Midterm_1_2019

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Georgetown University *

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Apr 3, 2024

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1 BFM – Spring 2019, Professor Mukharlyamov Midterm Exam #1 NAME: _______________________________________________________________________________ SECTION (circle yours): 2:00–3:15 PM 3:30–4:45 PM 5:00–6:15 PM EXAM INSTRUCTIONS 1) The midterm lasts 1 hour and 15 minutes. If you want to submit the work early, please do so in the first 60 minutes. In the last 15 minutes of the exam, submitting early is not allowed so that your fellow classmates are not disturbed by movement at the finish line of the midterm. 2) No bathroom breaks. If you need to use the bathroom, do so before opening the exam booklet. 3) Please write all answers and work in your exam booklet. Only answers in the exam booklet will count. No credit will be given for answers or work written on scratch paper. 4) The scratch paper and the formula sheet are attached to the end of the exam booklet. For your convenience, you may unclip the scratch paper and the formula sheet. If you do so, 1) write your name on each piece of the scratch paper and the formula sheet, and 2) make sure the exam booklet (with questions and answers) is securely stapled. The scratch paper and the formula sheet have to be submitted with the exam booklet at the end of the exam. 5) 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. 6) No partial credit will be given for the Part I multiple-choice questions. 7) 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 . 8) 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. One financial calculator per person. Graphic calculators not allowed. 9) Round your final answers to 2 decimal places unless requested otherwise. Honor statement: On my honor, I attest that I have completed this exam independently, without help from any individual. 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) (10 points) 1) Which one of the following is a capital budgeting decision? A. determining how many shares of stock to issue B. deciding whether or not to purchase a new machine for the production line C. deciding how to refinance a debt issue that is maturing D. determining how much inventory to keep on hand E. determining how much money should be kept in the checking account 2) Which one of the following actions by a financial manager is most apt to create an agency problem? A. refusing to borrow money when doing so will create losses for the firm B. refusing to lower selling prices if doing so will reduce the net profits C. refusing to expand the company if doing so will lower the value of the equity D. agreeing to pay bonuses based on the company’s stock price rather than on the firm's level of sales E. increasing current profits when doing so lowers the value of the firm's equity 3) Which of the following help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes. (Circle one of the choices A, B, C, D, or E on the right.) I. compensation based on the value of the stock II. stock option plans III. threat of a company takeover IV. threat of a proxy fight A. I and II only B. III and IV only C. I, II, and III only D. I, III, and IV only E. I, II, III, and IV 4) Which one of the following will increase the value of a firm's net working capital? A. using cash to pay a supplier B. depreciating an asset C. collecting an accounts receivable D. purchasing inventory on credit E. selling inventory at a profit 5) Dee Dee's Marina is obligated to pay its creditors $6,400 today. The firm's assets have a current market value of $5,900. What is the current market value of the shareholders' equity? A. −$600 B. −$500 C. $0 D. $500 E. $600 6) A firm has a debt-total asset ratio of 74% and a return on total assets of 13%. What is the return on equity? A. 26 percent B. 50 percent C. 65 percent D. 84 percent E. 135 percent 7) Given the tax rates as shown, what is the average tax rate for a firm with taxable income of $311,360? A. 28.25 percent B. 31.09 percent C. 33.62 percent D. 35.48 percent E. 39.00 percent
3 8) How many days of sales are in receivables? (Use 2012 values) (Income statement is to the right; balance sheet is underneath.) A. $1,732 B. $2,247 C. $2,961 D. $3,915 E. $4,267 9) You have just won the lottery and will receive $540,000 as your first payment one year from now. You will receive payments for 26 years. The payments will increase in value by 4 percent each year. The appropriate discount rate is 10 percent. What is the present value of your winnings? A. $6,221,407 B. $6,906,372 C. $7,559,613 D. $7,811,406 E. $8,003.11 10) The bonds issued by Stainless Tubs bear an 8 percent coupon, payable semiannually. The bonds mature in 11 years and have a $1,000 face value. Currently, the bonds sell for $952. What is the yield to maturity? A. 7.87 percent B. 7.92 percent C. 8.08 percent D. 8.69 percent E. 9.20 percent
