FIN 421 Practice Midterm Exam Questions and Answers: Arizona State University

Practice Midterm Exam FIN 421 Spring 2016 Name: Student ID: Section: 10893 (Th 6pm) 10894 (T/Th 3pm) 25667 (T/Th noon) Part I / 60 Part II / 40 Total / 100 • You have 60 minutes to complete this exam. • Only calculator and pen are allowed. A formula sheet is provided on the last page. • You are to answer these questions without consulting anyone. • Show your work wherever necessary. • Manage your time wisely. Shorter answers are often better. Part I. Multiple Choice Questions (6 points each) Choose only one answer for each question and write the corresponding letter in the table below. No justifications required. Question Answer 1 2 3 4 5 6 1. Shares outstanding (St), stock prices (Pt), and Dividends (Dt+1) for assets A and B are given below. All dividends are paid out at the end of the year, 12/31/2014. Asset B performed a 3:1 stock split at the beginning of the year, 01/01/2014. What is the value weighted portfolio return? Date Asset A Asset B St Pt Dt St Pt Dt 12/31/2013 (t) 100 20 10 100 12/31/2014 (t+1) 100 14 2 30* 50 3 Asset B performed a 3:1 stock split on 01/01/2014. A) -18.67% B) 6.33% C) 9.33% D) 24.00% E) None of the above Answer: B Weights are wA = 100 × 20/(100 × 20 + 10 × 100) = 2/3 and wB = 1 − wA = 1/3 Returns are rA = (14 + 2)/20 − 1 = −0.2,rB = 3(50 + 3)/100 − 1 = 0.59. The value weighted return is 2/3 × (−20)% + 1/3 × 59% = 6.33%. 2. You purchased 400 shares of Starbucks common stock on margin at $120 per share. Assume the initial margin is 50% and the maintenance margin is 30%. Following an earnings warning, the price of Starbucks starts declining rapidly. At what price do you get a margin call from your broker? Assume the stock pays no dividends and ignore interest on margin. A) $36.00 B) $78.00 C) $85.71 D) $102.88 E) None of the above