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Date Posted: 16:23:08 04/13/01 Fri
Author: finance esam
Subject: Re: Sample Final Exam
In reply to: Charles Hodges 's message, "Sample Final Exam" on 16:18:08 04/25/00 Tue

>Exam 3 FI4300 Summer 1999 Your Name
>___________________________
>
>YOU HAVE 2 HOURS TO COMPLETE BOTH PARTS OF 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. Problems are worth
>the number of points listed in the question.
>
>MC1. According to the text, the primary goal for a
>firm's financial managers is to:
> a. Maximize earnings per share. b.
>Maximize long run profits. c. Minimize firm
>risk.
> d. Increase the firm's asset base. e.
>None of the above is the primary goal for a financial
>manager.
>
>SA1. What is the optimal capital structure? Why?
>
>
>
>
>
>
>SA2. What is the optimal dividend policy? Why?
>
>
>
>
>
>SA3. What is the best capital budgeting decision
>rule? Why
>
>
>
>
>
>SA4. Of the capital structure decision, dividend
>policy decision, and capital budgeting decision, Which
>is the most important? Why?
>
>
>
>
>TF1. Over time, using the same risk-adjusted discount
>rate to discount all cash flows would encourage the
>firm to accept high-risk, negative NPV projects.
> a. True b. False
>
>TF2. Other things held constant, lower personal taxes
>should lead companies to pay higher dividends.
>A. True B. False
>
>
>SA5 (2 points) Real Options - fill in the blanks. If
>you need to describe the option more fully, write your
>description near the question. For the record, the
>type of option is either call or put. The underlying
>asset refers to the item, which upon a change in
>value, will impact the decision to exercise or not
>exercise the option.
>
>d. You are offered a new higher-paying job in your
>current industry. You have a non-compete agreement
>that requires you to pay your current employer
>$500,000 if you take the other job.
>
>Type of option ______ Who is long _________ Who is
>short ___________ Underlying Asset _________
>
>
>TF3. In capital budgeting analysis, the investing
>and financing decisions are separated.
>a. True b. False
>
>TF4. In perfect capital markets, the way a firm
>finances its assets is irrelevant.
>a. True b. False
>
>MC1. Which statement is always correct ?
>a) if the NPV of the project is positive then the IRR
>is smaller than 1.
>b) if the NPV of the project is positive then the IRR
>is greater than 1.
>c) if the NPV of the project is negative then the PI
>is greater than 1.
>d) if the NPV of the project is negative then the PI
>is greater than discount rate.
>e) if the NPV of the project is positive then the PI
>is greater than 1.
>
>TF5. During the early years of a long-term capital
>budgeting project, using straight-line depreciation,
>as opposed to MACRS depreciation, will generally
>increase the net income of a project and thus increase
>the project's IRR.
>a. True B. False
>
>TF6. In perfect capital markets, the WACC is
>constant, regardless of the proportion of debt.
>A. True B. False
>
>TF7. In the real world, the expected value of
>bankruptcy costs is negatively related to the degree
>of specialization of the firm's assets.
>A. True B. False
>
>
>MC2. According to the pecking order view of capital
>structure, which is management's preferred order of
>preference?
>a. Internal equity, debt, preferred stock, external
>equity
>b. Debt, internal equity, preferred stock, external
>equity.
>c. External equity, Internal equity, preferred stock,
>debt.
>d. Preferred stock, internal equity, debt, external
>equity.
>e. None of the above.
>
>SA6. Explain what happens to a firm's value as
>leverage in increased, according to the capital
>markets imperfections/tradeoff view.
>
>
>
>
>
>TF8. Restrictive covenants in bond contracts are
>primarily used to limit potential conflicts between
>stockholders and management.
>A. True B. False
>
>TF9. For most companies, dividends are more stable
>than earnings.
>A. True B. False
>
>
>
>MC3. The best explanation of payout ratios varying
>systematically across industries is probably;
>a. taxes b. investment opportunities. c. risk
>d. Transaction costs. e. Age of the average investor.
