Final_2016

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Georgetown University *

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211

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Finance

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Apr 3, 2024

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12

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1 BFM – Fall 2016, Professor Mukharlyamov Final Exam NAME: _______________________________________________________________________________ SECTION (circle yours): 2:00–3:15 PM 3:30–4:45 PM 5:00–6:15 PM EXAM INSTRUCTIONS 1) The exam lasts 2 hours. 2) Please complete all questions. 3) Please write all answers and work in your exam. Only answers in the exam booklet will count. No credit will be given for answers or work written on scratch paper. 4) You are allowed to use a handwritten study sheet. You must put your name on it and submit it with together with the exam booklet. 5) The scratch paper is provided at the end of the exam booklet. 6) If you are unsure of any element of a question, or believe the question is vague, please make an assumption, write down your assumption , and continue to solve the question. 7) No partial credit will be given for the Part I multiple choice questions. 8) Partial credit is possible for the Part II problems. To receive full credit, you must show all your work and write your final answers in the boxes provided . 9) If you use financial functions of a business calculator, indicate what was entered for each key to receive full credit. Sharing of calculators is not allowed. 10) Round your final answers to 2 decimal places unless otherwise requested. Honor statement: On my honor, I attest that I have completed this exam independently, without help from any individual other than Professor Mukharlyamov. I also attest that I have not shared my exam answers with any other student. I further attest that I will not provide information about the exam to any other student. I understand that violation of this honor statement subjects me to appropriate sanctions as determined by Georgetown University’s Honor Council. Signature _____________________________________________________________________________
2 Part I: Multiple Choice (circle the single right answer) 1) Boyer Enterprises had $200,000 in 2011 taxable income. What is the firm's average tax rate based on the rates shown in the following table? A. 28.25 percent B. 30.63 percent C. 32.48 percent D. 36.50 percent E. 39.00 percent 2) Charlie's Chicken has a debt equity ratio of 2.05. Return on assets is 9.2 percent, and total equity is $560,000. What is the net income? A. $105,616 B. $148,309 C. $157,136 D. $161,008 E. $164,909 3) A firm has sales of $68,400, costs of $42,900, interest paid of $2,100, and depreciation of $6,500. The tax rate is 34 percent. What is the value of the cash coverage ratio? A. 12.14 B. 15.24 C. 17.27 D. 23.41 E. 24.56
3 4) You have just made a $1,500 contribution to your individual retirement account. Assume you earn a 12 percent rate of return and make no additional contributions. How much more will your account be worth when you retire in 25 years than it would be if you waited another 10 years before making this contribution? A. $8,306.16 B. $9,658.77 C. $16,311.18 D. $16,907.17 E. $17,289.75 5) You want to buy a new sports coupe for $41,750, and the finance office at the dealership has quoted you an 8.6 percent APR loan compounded monthly for 48 months to buy the car. What is the effective interest rate on this loan? A. 8.28 percent B. 8.41 percent C. 8.72 percent D. 8.87 percent E. 8.95 percent 6) Bryceton, Inc. has bonds on the market with 13 years to maturity, a yield to maturity of 9.2 percent, and a current price of $802.30. The bonds make semiannual payments. What is the coupon rate? Face value equals $1,000. A. 6.56 percent B. 7.00 percent C. 7.25 percent D. 7.40 percent E. 7.65 percent
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4 7) Last year, Hansen Delivery paid an annual dividend of $3.20 per share. The company has been reducing the dividends by 10 percent annually. How much are you willing to pay to purchase stock in this company if your required rate of return is 13 percent? A. $1.92 B. $7.87 C. $12.52 D. $21.16 E. $24.08 8) The common stock of Alpha Co. has a beta of 1.14 and an actual expected return of 15.26 percent. The risk free rate of return is 4.3 percent and the market rate of return is 12.01 percent. Which one of the following statements is true given this information? A. The actual expected stock return will graph below the Security Market Line. B. The stock is overpriced. C. To be correctly priced according to CAPM, the stock should have an expected return of 21.95 percent. D. The stock has less systematic risk than the overall market. E. The actual expected stock return indicates the stock is currently underpriced. 9) Which form of financing do firms prefer to use first according to the pecking order theory? A. regular debt B. convertible debt C. common stock D. preferred stock E. internal funds
