C. T. Bauer College of Business at the University of Houston



Sample Final Exam FINA-635Professor Nisan LangbergInstructionsYou have three hours to complete this exam. Please write your answers clearly in the body of the exam. You may use a simple/financial calculator only. You may bring two A4 sheets to the exam. Good Luck!Question 1 [5 points]: Consider a project that requires a current investment of $1,000,000 at time t=0 and yields annual cash flows of $250,000 at the end of each year for the next ten years, i.e., at time t=1,2,3…10. What statement is appropriate for this project?It meets the “5 – year” payback rule.It does not meet the “5 – year” payback rule.Question 2 [5 points]: Identify each of the following risks as either systematic risk or diversifiable risk:The risk that the CEO of your firm is killed in a plane accidentThe risk that the economy slows, decreasing demand for your firm’s productsThe risk that your best employees will be hired awayThe risk that the new product you expect your R&D division to produce will not materialize.Question 3 [5 points]: Suppose the market risk premium is 6% and the risk-free interest rate is 2.7%. What is the expected annual return of investing in Microsoft’s stock according to the CAPM if its beta is 1.24?Question 4 [15 points]: Fast Track Bikes, Inc., is thinking of developing a new composite road bike. An initial investment of $1,000,000 is required (at time t=0). Profits are expected to be $70,000 this year (at time t=1) and will grow at rate of 3% afterwards forever. Fast Track Bikes has a cost of capital of 12%.What is the IRR of this investmentIs it a good idea for Fast Track Bikes to invest in this project (what is the NPV of the project)? Question 5 [20 points]: Your firm needs to decide how many new coffee shops to open in a small town and whether they should be “all inclusive” or “coffee only”: the difference is that an “all inclusive” coffee shop sells sandwiches as well as coffee and pastries while the “coffee only” shop sells only coffee and pastries but no sandwiches. The appropriate cost of capital for your firm is 10%.Coffee Only shop: Costs $300,000 to build, requires 2 trained workers, and generates annual cash flows of $46,000 at the end of each year for 15 years.All-inclusive shop: Costs $450,000 to build, requires 4 trained workers, and generates annual cash flows of $69,000 at the end of each year for 15 years.What is the NPV of opening one “coffee only” shop?What is the NPV of opening one “all inclusive” shop? How many shops and of what kind would you build if you hand only 8 trained workers?Question 6 [25 points]: You are saving for retirement. To live comfortably, you decide you will need to save $2 million by the time you are 65. Today is your 30th birthday and you have accumulated $45,000 in savings so far. You decide that starting at the end of this year and continuing on every birthday up to and including your 65th birthday, that you will put the same amount into a savings account. If the interest rate is 4%, how much must you set aside each year to make sure that you will have a total of $2 million in your savings account on your 65th birthday.Question 7 [25 points]: NDF, Inc., expects earnings at the end of this year (at time t=1) of $10 per share, and it plans to pay an annual dividend to shareholders of $4 (also at time t=1). NDF has new projects with an expected return on investment of 12% per year. Suppose that NDF will maintain the same dividend payout rate, retention rate, and return on new investments in the future and will not change its number of outstanding shares. NDF’s current (at time t=0) stock price is $100.Based on the market price of NDF’s stock, what is the NDF’s equity cost of capital?Suppose that NDF instead used a payout rate of 25% forever (will pay a dividend at time t=1 of $2.5 instead of $4). What would its current stock price be under the new payout policy?Blank for your own use ................
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