>
>
>SA 7. Match the term with the date:
>Record Date _________ April 12, 1999
>Declaration Date _________ April 15, 1999
>Ex-Dividend Date __________ April 30, 1999
>Payment Date __________ April 1, 1999
>
>
> Exam 3 Summer 1999 FI 4300 Your Name
>______________________________
>
>YOU HAVE 2 HOURS TO COMPLETE BOTH PARTS OF THIS EXAM
>PROBLEM INSTRUCTIONS
>
>* Show all work.
>* Be sure to label each section of the answer.
>* Use the back of the test if you need more room.
>* This portion of the exam is open book, open notes.
>* Set your calculator to four decimal places.
>· Hint, if you cannot solve a problem due to a missing
>number, simply make up a reasonable number and use
>this number to complete the problem. As an example in
>problem 2, if you can't solve for leverage in part A,
>then assume some debt equity mix and use this in part
>B.
>
>1. (4 points) consider the projects shown below. If
>you were rationed to $100 for the initial investment,
>which project(s) should you choose?
>
>Project: A B C D E F G H I
>Initial Cost: 15 20 25 30 35 40 45 10 15
>NPV: 1.5 2.1 4.5 3.2 1.8 2.9 3.1 -2.7 -1.9
>
>
>
>
>2. (6 points) Rollins Corporation is constructing its
>MCC schedule. The firm is at its target capital
>structure. Its bonds have a 9 percent coupon, paid
>semiannually, a current maturity of 17 years, and sell
>for $1,125. Rollins' beta is 1.1, the risk-free rate
>is 6 percent, and the expected return on the market is
>12 percent. Rollins is a constant growth firm, which
>just paid a dividend of $3.00, sells for $27.00 per
>share, and has a growth rate of 8 percent. Rollins
>corporate tax rate is 40%.
>The firm's book value balance sheet is as follows:
> Asset $8,000 Long Term Debt $5,000
> Equity ($1 par) $500
> Retained Earnings $2500
>
>
>(2)What is the firm's leverage ratio?
>
>
>
>(4)Assuming the pre-tax cost of debt is 8.7%, and
>using CAPM estimate of the cost of retained earnings,
>what is Rollins' WACC?
>
>
>
>2. (3 points) Albatros, Inc., an all equity firm, is
>considering buying a piece of equipment (a cyclotron)
>from Warren Piece for $47 million. By reducing
>Albatros's expenses for Proton-spectroscopy, the
>equipment will increase the company's net income by
>$2.3 million per year for next 20 years. At the end
>of year 20, the company can sell the cyclotron's
>magnetic alloys for $0.0 million. The depreciable life
>of the cyclotron is 20 years and company can use
>straight-line depreciation to $0 million salvage
>value. Albatros, Inc. estimated for this project a
>discount rate of 11 percent p.a. and corporate tax
>rate is 40 %.
>What is the IRR of the equipment ?
>
> 3. (3 points) You have just won a lawsuit. The
>settlement will pay either a single lump sum
>settlement today, or the following cash flows (assume
>the following cash flows come at the end of the
>period):
> Year 1: $15,000 Years 2-4: $ 4,000 Years 5
>onward (forever): $ 5,000
>You can presently earn 8% on your investments. What
>is the least you should accept today as a lump sum
>settlement?
>
>
>
>
>
>
>
>
>4. (20 points) Use the following information for the
>next several questions. Consider a world of perfect
>capital markets. This world has no corporate or
>personal taxes, all investors have homogeneous
>expectations, no bankruptcy costs, and M&M's no-tax
>theory of capital structure is true.
> Company Y is financed has the following market value
>balance sheet:
>
> Assets = $ 200 Liabilities = $80
> Equity = $120
>
>The firm had $15 in EBIT last year. The firm has 25
>shares outstanding. The firm expects this same return
>for the foreseeable future. The firm a is a zero
>growth firm, that pays out all excess earnings as
>dividends. Any time the firm changes its capital
>structure, it changes only the debt/equity mix and
>does not change its total assets. The firm's
>liabilities consists entirely of perpetual debt. The
>firm's debt is risk-less, perpetual, selling at par,
>and has a 5% yield. If the firm were to change its
>capital structure, new debt would still have a 5%
>yield. The expected return on the market is 14%.
