1 - Tulane University



Finance 6020Professor - Bill ReeseMidterm ExamFall 2019Instructions:The first three pages consist of 15 multiple choice questions for which you do not have to show any work. These questions are worth two points each. Circle the letter of the best answer.The next seven pages contain 7 problems. You must show your work (including formulas with the numbers inserted) and your final answers to receive full credit for these problems. Each problem is worth ten points and partial credit will be given where applicable. If you need more space, write on the back of the page and leave me a note that your answer is continued on the back.All bonds with coupon payments pay their interest semiannually. Assume all other cash flows are annual and come at the end of the year unless the problem states otherwise. Assume that compounding occurs when the cash flows are received (i.e. monthly cash flows means monthly compounding) unless the problem states otherwise. Assume APR unless the problem states otherwise. All dollar and interest rates are expressed in nominal values unless the problem states otherwise. If a problem doesn’t mention nominal or real or inflation, it does not involve inflation.Please make it clear which letter you are circling.You may use a calculator, excel, and the one piece of paper you were allowed to bring to this exam with any notes you want to refer to.If you use your laptop, it may be used for Excel only, and you must begin with a blank Excel worksheet. If anything else is on your monitor, it will be considered to be a violation of the honor code.Carry out your final answers to the nearest cent (for monetary answers) or basis point (for percentage answers). Carry out all workings within a problem either in Excel or your calculator and use cell references whenever e to the front to see me if you have any questions.Some questions and problems may contain more information than is needed to solve them.You have three hours to complete this test.I will post your grade on the web site by your number as soon as I have them all graded.Good luck!Name (please print neatly): _____________________________________________ Which of the following is found on a yield curve?Yield to MaturityPriceBoth of the aboveNeither of the aboveIf you expect to receive $100,000 exactly five years from now, what do you expect its purchasing power to be if you expect the nominal rate to be 6.0% every year and you expect inflation to be 2.0% every year? $74,725.82$82,503.34$90,573.08None of the above are correctAccording to your text, the goal of financial management is toAvoid financial distress and bankruptcyMaintain steady earnings growth in perpetuityMaximize profits and earnings per shareMaximize the current value per share of the existing stockAccording to your text, which of the following are types of orders?Market OrdersLimit OrdersBoth of the aboveNeither of the aboveThe value (price) of any financial asset can be found byCalculating the present value of its expected future cash flowsFinding a comparable asset and applying the correct financial ratioObserving the supply of the asset and the demand for the assetNone of the above are correctA bond’s yield to maturity will be greater than its coupon rate ifThe bond is selling at a discountThe bond is selling at a premiumInterest rates have significantly fallen since the bond was issuedThe face value of the bond is less than its priceWhich of the following is the lowest rating for an investment grade bond?ABBBBBBWhich of the following does not make any coupon payments?A U.S. Treasury BondA U.S. Treasury NoteA U.S. Treasury BillAll of the above make coupon paymentsYour company’s revenues were $2 million this year. You paid out $500,000 in salaries and your only other cash outflow was the purchase of a piece of construction equipment for $1 million that is to be depreciated to a zero salvage value on a straight-line basis over the next 10 years. If your tax rate is 21%, what was your free cash flow this year?A. $185,000B. $395,000C. $1,185,000D. None of the above are correctWhich of the following is most relevant to a financial manager who is making decisions about whether or not to pursue a new project for an existing firm?A. Average tax rate B. Effective tax rateC. Marginal tax rateD. Total tax rateIf you invest $500 at the continuously compounded annual rate of 3.5%, how much money will it have grown to in five years?A. $420.99B. $593.33C. $876.84D. None of the above are correctThree years ago, you purchased a brand-new 30-year bond with a face value of $100,000. This bond is currently trading at a quoted price of 92.75226 and a yield of 9.00%. What is the coupon rate of this bond?