Finance 3227: Introduction to Finance
Midterm Examination #2, Fall 2020
Time Permitted: 80 Minutes
Name: Student Number:
Section: 007 Instructor’s Name: Tashfeen Hussain
Questions Marks Earned
MCQ (Question 1 – Question 15) /30
Question 16 /8
Question 17 /8
Question 18 /4
Question 19 /4
Total /54
Instructions:
- Please write your first name, last name, student ID, section number and Instructor’s name
correctly
- Answer all the questions
- The exam has a total of 15 MCQ and 4 Analytical Questions
- The exam consists of 10 pages in total
- Only BA II Plus Calculator is permitted in the exam
- Show your work clearly for questions 16 - 19
- You can use the text book, lecture notes and formula sheet
- You cannot communicate with anyone else during the exam. That will be considered a serious
violation of academic integrity.
Section A: Multiple Choice Questions (each MCQ is worth 2 points)
For each of the following, please pick the best answer
1. Which of the following situations is a potential source of cash flows for a shareholder of a
certain stock?
I. The investor may be able to sell the shares at a future date.
II. The firm in which the shares are held might pay out cash to shareholders in the form of
1
, dividends.
III. The firm in which the shares are held might increase the value of its shares by reducing the
operating cost.
a. I only
b. II only
c. I and II
d. II and III
Correct answer: C.
2. According to constant growth DDM, the value of a stock increases as:
a. the required rate of return decreases.
b. the required rate of return increases.
c. the dividend growth rate increases.
d. both a and c are correct.
Correct answer: D.
3. PPE Inc. plans to pay a dividend of $2.10 per share a year from now. The dividends are expected
to increase by 2.5% annually going forward. Shareholders require a return of 8.5% on PPE’s stock.
What is the fair value of the stock?
a. $35.00
b. $42.00
c. $24.71
d. $19.09
Correct answer: A.
4. Gremlin Industries will pay a dividend of $1.80 per share at the end of this year. It is expected
that this dividend will grow by 4% per year in the future. The current price of Gremlin's stock is
$22.40 per share. What is Gremlin's required rate of return on equity?
a. 11.65%
b. 12.04%
c. 14.50%
d. 16.40%
Correct answer: B.
5. Poutine Professionals Inc. has just paid a dividend of $0.55 per share. The dividends are
expected to remain same in the foreseeable future. What is the fair value of the stock today if the
required rate of return is 12.5 percent?
2
Midterm Examination #2, Fall 2020
Time Permitted: 80 Minutes
Name: Student Number:
Section: 007 Instructor’s Name: Tashfeen Hussain
Questions Marks Earned
MCQ (Question 1 – Question 15) /30
Question 16 /8
Question 17 /8
Question 18 /4
Question 19 /4
Total /54
Instructions:
- Please write your first name, last name, student ID, section number and Instructor’s name
correctly
- Answer all the questions
- The exam has a total of 15 MCQ and 4 Analytical Questions
- The exam consists of 10 pages in total
- Only BA II Plus Calculator is permitted in the exam
- Show your work clearly for questions 16 - 19
- You can use the text book, lecture notes and formula sheet
- You cannot communicate with anyone else during the exam. That will be considered a serious
violation of academic integrity.
Section A: Multiple Choice Questions (each MCQ is worth 2 points)
For each of the following, please pick the best answer
1. Which of the following situations is a potential source of cash flows for a shareholder of a
certain stock?
I. The investor may be able to sell the shares at a future date.
II. The firm in which the shares are held might pay out cash to shareholders in the form of
1
, dividends.
III. The firm in which the shares are held might increase the value of its shares by reducing the
operating cost.
a. I only
b. II only
c. I and II
d. II and III
Correct answer: C.
2. According to constant growth DDM, the value of a stock increases as:
a. the required rate of return decreases.
b. the required rate of return increases.
c. the dividend growth rate increases.
d. both a and c are correct.
Correct answer: D.
3. PPE Inc. plans to pay a dividend of $2.10 per share a year from now. The dividends are expected
to increase by 2.5% annually going forward. Shareholders require a return of 8.5% on PPE’s stock.
What is the fair value of the stock?
a. $35.00
b. $42.00
c. $24.71
d. $19.09
Correct answer: A.
4. Gremlin Industries will pay a dividend of $1.80 per share at the end of this year. It is expected
that this dividend will grow by 4% per year in the future. The current price of Gremlin's stock is
$22.40 per share. What is Gremlin's required rate of return on equity?
a. 11.65%
b. 12.04%
c. 14.50%
d. 16.40%
Correct answer: B.
5. Poutine Professionals Inc. has just paid a dividend of $0.55 per share. The dividends are
expected to remain same in the foreseeable future. What is the fair value of the stock today if the
required rate of return is 12.5 percent?
2
