > Bank A

Bank A (APR): 5%

Bank B (APR): (0.0125 x 4 quarters) = 5%

Annual Percentage Rate: The same

Question 9

Your bank offers you a 9.68% APR on your deposits, compounded monthly. What is the percentage EAR that
the bank is implicitly offering you? Round to the first two decimal places: That is, you should write "3.32" for
an EAR of 3.32%.
.
(1 + ) – 1 = 10.12%

Question 10

You plan on depositing $83 in your bank account in one year (t=1), $55 in two years, and $6 in three years.
How much will you have in six years if the interest rate is 3%? Round your answer to the first two decimal
places.

$83 x 1.03 + $55 x 1.03 + $6 x 1.03 = $164.68

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Question 11

You are thinking of starting to save for retirement. Next year, you will contribute $15,000 to your retirement
account. Starting from the following year (t=2), you will increase these contributions at a fixed rate g=5.44%. If
you can earn 7% on your retirement account, how much will you have saved in 30 years (t=30)? Round your
answer to the first two decimal places.
( . . )
$15,000 x = $2,608,308.15
( . . )

Question 12

You are saving to make a $100,000 down payment on your house. You have $30,000 saved up already, and you
can afford to save an additional $5,000 each year. If you earn 1% per year on your savings, how many years
will it take you to save a total of $100,000?

1. 13
2. 15
3. 17
4. 25
5. 23
6. 21
$ ,
$30,000 x (1 + 0.01) + x ((1 + 0.01) − 1) = $100,000
.

N = 12.47 ≈ 13

Question 13

You plan to retire in 30 years. In year 30, you will buy a perpetuity that will pay $10,000 per year (forever)
starting form year 31. To do so, you are going to save a constant amount of x dollars every year from year 1
until year 30. Assuming that the relevant interest rate from year 31 onward is 3%, while the relevant interest
rate from year 1 until year 30 is 8%, what is x (your annual contribution to your pension if your pension is a
perpetuity)?

1. $2,942
2. $8,827
3. $14,712
4. $1,471
5. $4,414
6. $7,356

Perpetuity at year 30 (FV30) =$10,000/0.03 = $333,333.33

$
x ((1 + 0.08) − 1) = $333,333.33
.

$PMT = $2,942.48 ≈ $2,942

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Question 14

You want to sell your startup. The buyer offers you $394,527 cash today, and a 20-year annuity of $33,001
starting next year, whose cash flows will grow at a 3% rate starting two years from now. If you require an EAR
of 10%, how much is your company worth today? Round your answer to the first two decimal places.
$ , ( . )
$394,527 + x (1- ) = $793,403.04
. . ( . )

Question 15

You are considering a project that will pay $631 in the first year, $2,000 in the second year, and $2,599 in the
third year. In the fourth year, the project will pay a cash flow of 3,000, which starting from the fifth year will
grow forever at a rate of 3%. If the interest rate for this project is 12%, and the time-zero cost of starting this
project is $10,000, what is the Net Present Value (PV of benefits minus PV of costs) of the project? Round your
answer to the first two decimal places.
$ ,
Growing perpetuity at year 3 (FV3) = = $33,333.33
. .

$ $ , $ , $ , .
NPV = -$10,000 + + + + = $17,733.71
( . ) ( . ) ( . ) ( . )