Re: Sample Exam 1 -- Advanced Corporate Finance

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Date Posted: 18:03:43 11/13/16 Sun
Author: fdghfdgj (cxzvzxcv)
Subject: Re: Sample Exam 1

>Exam 1 Summer 1999 FI 4300 Your Name
>______________________________
>
>YOU HAVE 1 3/4 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 chec
>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.
>
>1.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.
>
>2. If an analyst uses the constant dividend growth
>model to value a stock, which of the following is
>certain to cause the analyst to increase her estimate
>of the current value of the stock?
>a. Decreasing the required rate of return for the
>stock.
>B .Decreasing the estimate of the amount of next
>year's dividend.
>c. Decreasing the expected dividend growth rate. d.
>Decreasing the price earnings multiple.
>e. An announcement that the President of the firm had
>been fired.
>
>3. 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.
>
>4. You have the following information on four mutually
>exclusive projects with an equal life:
> Project IRR NPV Initial Cost
> A 10% 3,500 8,000
> B 13% 5,000 20,000
> C 15% 4,000 500
> D 25% 4,500 1,000
>Which project(s) would you choose ?
>a) A b) B c) C d) D e) C or D but need more
>information to determine which one is better
>
>5. (short answer) What is meant by the agency problem?
>
>
>
>
>6. (2/18) To evaluate and compare investment
>proposals, we must adjust all cash flows to a common
>date.
> A. True B. False
>
>7. (2/91) If investors increase their expected return
>on a stock, and other expectations about the stock do
>not change, we can usually expect the stock price to
>drop.
> A. True B. False
>
>8. Briefly describe the set-of-contracts model of the
>corporation?
>
>
>
>
>
>9, 10. (this counts as 2 questions) Using at least
>4 principles of finance, discuss whether acquisitions
>are likely to be positive, negative, or 0-NPV
>projects?
>
>
>
>
>
>
>
>
>
>
>
>11. Multiple IRRs can occur due to:
>a. differences in the timing of cash flows.
>b. Differences in the size of the investment.
>c. Differences in the reinvestment rate assumptions.
>d. Changes in the signs of the cash flows.
>e. All of the above.
>
>12. List the five steps of the capital budgeting
>process.
>
>
>
>
>
>
>
>13. When evaluating mutually-exclusive projects, the
>most likely reason that NPV and IRR will give
>conflicting results is the different reinvestment rate
>assumptions of the two methods.
>a. True B. False
>
>14. Project cash flows should be evaluated on a
>before-tax, incremental basis and financing cash flows
>should be ignored.
>a. True B. False
>
>15. 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
>
>
>
>
>
>
>
>
>
> Exam 1 Summer 1999 FI 4300 Your Name
>______________________________
>
>YOU HAVE 1 � 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.
>
>
>1. (4 points) Your required rate of return is 8%. If
>you invest $150 today you will receive the following
>cash
>flows: At the end of year 1 $70
> At the end of year 2 $75
> At the end of year 3 $90
>What is the NPV of the project? What is the payback
>of the project?
>
>
>
>2. (4 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
>$4.3 million per year for next 20 years. At the end
>of year 20, the company can sell the cyclotron's
>magnetic alloys for $2.0 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 15 percent p.a. and corporate tax
>rate is 30 %.
>What is the IRR of the equipment ?
>
>
>
>
>3. (4 points) after you discovered that a Georgia
>State University chemistry professor is planning to
>illegally produce liquor in his lab, you report him to
>police. He admitted to police that he spent $12,500 to
>modify the lab's hot water boiler for this purpose and
>he expected to earn an annual net income of $6000 on
>the black market for liquor. He did not plan to pay
>any taxes. Because he already had tenure he estimated
>that he would be able to use the equipment until his
>retirement, that is 20 years from now. Then he would
>sell the equipment for $2,500 to his son. Due to an
>enormous risk associated with this activity, he
>estimated a required rate of return of 7 percent p.a.
>After all, you wanted to find out whether this was a
>good investment. What was the expected NPV of the
>project ?
>
>
>
>
>
>
>4. (3 points) You have invested $3,000 in a CD paying
>12.4% p.a., compounded semi-annually.
> How much would you have in your account after 4
>years?
> a. $4,788.36 b. $4,682.18 c.
>$4,854.20 d. $4,600.00
>e.$6,280.50
>
>
>
>5. (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: $10,000 Years 2-4: $ 5,000 Years 5
>onward (forever): $ 3,000
>You can presently earn 8% on your investments. What
>is the least you should accept today as a lump sum
>settlement?
> a. $48,753.88 b. $21,190.26
>c. $51,190.26 d. $46,712.13 e.
>$28,150.00
>
> 6. (3 points) How long does it take for money to
>triple in value at an 8% annual interest rate?
> a. in 37.52 years b. in 19.27 years
> c. in 14.27 years d. in 33.50 years e. in
>10.27 years
>
>
>
>7. (3 points) Holt Fasner is considering purchasing
>the stock of United Mining Companies, which he plans
>to hold indefinitely. United Mining just paid an
>annual dividend of $2.00 and the price of the stock
>is $45 per share. The earnings and dividends of the
>company are expected to grow forever at a rate of 6
>percent per year. What annual rate of return does
>Holt expect on his investment?
> a. 6.00% b.10.44% c.10.58%
> d.10.71%
>e.11.32%
>