5 10) Consider the following two mutually exclusive projects, A and B, on the right. The required return is 15 percent for both projects. Which one of the following statements related to these projects is correct? A. Because both the IRR and the PI imply accepting Project B, that project should be accepted. B. The profitability rule implies accepting Project A. C. The IRR decision rule should be used as the basis for selecting the project in this situation. D. Only NPV implies accepting Project A. E. NPV, IRR, and PI all imply accepting Project A. Part II starts on the next page
6 Part II: Problems Partial credit is possible. You must show all your work and explanations to receive full credit. Remember to use precise values for numbers used in further calculations. Final values can be rounded to two decimal places. Write your final answers in the boxes provided. Problem 11: Amortized Loan This morning, you borrowed $150,000 to buy a house. The mortgage rate is 7.35 percent. The loan is to be repaid in equal monthly payments over 20 years. The first payment is due one month from today. How much of the second payment applies to the principal balance? Answer
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7 Problem 12: Capital Investment Decision Consider a project to annually supply 60,800,000 postage stamps to the U.S. Postal Service for the next 5 years. You have an idle parcel of land available that cost $760,000 five years ago; if the land were sold today, it would net you $912,000, after tax. The land can be sold for $1,500,000 after taxes in 5 years. You will need to install $2,356,000 in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment will be depreciated straight line to zero over the project's 5 year life. The equipment can be sold for $456,000 at the end of the project. You will also need $469,000 in initial net working capital for the project, and an additional investment of $38,000 in every year thereafter. All net working capital will be recovered when the project ends. Your production costs are 0.38 cents per stamp, and you have fixed costs of $608,000 per year. Your tax rate is 31 percent and your required return on this project is 11 percent. What bid price per stamp should you submit? In other words, what price per stamp sets the NPV of the project equal to zero? Note: Good structure will help you to arrive at the right answer. Use both this and the next page to answer this question. Write your final answer in the box provided on the next page.
8 Answer
9 Problem 13: Return, Risk, and the Security Market Line Suppose you observe the following situation: State of economy Probability of state of economy Return if state occurs Stock A Stock B Bust 0.15 0.08 0.10 Normal 0.60 0.11 0.09 Boom 0.25 0.30 0.27 a) Calculate the expected return on each stock. E(R A ) E(R B ) b) Assuming the capital asset pricing model holds and Stock A’s beta is greater than Stock B’s beta by 0.35, what is the expected market risk premium? Answer
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10 Problem 14: Financial Leverage and Capital Structure Policy Alpha Co. expects an EBIT of $7,000 every year forever. Under the current D/E ratio of 1, the cost of equity is 12 percent. The firm can borrow at 8 percent and the corporate tax rate is 34 percent. a) What is the firm’s WACC at the current D/E ratio of 1? Answer b) What is the value of the whole firm—debt and equity combined—at the current D/E ratio of 1? Answer c) What will the WACC of the firm be if it changes its capital structure and sets the D/E ratio equal to 2? Answer
11 Problem 15: Raising Capital 15.1 The Warm Shoe Co. has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering. It has correctly determined that as a result of the rights offering, the share price will fall from $100 to $90 ($100 is the rights on price; $90 is the ex rights price). The company is seeking $18 million in additional funds with a per share subscription price of $50. How many shares of stock are outstanding, before the offering? Answer Turn the page for the remaining sub questions.
12 The following information applies to questions 15.2–15.3 Steve is the founder of Jefferson & Westover. Recently, the firm decided to issue an IPO with Steve retaining 30 percent ownership of the firm. The IPO agreement contained both a greenshoe option and a 6 month lockup agreement. Steve's cost basis per share is $15. The offering price for the IPO was $16. On the first day of trading, the market price per share rose to $28.20 and closed for the day at $25.60. Now, six months after the IPO release, the stock is valued at $15.40 a share. 15.2 Explain who benefited the most during the lockup period, an outside investor or Steve, and why. _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ 15.3 Do you think the greenshoe option was exercised? Explain. _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________ _____________________________________________________________________________________
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