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Date Posted: 20:14:15 05/08/07 Tue
Author: t
Subject: Re: Another mid-term exam
In reply to: rajaram 's message, "Re: Another mid-term exam" on 09:39:10 09/13/05 Tue

>>Exam 1 Fall 2000 FI 4300 Your Name
>>______________________________
>>
>>YOU HAVE 2 1/2 HOURS TO COMPLETE BOTH PARTS OF THIS
>>THIS EXAM
>>Instructions:
>>1) The part of the exam is closed book and closed
>>notes. No scrap paper is allowed, use the back of the
>>exam if necessary.
>>2) Read the entire exam before starting. The best
>>strategy is generally to "cherry pick". In other
>>words, solve the easiest (and/or most familiar)
>>problems first. This will save time (and energy) that
>>can be expended on the more difficult problems.
>>3) Partial points are based on readily observable
>>evidence that you know at least part of the solution
>>concept. The more evidence presented (and the clearer
>>the evidence), the better the chance for partial
>>points. In other words, SHOW ALL WORK!
>>4) If you have additional time remaining, give your
>>work one last check.
>>5) True/False questions are worth 2 points.
>>Multiple choice questions are worth 3 points. Short
>>answer questions usually take less than three
>>sentences and are worth 4 points. Discussion Questions
>>and Problems are worth the number of points listed in
>>the question.
>>
>>1. According to the text, the primary goal for a
>>firm's financial managers is to:
>> a. Maximize the firm's stock price. b.
>>Maximize long run profits. c. Minimize firm
>>risk. d.
>>Increase the firm's asset base. e. Maximize
>>the firm's beta.
>>
>>2. DISCUSSION QUESTION (15 points)
>> Suppose you bought $1,000 of Xerox stock and another
>>$1,000 of the Wells Fargo S&P500 Index Fund in early
>>1973. You bought the Xerox stock for several good
>>reasons. 1) Xerox was the leading producer of copiers
>>in the world with the best-recognized brand and
>>patents protecting this technology. 2) In 1972, you
>>had been to the Palo Alto Research Center (PARC for
>>short) had had seen Personal Computers (PC) operating
>>on a Local Area Network (LAN) using Graphical User
>>Interfaces (GUI, pictures instead of words on the
>>computer screen) to designate programs and these
>>programs were opened using a mouse. At PARC, you see
>>the workers communicating with other Research Centers
>>and universities over something called the Internet.
>>Except for the Internet, Xerox has at least a 5-year
>>lead over competitors and the PC, GUI, mouse, and
>>LANs. All of these products are market ready and
>>could be marketable products within the year. You
>>understand how revolutionary are these products and
>>expect each of these products to be worth billions.
>>3) Earnings and the stock price have been growing at a
>>very high rate. Xerox is rated as a strong buy by
>>most analysts, has a high a high P/E ratio as
>>befitting a high growth company, and is part of the
>>Nifty 50 (a term first used in the late 1960's to
>>describe technology companies with dominant market
>>positions and high growth rates). You bought the
>>Index Fund on a whim. When created by Wells Fargo in
>>1973, this was the first unmanaged mutual fund and the
>>only fund that was trying to be "average."
>> It is now October 2000 and you are looking your
>>portfolio. You notice that your Xerox stock now has a
>>value of about $400 (down 60%) and your Index fund has
>>a value of over $12,000 (up 1200%). While you were
>>wrong about the Xerox stock being a good buy, you were
>>right about the value of the PC (Dell, Gateway, and
>>lots of others), GUI (Bill Gates (Microsoft) and Steve
>>Jobs (Apple) both credit with what they saw at PARC in
>>1974 as the basic ideas behind their companies), the
>>LAN (Novell, Cisco, Silicon Graphics and others), the
>>mouse, and last but not least the Internet.
>> All of the above is true. Using at least 5 Axioms of
>>Finance, discuss POSSIBLE REASONS why the Xerox stock
>>underperformed the S&P Index. Note I want
>>speculations that properly apply the axioms. Listing
>>the axioms is worth ½ point. Applying the axioms is
>>worth 14 ½ points. You need to write at least 11/4
>>pages to properly answer this question.