$4,0004.00%8.00%None of the aboveSustef Corp. has $120 million in assets on its balance sheet. It also has $20 million of debt. If Sustef’s ROA is 10.0%, what is its ROE?10.0%10.5%12.0%12.5%You expect a stock that you own to pay a dividend of $10 later today. You expect it to continue to pay a dividend of $10 per year forever. If you require a 10% rate of return on this stock, what do you feel its price should be?A. $90 B. $100C. $110D. None of the aboveWhich of the following describes “Net Working Capital”?Current Assets minus Current LiabilitiesCurrent Assets divided by Current LiabilitiesCurrent Assets plus Depreciation divided by Current LiabilitiesCurrent Assets minus Inventory divided by Current LiabilitiesReese’s Pieces Corp. paid a dividend of $3 per share of common stock yesterday. Reese’s Pieces is growing fast, so you expect that dividend to increase at the rate of 10 percent per year for the next three years. At the end of those three years, you expect the company’s P/E ratio to be the same as other chocolate and candy companies. After careful research, you conclude that those firms typically have a P/E ratio of 20, and you expect that to be the case in the future as well. Based on the riskiness of Reese’s Pieces, investors require a return of 12% to invest in it. If you expect Reese’s Pieces to have earnings of $50 million in three years, along with 20 million shares outstanding, what do you feel should be the price per share of Reese’s Pieces stock today?Price per share ____________________A U.S. Treasury bond has 8 years remaining until it matures. The face value of this bond is $100,000 and its coupon rate is 3.25%. If a bond dealer quotes prices of 101:16 and 101:18, what is this bond’s yield-to-maturity based on its ask price?YTM __________________Assume that today is November 1, 2019 and you have just taken out a 4-year car loan at an APR of 8.50% fixed rate with monthly payments. The amount of the loan is $25,000. What are your scheduled monthly payments? Your first payment is due Dec. 1, 2019. Instead of making the scheduled monthly payments, you decide to pay an even $1,000 every month beginning with the first payment. How many full payments of $1,000 will you need to make until the loan is paid off? If your last partial payment is made on the first of the month after your last full $1,000 payment, on what date will you have your loan completely paid off? That is, when will that last partial payment be made?Scheduled Monthly Payments ___________________Number of full $1,000 payments needed to pay off loan __________________Date (month, day and year) when you will pay off your loan ________________A bond has a face value of $1 million, a coupon rate of 3.25%, a YTM of 3.46%, and it matures exactly 16 years from today. What is its price if the next coupon payment is scheduled to be made six months from today?Price of Bond (in dollars and cents) ____________________You feel that you can achieve a comfortable retirement if you have the equivalent of $2 million of today’s purchasing power in your retirement account when you retire. Currently, you have $20,000 in this account and you anticipate that your investments will earn an average return of 7.0% per year (APR with monthly compounding). You expect inflation to average 2.0% per year (also APR with monthly compounding). You want to retire exactly 40 years from today. You plan to start putting the same amount of money (the same number of dollar bills) into your retirement account each month starting one month from today. How much do you need your retirement account to have in it on the day you retire to meet your goal? How much do you need to contribute to your retirement account each month to meet that goal? (you want to have enough to retire immediately after you make your monthly contribution to the account exactly 40 years from today)Amount you need in your account to meet your goal _____________________Amount you need to add to the account each month starting one month from today _____________________Sustef Corp. is a new firm that is planning to issue shares of common stock for the very first time (an initial public offering) on January 1, 2020. You have carefully analyzed its financial statements and have come up with the following projections:Financial Projections:Free Cash Flow in 2020: $8.5 millionFree Cash Flow in 2021: $10 millionFree Cash Flow in 2022: $15 millionGrowth rate of FCF after 2022: 3% foreverRequired Rate of Return: 16%Market Value of all debt on 1/1/20: $30 millionNumber of shares of common stock outstanding: 900,000In order to determine the value of a share of stock, you have decided to apply the free cash flow approach to the firm’s financial data. If we assume that all cash flows come at the end of each year, what is the appropriate value of one share of Sustef Corp. at the beginning of 2020?Appropriate value of one share of stock __________________You have taken out a 5-year loan with monthly payments to finance a new office building. The amount of the loan is $500,000. The bank has set your payments at $6,000 per month with the first payment to be made one month from today. At the end of the five years, the agreement with your bank says that you will owe $300,000 and can refinance with them at that time. What is the interest rate you are paying on this loan? Express your answer as a monthly rate, an APR, and an EAR.Monthly Rate _______________APR ___________________EAR ___________________ ................
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