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4 Part II: Problems (20 points) Problem 11: Time Value of Money (5 points) What is the present value of $1,100 per year, at a discount rate of 10 percent if the first payment is received 6 years from now and the last payment is received 30 years from now? Answer Problem 12: Effective Annual Rate (5 points) You have just purchased a new warehouse. To finance the purchase, you've arranged for a 30-year mortgage loan for 80 percent of the $2,600,000 purchase price. The monthly payment on this loan will be $12,200. The first payment is in one month from now. What is the effective annual rate on this loan? Answer
5 Problem 13: Bond Valuation, YTM, and HPY (5 points) Today, you are considering an investment into a 5-year 10% annual coupon bond A with a face value of $1,000. The interest rate relevant for discounting is 6% over the first year, 8% over the second year, and 10% over the third, fourth, and fifth years. 13.1 (2 points) Calculate the bond’s fair price (i.e., present value) today. Answer 13.2 (1 point) Calculate the bond’s fair price at the end of the second year. (Use calculator or present value formulas.) Answer
6 13.3 (1 point) Keeping in mind that bonds are priced at par if and only if the coupon rate equals the yield-to-maturity, please give a verbal explanation of what you expect the bond’s fair price to be at the beginning of the fifth year, at the beginning of the fourth year, and at the beginning of the third year. The verbal explanation exists because two specific conditions are satisfied in this case. Please mention what these two conditions are. 13.4 (1 point) Imagine that you bought the bond today at the price calculated in 13.1 and sold after two years at the price calculated in 13.2. What is the holding period yield? Answer
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7 Problem 14: Bond Replication, Mispricing, and Sensitivity to the Interest Rate (5 points) You are a bond trader and observe the following three US government bonds trading in the market. The market interest rate is 7%. Bonds A and B trade at their fair prices. A: A five-year 10% semi-annual coupon bond trading at $1,130.0599 B: A five-year 5% semi-annual coupon bond trading at $921.5230 C: A five-year zero coupon bond trading at $700.0000 14.1 (1 point) What is the fair price of Bond C? Answer 14.2 (2 points) If Bond C is trading at a price different from its fair price, how can you profit from the mispricing? If the trading strategy involves buying low and selling high, be specific about what you will buy and what you will sell. (Hint: one transaction will involve Bond C and another transaction will involve a basket of bonds A and B. You need to be clear about the number (possibly fractional or negative) of each bond in this basket.)
8 14.3 (1 point) In financial markets, mispricings (i.e., deviations of prices from fair prices) do not usually exist for a long time. Give a verbal explanation why. You may use the mispricing of Bond C as an example. 14.4 (1 point) Suppose the market interest rate increases from 7% to 8%. The price of which bond, A or B, do you expect to experience a bigger percentage change? Give a verbal explanation. (Note that to guide your intuition—which is not required—you may recalculate the price of each bond assuming market interest rate of 8% and compare the new price with the old price. Bear in mind, though, the emphasis on a percentage change of price as opposed to the dollar (or absolute) change. Use this calculation only to guide or confirm your intuition, because full credit will be given only for a verbal explanation which does not rely exclusively on calculations.)
SCRATCH PAPER SCRATCH PAPER
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SCRATCH PAPER SCRATCH PAPER
SCRATCH PAPER SCRATCH PAPER
Formulas: ROA = NI / Total assets ROE = NI / Total equity ROE = PM * TAT * EM PM = Net income / Sales Inv. turnover = COGS / Inventory Receivables turnover = Sales / AR Days’ sales in inv. = 365 / inv. Turnover Days’ sales in rec. = 365 / rec. turnover Current ratio = CA / CL NWC turnover = Sales / NWC Quick ratio = (CA – Inv) / CL Cash ratio = Cash / CL Interval measure = CA / Avg daily operating costs TIE ratio = EBIT / Interest TAT = Sales / Total assets RE = NI – dividends BV per share = TE / Shares outstanding FAT = Sales / Net fixed assets Total debt ratio = (TA – TE) / TA D-E ratio = Total debt / Total equity MTB ratio = market value / book value EM = TA / TE PE ratio = Price / EPS EPS = NI /shares outstanding Dividend payout ratio = Divd / NI NWC = CA – CL Long term DR = LTD / (LTD + Equity) NFA = GFA – Accum. depreciaton FCF = OCF – CAPEX - ΔNWC OCF = NI + Int + D 𝑃𝑃𝑃𝑃 = 𝐹𝐹𝑃𝑃 (1 + 𝑟𝑟 ) 𝑡𝑡 𝑃𝑃𝑃𝑃 = 𝐹𝐹𝑃𝑃 (1 + 𝑟𝑟 / 𝑚𝑚 ) 𝑚𝑚𝑡𝑡 𝑃𝑃𝑃𝑃 = 𝐹𝐹𝑃𝑃 𝑒𝑒 𝑟𝑟𝑡𝑡 𝑃𝑃𝑃𝑃 = 𝐶𝐶 𝑟𝑟 𝑃𝑃𝑃𝑃 = 𝐶𝐶 1 𝑟𝑟 − 𝑔𝑔 𝑃𝑃𝑃𝑃 = 𝐶𝐶 𝑟𝑟 1 1 (1 + 𝑟𝑟 ) 𝑡𝑡 𝐸𝐸𝐸𝐸𝐸𝐸 = 1 + 𝑟𝑟 𝑚𝑚 𝑚𝑚 1 𝐸𝐸𝐸𝐸𝐸𝐸 = 𝑒𝑒 𝑟𝑟 1 𝑃𝑃𝑃𝑃 = 𝐶𝐶 1 𝑟𝑟 − 𝑔𝑔 1 − � 1 + 𝑔𝑔 1 + 𝑟𝑟 𝑡𝑡
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