>
>
>
>8. (3 points) Tosev Inc. just paid a dividend of
>$2.00 per share. This dividend is expected to grow at
>a supernormal rate of 15 percent per year for the next
>two years. It is then expected to grow at a rate of
>5 percent per year forever. The appropriate discount
>rate for Tosev's stock is 16 percent. What is the
>price of the stock?
> a.$16.86 b.$20.13
>c.$20.76 d.$22.72
>e.$30.21
>
>
>
>
>
>9. (3 points) McIntire Corp. is considering the issue
>of $1,000 face value, 20 year, 9 percent coupon
>bonds. The bonds will make coupon payments on a
>semiannual basis. It observes that bonds of Barrett
>Company are trading at $1079.31, has the same maturity
>date and pay an annual coupon of 10 percent. If the
>two bonds are expected to be similar in risk, what
>price will a bond of McIntire Corp. sell for?
> a. $1,000.00 b. $ 988.73 c.
>$1,079.31 d. $1,503.63 e.$ 908.01
>
>
>
>
>
>10. (3 points) A consol (perpetual bond that never
>matures) with par value of $1,000 currently trades at
>$350.00. If investors require a return of 12 percent,
>what is the annual coupon payment on the bond?
> a. $115.00 b. $ 18.50 c. $ 22.51
> d.$ 47.29 e.$ 42.00
>
>
>
> 11. (25 points) Frustrated after being removed from
>the X-files, Fox Mulder decided to make some money. He
>forms a company called "Foxy Productions, Inc." The
>company plans to build a theme Park dubbed "When a
>Nightmare Becomes Reality".
> Not having enough experience in causing nightmares,
>Fox interviewed Freddy Krueger for the position of
>chief operating officer (COO) of his Park. Freddy
>liked the job description very much because he finally
>could be paid for his hobby and make some money for
>his retirement. However, Freddy said that he is
>currently getting really busy at Elm Street but he
>will run the Park for a salary of $2.2 million per
>year for the next 7 years. After that the park will be
>closed, and land and a remaining equipment will be
>sold for scrap. Fox and Freddy estimated the following
>costs and revenue.
> Fox would immediately need to start construction on
>the land that he bought 5 years ago for $18 million.
>Current market value of the land is $8 million and is
>expected to grow to market value of $20 million
>dollars at the end of year 7. If the park does not
>open, Fox will sell the land. To start operations,
>$5.7 million is needed to purchase knifes, blades,
>gloves baseball bats, blowtorches, chains, computers
>and other equipment. This equipment will be amortized
>to zero tax salvage value over 5 years using MACRS
>depreciation. The actual total salvage value of all
>the equipment and supplies will be $0.7 million. The
>construction will cost $70 million dollars and will
>have zero salvage value. In addition, at the time of
>the closing of the Park $5 million will be spend on
>building demolition.
>They estimated that the park's maximum capacity was
>2,000 visitors each day for 350 days a year. To
>attract the visitors, each visitor will be paid $30
>for coming to the Park. However, each visitor is
>expected on average (after a discount) to spend $500
>for medical treatment required after the visit. To
>assure that visitors will select "certified and
>licensed" health care providers, Fox contracted with
>all of the area doctors for special "quality control
>inspections" for each patient coming from the Park.
>Doctors will pay 25 percent commission of their $400
>fee to the Park to cover the cost of these
>inspections. Fox would also need to pay an annual
>rent of $2.5 million for the additional office space,
>$4 million per year for supporting labor, and $3
>million for utilities every year. Should Fox not open
>this Park, his company's only alternate project is the
>money he could have earned, a net $1.3 million pre-tax
>income per year, as guest host on the Art Bell show.
> In addition, Fox pre-contracted with John Cochran,
>David Kendall, Kenneth Starr and Vernon Jordan to
>provide unlimited legal services for next 7 years.
>Provided the park opens, Each will be paid $5 million
>per year. Last year Fox hired Monica Lewinsky's firm
>to make a marketing survey. The survey supported the
>above customer demand and revenue estimates, confirmed
>that people are already waiting for the opening of the
>Park, and implied that certain types of men like thong
>underwear. She just billed Fox $2.3 million for the
>survey.
> Fox recently paid $1.7 million to Dewey,
>Cheatum, and Howe, L.L.P. for tax accounting advice.
>They estimated that average, and marginal, business
>tax rate would be 40 percent, Fox should depreciate
>the buildings on a straight line basis for 10 years
>with zero salvage value. Unless otherwise noted,
>they suggested that all other expenses be expensed
>rather than capitalized/depreciated.
> To run the business smoothly, however, Fox will need
>a working capital of $20 million (cash) immediately.
>This amount will be recovered at the termination of
>the business. Fox has only $6.4 million dollars and
>the rest of the money needed to finance the project
>will be borrowed from a bank, controlled by his buddy
>the Smoking Man. The loan will be amortized for over
>the life of the project and the interest will be 10
>percent p.a. Fox's required rate of return for this
>project is 14 percent p.a.
> Should Fox's company accept the Theme Park or the Art
>Bell guest host job? Note, your answer is worth 1
>point, displaying the calculations that led to your
>answer is worth 24 points.

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