FINAL EXAM– FINANCIAL ECONOMICS – OPTION A

NAME.....................…………………………………………….………………………………………………………..
GROUP…………………………………………………………………………………………………………….……………
DEGREE.………………………………………..………………………………………………………………………………

INSTRUCTIONS

A- Correct answer: +1.00; wrong: -0.33; No answer: +0.00. Time: 1.30h.

B- The exam consists of 20 questions. Just one answer per question.
C- Mark your answers in the answer sheet. You must provide the exam copy and the answer sheet.
Numerical answers must be justified by their corresponding calculus.
D- There is no scratch paper. Please, write your calculus in the exam copy.
E- Mobile phones are strictly forbidden.

1. Choose the correct answer about the preferred stocks:

a. They have lower priority than common stocks in case of liquidation of the company.

b. They do not have voting rights.

c. They do not benefit by an increase in the value of the company.

d. None of the options is correct.

2. You have in your disposal 5,000€, and you want to calculate how many years you need, in order to
increase them to 12,000€, with an annual interest rate of 5% (choose the right range). Assume
compound rate.

a. 17 to 18 years

b. 2 to 3 years

c. 27 to 28 years

d. 15 to 16 years

3. A company is expected to pay a dividend of 4€ in year 1, of 2€ in year 2, and starting from year 3 and
forever after that, is expected to pay a dividend of 3€. What is the price of the stock of this company if
the annual expected return for it is 10%? (choose the right range)

a. 30€ - 30.5€

b. 27.5€ - 28€

c. 7.5€ - 8€

d. None of the options is correct.

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4. You are the financial manager of a firm, and you examine a project (using the NPV method) with an initial cost
of 4,000€, and then an annual payoff of 1,600€ for years 1, 2 and 3. Initially you calculated the NPV assuming a
cost of capital of 10% annual, however after some discussions with the board of directors you re-calculate the
NPV of the project assuming a lower cost of capital of 8% annual. Does the new NPV imply a change in your
decision regarding the undertaking of the project? Choose the right answer:

a. Yes. With the initial NPV (cost of capital 10%) the decision was positive (proceed to the project), but with the
new NPV (cost of capital 8%) the decision is negative (do not proceed to the project).

b. No. Both with the initial NPV (cost of capital 10%) and the new NPV (cost of capital 8%), the decision is positive
(proceed to the project).

c. No. Both with the initial NPV (cost of capital 10%) and the new NPV (cost of capital 8%), the decision is negative
(do not proceed to the project).

d. Yes. With the initial NPV (cost of capital 10%) the decision was negative (do not proceed to the project), but
with the new NPV (cost of capital 8%) the decision is positive (proceed to the project).

5. A stock is expected to pay every year for ever a dividend of 2€. The price of this stock in the market
is 18€. According to the CAPM, and given that the beta of the stock is 1.5, the risk-free rate is 3%
annual and the expected return of the market is 12% annual, which of the following is correct?

a. The stock is overpriced.

b. The stock is underpriced.

c. The stock is correctly priced.

d. There are not enough data to answer.

6. The spot rates for years 1, 2 and 3, are 5%, 6% and 7% annual respectively. There is an annual liquidity
premium of 1% and an annual inflation premium of 0.5% annual. What is the expected spot rate for the
one-year period that starts in two years and ends in three years? (choose the right range)

a. 6.5% to 7%

b. 7.5% to 8%

c. 1% to 1.5%

d. None of the options is correct.

7. The price of a stock is 20€. There is a call and a put option on this stock, both with strike price 18€,
and both with expiration in one year. The price of the call is 3€ and that of the put is 1€. The risk-free
rate is 1%. Which of the following is correct?

a. There is an arbitrage opportunity. To exploit it you should buy the share and the put, sell the call,
and take a loan of 18€ at the risk-free interest rate.

b. There is an arbitrage opportunity. To exploit it you should short sell the share and sell the put, buy
the call, and invest 18€ at the risk-free interest rate.

c. There is not an arbitrage opportunity.

d. None of the options is correct.

