Part 1. Definitions:
Do not define the word with the word. Do not give examples. Do not draw. Do not write formulas. Write in complete sentences. Limit your responses to no more than 2-3 sentences. Please be concise. Any form of plagiarism will invalidate your entire exam. Please define the words below.
1. Finance
2. List, and then define the 3 financial statements discussed in class. (Remember, I am looking for our strategic definitions).
3. Discount rate
4. Value
5. Risk
6. IRR
7. Bond Coupon
8. Price
9. YTC
10. Variance
11. Standard Deviation
12. *Opportunity Cost (& why do finance people often object to this concept)
13. Inverted yield curve
14. Risk free rate
15. Intrinsic Value
Part 2. Financial Concepts
Write brief concise responses. Do not wonder around in your response. All of your response must be correct in order to receive credit. If any part of your response is incorrect, then the entire answer will be marked as incorrect. When you are writing do not write more than two paragraphs. Spell & grammar check, please. APA writing is not required for answers, but it is always acceptable.
1. Berk & Demarzo discuss the concepts of the P/E Ratio and equity multiplier. What are their differences? (A definition on each will be considered none responsive. I know their definitions; I am interested in their difference).
2. We discuss the Net Present Value equation in class, along with its strengths and weaknesses. List 3 strengths and 3 weaknesses of NPV.
3. List the rules of time travel of money, then state which rule is the most important?
4. What is the impact on EMT (as discussed by Lo) on corporate finance?
5. Berk & Demarzo argued the concepts of efficient markets. What is the relationship between efficient markets and NPV?
6. Given the opportunity to put away the same amount of annual payments for 13 years, at the same rates of which type of annuity will generally have a larger future value and why?
7. When does the YTC equal the YTM?
8. What is a capital budget and what does it reflect?
9. How could one argue against Berk & DeMarzo's discussion on the Law of One Price.
10. How is Free cash flow calculated (List 3 ways; just formulas):
Part 3. Quantitative Problem Solving
You must use the proper equation, with plugged in values, as well as show your work to get credit. Questions with just numerical answers receive no credit.
1. (As this is a Word document place the spacing (hit the enter key) so that you can comfortably write your answers). Write the equation with the values, then solve:
A. What is the quick ratio for 2013?
B. What is the current Ratio for 2011?
C. What is the Gross Profit Margin for 2010?
D. What is the 2013 debt ratio?
E. What is the 2012 net working capital?
F. What are the EPS fir 2012 and 2013?
G. What is the Return on invested capital (RoIC) for 2013?
H. 2013 ROA?
I. 2013 ROE?
J. 2013 Asset turnover?
K. 2012 and 2013 Market to Book Ratio?
L. What is the Enterprise Value based on 2013 data?
M. What is the growth ("g") for 2013?
2. Growing perpetuity is a stream of cash flows that occurs at regular intervals and growth at a constant rate forever. If each cashflow is $246, and the bank pays a rate of 4.3%. What is the present value of your fund if the growth rate is 3.2%?
3. You plan to place $20,000 in an IRA. The bank is offering 5% interest. However, because of your brilliant smile bank will add another 3% if you open up the plan with them. You know that you will require $2,000 at the end of each year to cover taxes, while you are still working. At the time you open up the IRA you plan to work for another 15 years. How much money will you have in this account when you retire in 15 years?
4. What is the future value of a lump sum of $159 deposited in a bank for 28 years at 4.9% interest?
5. If you decide to deposit $600 at the end of each year for 17 years in a saving account with 2.8% interest. How much will be in your have when he makes the final deposit?
6. If you decide to place the same $600 into an account, but this time you do not want to wait until the end of the year, but rather start your account out with a deposit of $600. You plan on receiving the same interest rate of 2.8%. What is the value of your account in 17 years?
7. An Internet company showed net income of $195 million for the most recent fiscal year. The firm decided not to carry any debt. Its capital expenditures of $185M increasing the working capital by $10M. This had depreciation expenses of $87 million. If depreciation expenses were $100M what would be the free cash flow for the Internet company?
8. What is the value of a 26 year corporate $10,000 bond with a 10% return paying 7.5% annually?
9. A 30-year bond with a face value of $1000 offers a return of 9.7% and has a coupon rate of 5.5% with quarterly payments. What is the specific coupon payment for this bond?
10. What is the YTM on a $12,550 Bond with an 8.5% annual coupon due in 23 year bond selling at $9,426.00?
11. What is the market price of a 14-year $12,500 Bond with a 10% semiannual coupon bond, if the return is 13%?
12. Your company has decided to issue a 19-year $65,000 Bond whose annual coupon rate is 7.6% and place it in the market for $80,000.
13. As the CFO of a company you are trying to decide on whether to invest in a new technology or place the investment into market place expansion. The company will use the bond rate from problem 12. Your budget investment is $65M. The following data cash flows are available from the VP of marketing: Year 1: $9M; Year 2: $18M; Year 3: $26M; Year 4: $45M; Year 5: $38M. The VP of Engineering has offered the following cashflow data: Year 1: $5M; Year 2: $13M; Year 3: $39M; Year 4: $40M; Year 5: $43M associated with the new technology.
a. What is the NPV for each investment?
b. What is the internal rate of return for each investment?
c. What is the modified internal rate of return for each investment?
d. Which investment do you tell your company to make and why?