>>
>> THIS PAGE INTENTIONALLY LEFT BLANK AND SHOULD BE USED
>>IN THE DISCUSSION QUESTION.
>>
>>
>>3. Which of the following statement is/are true if the
>>efficient capital markets hypothesis holds?
>>
>>a. It implies perfect forecasting ability.
>>
>>b. It implies that the market is irrational.
>>
>>c. It implies that prices do not fluctuate.
>>
>>d. It implies that prices reflect all available
>>information.
>>e. None of the above.
>>
>>4. The organizational form which gives the owner(s)
>>limited liability is the:
>>a. Corporation. b. Partnership.
>>
>>c. Sole proprietorship. d. All of
>>the above give limited liability to owners.
>>e. None of the above give limited liability to owners
>>
>>5. Stocks with a beta of zero offer an expected return
>>of zero.
>> a. True B. False
>>
>>6. Because investors cannot hope to make large
>>speculative profits from investing in Treasury bills,
>>the expected return from bills has to be higher than
>>the expected return from the market portfolio
>> a. True B. False
>>
>>7. What is meant by the term "agency problem"?
>>
>>
>>
>>
>>8. The present value of the expected net cash inflows
>>for a project will most likely exceed the present
>>value of the expected net profit after tax for the
>>same project because:
>> a. Income is reduced by taxes paid, but cash flow is
>>not.
>> b. There is a greater probability of realizing the
>>projected cash flow than the forecasted income.
>> c. Income is reduced by dividends paid, but cash
>>flow is not.
>> d. Income is reduced by depreciation charges, but
>>cash flow is not.
>> e. Cash flow reflects any change in net working
>>capital, but sales do not.
>>
>>9. (3 points) Consider the following information about
>>Ihouro, Inc. If the annual capital budget is less than
>>$1,500,000, the cost of capital is 9%. If the annual
>>capital budget is more than $1,500,000, then the cost
>>of capital is 12%. You are considering the following
>>projects:
>> Circle the letters of the projects that should be
>>accepted.
>> Initial
>> Project Investment NPV @ 9% NPV@12% IRR
>>PI @ 9% Payback
>> A $1,000,000 $100,000 ($ 97,000)
>> 10.2% 1.04 3 years
>> B $ 400,000 ($75,000) ($195,000)
>> 197.8% .94 Never
>> C $ 150,000 $ 25,000 $ 11,000
>> 23% 1.32 1 year
>> D $ 250,000 $ 44,000 $
>>7,000 12.4% 1.13 5 years
>> E $ 215,000 $ 51,000 $ 18,000
>> 3.7% 1.19 3 years
>> F $ 230,000 ($19,000) ($ 33,500)
>> 7.4% .91 6 years
>> 10. Two of your classmates are evaluating a project
>>with the following net cash flows:
>>
>> Year Cash Flow
>> 0 -$ 10,000
>> 1 $100,000
>> 2 -$100,000
>>
>>One classmate says that the project has an IRR of
>>between 12 and 13%. The other classmate calculates an
>>IRR of just under 800%, but fears his calculator's
>>battery is low and may have caused an error. You agree
>>to settle the dispute by analyzing the project cash
>>flows. Which statement best describes the IRR for this
>>project?
>> a. There is a single IRR of approximately 12.7
>>percent.
>> b. This project has no IRR, because the NPV profile
>>does not cross the X axis.
>> c. This project has two imaginary IRRs.
>> d. There are an infinite number of IRRs between 12.5
>>percent and 790 percent that can define the IRR for
>>this project.
>> e. There are multiple IRRs of approximately 12.7
>>percent and 787 percent.
>>
>>11. The primary advantage of accelerated depreciation
>>over straight-line depreciation is that the total,
>>undiscounted, depreciation tax savings over the life
>>of the project are greater when an accelerated
>>depreciation method is used.
>> a. True b. False
>>
>>12. A firm which bases its capital budgeting
>>decisions on either NPV or IRR will be more likely to
>>accept a given project if it uses MACRS accelerated
>>depreciation than if it uses the optional
>>straight-line alternative, other things being equal.