>Given this information, answer the following questions:
>
>A. (3 points) What is the firm's current weighted
>average cost of capital.
>
>
>
>b. (3 points) What is the current price per share?
>
>
>
>c. (2 points) What is the current dividend per share?
>
>
>
>Now assume that the firm issues enough equity to
>repurchase all of the firm's debt. This change in
>capital structure reveals no new information about
>future firm prospects.
>
>d. (2 points) What is the overall firm's new WACC?
>
>
>
>e. (2 points) What is the stock's new beta?
>
>
>Now consider a DIFFERENT COMPANY in a world that of
>perfect capital markets, with one change, CORPORATE
>TAXES DO EXIST. This world has no personal taxes, all
>investors have homogeneous expectations, no bankruptcy
>costs, and M&M's with corporate taxes theory of
>capital structure is true. Company Y is financed has
>the following market value balance sheet:
>
> Assets = $ 165 Liabilities = $70
> Equity = $95
>
>The firm had $25 in EBIT last year. The firm has 19
>shares outstanding. The firm expects the same
>return/profits for the foreseeable future. The firm a
>is a zero growth firm, that pays out all excess
>earnings as dividends. Any time the firm changes its
>capital structure, it changes only the debt/equity mix
>and does not change its total assets. Liabilities
>consist only of the firm's debt. The debt is
>riskless, perpetual, selling at par, and has a 8%
>pre-tax yield. If the firm were to change its capital
>structure, new debt would still have a 8% pre-tax
>yield. The firm's tax rate is 35%. Given this
>information, answer the following questions:
>
>G. (2 points) What is the value of the firm's tax
>shield due to the use of perpetual debt?
>
>
>
>H. (2 points) What is the current expected return on
>the firm's equity?
>
>
>
>I. (2 points) What is the firm's current dividends
>per share?
>
>
>
>J. (Fill in the blank, 2 points each) Now assume the
>firm issued an additional $20,000,000 in debt and used
>the funds to repurchase equity. Under this scenario,
>the required rate of return on the equity would
>_________________ (be lower/be higher/be unchanged),
>while the overall WACC of the firm would
>________________(be lower/be higher/be unchanged).
>
>
>
> 1. (10 points) In 1997, the Lissa Company, a low
>growth firm, paid dividends of $12,000,000 on
>after-tax income (cash flow) of $16,000,000. Capital
>budget projects totaled $14,000,000 in 1997. 1997 was
>a normal year for earnings, dividends, and capital
>budgets. For the past 8 years, earning have grown at
>a constant rate of 11%. However, in 1998, earnings are
>expected to fall to $12,000,000 and the firm expects
>to have profitable investment opportunities will grow
>to 18,000,000. It is predicted that Lissa will not
>maintain the 1998 level of earnings growth, and the
>company will return to it previous 11% growth rate.
>Lissa's target debt ratio is 20%.
>
>a. Calculate Lissa's total dividends for 1998 if its
>dividend payment is set to force dividends to grow at
>the long-run growth rate in earnings.
>
>
>
>b. Calculate Lissa's total dividends for 1998 if it
>continues its 1997 dividend payout ratio.
>
>
>
>c. Calculate Lissa's total dividends for 1998 if it
>uses a pure residual dividend.
>
>
>
>d. Calculate Lissa's regular and special dividends for
>1998 if it employs a regular dividend plus extras
>policy, with the regular dividend being based on the
>long-run growth rate and the extra dividend being set
>according to the residual policy.
>
>
>
>e. Based on what you know about finance, what
>dividend should Lissa pay and why (i.e. should Lissa
>increase/decrease the dividend payout ratio)?

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