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8. Choose the correct answer about the expected stock returns:

a. They ignore the time value of money.

b. They are computed using the volatility of the stock.

c. They include a compensation for the risk of the stock.

d. None of the options is correct.

9. Choose the correct answer about the credit risk:

a. Higher credit rating means higher credit risk and higher bond yields.

b. Higher credit rating means lower credit risk and lower bond yields.

c. Higher credit rating means lower credit risk and higher bond yields.

d. None of the options is correct.

10. Suppose that Maria has a 20-year mortgage with an initial debt of €215,000 at BBVA bank. This bank
charges her an annual interest rate equal to 2% annual. If the loan is amortized by constant annuities,
determine the interest payment in the second year. Note: The payments are annual:

a. Between 2000 and 3000 euros

b. Between 3000 and 4000 euros

c. Between 4000 and 5000 euros.

d. Between 5000 and 6000 euros

11. In the context of the previous exercise, determine the outstanding principal to be amortized after
10 years (after the tenth annuity payment):

a. Between 117,000 and 119,000 euros

b. Between 119,000 and 121,000 euros

c. Between 121,000 and 123,000 euros.

d. Between 123,000 and 125,000 euros.

12. A short selling strategy,

a. Allows the investor to sell a stock that he does not own, so he must buy it in the future to
return it to its original owner when the position is closed.

b. Allows the investor to profit from a fall in stock prices.

c. It allows the investor to profit from a rise in stock prices.

d. a and b are correct.

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13. Assuming that we can invest in the IBEX 35 index and in Treasury Bills (risk-free asset), what will be
the proportion to invest in the IBEX 35 (with annual expected return of 3%, and annual volatility of 15%)
if we want to form a portfolio with a volatility of 7% annual?

a. 46.6%

b. More than 100%

c. 69,2%

d. None of the above

14. Consider a project that costs 100 and produces a one-time cash-flow in one year of 120 with
probability q and 90 with probability (1-q). If the IRR of the project is 15% annual, how much is q worth?

a. 92.6%

b. 83.3%

c. 50%

d. Cannot be calculated without knowing the opportunity cost of the project.

15. The shares of company X are trading at €30 in the secondary market. The company has announced
that the dividend for next year will be €3. In addition, you, an analyst, have estimated that the dividend
will grow at a rate of 3% per year thereafter. Determine the discount rate the market is applying to the
stock.

a. Less than 5%.

b. Greater than 8%, and less than 10%.

c. Greater than 20%.

d. None of the above

16. Calculate the modified duration of a 5-year bond, annual coupon of 2.5%, 4% annual interest rate
and nominal of 1,000. The bond amortizes at par.

a. 3.63 years.

b. 3.73 years.

c. 4.57 years.

d. 5 years

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17. In the context of the previous exercise, determine how the price of the bond will change if interest
rates rise by 30 basis points (1%=100bps).

a. The price of the bond will fall by 1.37%.

b. The price of the bond will rise by 1.37%.

c. The price of the bond will fall by 5%.

d. The price of the bond will rise by 5%.

18. Under the Gordon growth model (i.e., constant growth), a stock with an annual growth rate

of 5% and an annual dividend yield (D0/P0) of 6%, has an annual expected return of

a. 11.0%

b. 11.3%

c. 6.3%

d. 5.0%

19. All else equal, if the risk-free rate falls, then the value of an European put

option will

a. Decrease

b. Stay the same

c. Increase

d. Not enough information to tell

20. The market price of a call (put) option is EUR 7.00 (5.00). Both options have the same strike price
(K=100) and underlying. In both cases, the maturity is 1-year. Then,

a. Call option is overpriced, according the put-call parity.

b. Stock price is EUR 12.00.
c. Put option is overpriced, according the put-call parity.
d. The price of a forward contract on the same underlying, maturity and K=100, will be EUR
2.00.

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