>> a. True b. False
>>
>>13. The accounting model of the firm is a subset of
>>the investment-vehicle model of the firm and visually
>>is similar to the balance sheet with Assets
>>representing the investment decision and Liabilities
>>and Owner's Equity representing the financing
>decision.
>> a. True b. False
>>
>> Exam 1 Fall 2000 FI 4300 Your Name
>>______________________________
>>
>>YOU HAVE 2 1/2 HOURS TO COMPLETE BOTH PARTS OF THIS
>>THIS EXAM
>>Instructions:
>>1) The part of the exam is open book and open notes.
>>2) Point values are listed with the question.
>>3) Show your work in order to have the possibility of
>>partial credit.
>>
>>1. (3 points) If the risk-free rate is 7 percent, the
>>expected return on the market is 10 percent, and the
>>expected return on Security J is 13 percent, what is
>>the beta of Security J?
>>a. 1.0 b. 1.5 c. 2.0 d. 2.5 e. 3.0
>>
>>
>>
>>
>>2. (3 points) The current price of a 10-year, $1,000
>>par value bond is $1,158.91. Interest on this bond is
>>paid every six months, and the nominal annual yield is
>>14 percent. Given these facts, what is the annual
>>coupon rate on this bond?
>>a. 10% b. 12% c. 14% d. 17% e. 21%
>>
>>
>>
>>
>>
>>3. Jill's Wigs Inc. had the following balance sheet
>>last year:
>>
>> Cash $ 800
>>Accounts payable $ 350
>> Accounts receivable 450 Accrued
>>wages 150
>> Inventory 950 Notes
>>payable 2,000
>> Net fixed assets 34,000
>>Mortgage 26,500
>> Common
>>stock 3,200
>> Retained
>>earnings 4,000
>> Total assets $36,200 Total liabilities
>>and equity $36,200
>>
>>a. (1.5 points) What is the firm's debt ratio?
>>
>>
>>
>>b. (1.5 points) What is the firm's quick ratio?
>>
>>
>>
>>Over the next year Jill's's current assets, accounts
>>payable, and accruals will grow in proportion to sales
>>(i.e. are spontaneous). Last year's sales were
>>$20,000 and this year's sales are expected to be
>>23,000. The firm will retain $1000 in earnings to
>>fund current asset growth, and any additional funds
>>needed to fund current assets growth will be funded
>>with notes payable. The net fixed assets account will
>>increase to $40,000 and will be funded directly by a
>>new equity issue.
>>
>>c. (4 points) What will Gemini's new current ratio be
>>after the changes in the firm's financial picture are
>>complete?
>>
>>
>>d. (2 points) What will be the firm's new fixed asset
>>turnover ratio?
>> 4. (3 points) A commercial loan is made for 11 years
>>at a 9% interest rate. If equal annual payments are
>>made at the end of each year, what annual payment is
>>required to amortize an initial loan of $6,300,000?
>>(Round your answer to the nearest $1)
>>a. $6,300,000 b. $925,764 c. $700,000 d. $572,727 e.
>>$567,000
>>
>>
>>
>>5. (3 points) The common stock of Darkover Inc. just
>>paid an annual dividend of $1.00. The dividend is
>>expected to grow at a constant rate forever. The
>>required rate of return for this stock is 12 percent.
>>If the current price of the stock is $15.00 what is
>>the expected growth rate of the dividends?
>>a. 17.50% b. 5.33% c. 18.67% d. 5.00% e. 7.04%
>>
>>
>>6. Mack Industries just paid a dividend of $1.00 per
>>share (i.e., D0 = $1.00). Analysts expect the
>>company's dividend to grow 20 percent this year (i.e.,
>>D1 = $1.20), and 15 percent next year. After two
>>years the dividend is expected to grow at a constant
>>rate of 5 percent. The required rate of return on the
>>company's stock is 12 percent. What should be the
>>current price of the company's stock?
>> a. $12.33 b. $16.65 c. $16.91 d. $18.67 e. $19.67
>>
>>
>>
>>
>>
>>7. (4 points) Your required rate of return is 11%. If
>>you invest $250 today you will receive the following
>>cash
>>flows: At the end of year 1 $97
>> At the end of year 2 $65
>> At the end of year 3 $99
>> At the end of year 4 $152
>>What is the IRR of the project? What is the payback
>>of the project?
>>
>>
>>
>>
>>
>>8. (8 points) Fill in the missing numbers for the
>>Aboutt, Inc. 1997 annual financial statements. Assume
>>all balance sheet accounts are 1997 ending balances
>>unless other wise noted. Missing numbers are worth 1
>>point unless otherwise noted.
>>
>>Profit before taxes $ 162 Accrued Wages $________
>>Depreciation $100 Income tax $ ________
>>Net income $ 77 Total current liabilities$
>>__________
>>Long term debt $ 205 Net sales $ 927
>>Total liabilities and owner's equity $_____
>>Additional Paid-in Capital $100
>>Common stock ($.03 par) $ 50 Ending retained
>>earnings $ 131
>>Cost of goods sold ________ Cash $ ____________
>>Accounts payable $ 193 Accounts receivable $230
>>Inventories $ 95 Gross profit $ 467
>>Rent $70 Total Assets $ ___________
>>Research and Development Expense $7 Advertising $110
>>
>>Operating Profit $ _________ Interest expense
>>$28
>>Total Current assets $ 421 Net fixed assets $ 397
>
>>Dividends $74
>>
>> 8. (20 points) Seinfeld Creative Productions is
>>evaluating the construction of a studio complex. The
>>planned site is currently valued at $400,000 but this
>>parcel would not need to be purchased since Seinfeld
>>already owns it. (If the company does not use the
>>parcel for this project, it will be sold today for its
>>current value). Jerry got lucky when he bought the
>>land as he only paid $70,000 in 1991.
>>The studio construction would cost Seinfeld $1 million
>>and would be depreciated for tax purposes using the
>>10-year MACRS schedule. Costanza & Benis, LLP is
>>retained as the creative consultant of this project.
>>George Costanza is due $25,000 in fees next month for
>>services already rendered in the design stage. If
>>Seinfeld launches the project Elaine Benis will need
>>to perform additional services, her fee for these
>>services will be $35,000.
>>It is expected that the studio will increase
>>Seinfeld's short-movie production by 3 new releases
>>every year with each of them to bring in $90,000 per
>>year in royalty fees. Thus in year 1 there are 3
>>movies, in year 2 there are 6 movies and so on, until
>>the project ends. However, Seinfeld must pay
>>$30,000, per film, per year, in residuals to the other
>>actors. The operation of the studio will necessitate
>>additional marketing expenditures of $100,000 per year
>>and other general expenses of $50,000 per year. Due to
>>the time needed to run the studio, Jerry Seinfeld
>>would need to stop doing stand-up comedy engagements.
>>He currently earns about $50,000 per year doing
>>standup. Seinfeld would need a one-time inventory
>>increase (primarily raw film stock and finished movie
>>prints) of $150,000. His suppliers will let him
>>maintain account payable of $80,000. He will allow
>>customers to pay with a short lag, thus giving an
>>average accounts receivable balance of $90,000. These
>>amounts would be recovered at the end of the life of
>>the project.
>>At the end of the project, Seinfeld Productions
>>expects to be able to the site parcel for $700,000.
>>However, before the land could be sold, Seinfeld would
>>need to pay about $200,000 to demolish the studio
>>building. At the end of the project, Jerry will be
>>able to sell all future rights to the films for
>>$700,000.
>>The marginal tax rate of Seinfeld is 40%. For purposes
>>of identifying the timing of cash flows, consider all
>>project related cash flows to occur at the end of the
>>year. The construction will be completed this year,
>>the first year of operations is the year 2001, and
>>project will operate for 8 years.
>>Should Jerry Seinfeld continue doing standup or build
>>the studio. Note the correct answer is worth 1
>>points, showing your work on how your arrived at the
>>correct answer is worth 19 points.

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  • Re: Another mid-term exam -- Pinky, 20:23:33 06/16/08 Mon
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