Principles of Modern Finance Sample Midterm

Standards of Modern Finance Spring 2013 Sample Midterm February 22, 2012 Instructions †¢ You have 1 hour and 40 minutes. †¢ The test is out of 25 focuses. †¢ There are 22 different decision questions. 19 inquiries are worth one point, 3 inquiries are worth two focuses and are set apart in that capacity. †¢ If you stall out, proceed onward and return later. 1. A stock is relied upon to deliver a profit of $10 one year from now, and this profit is required to develop by 5% every year from there on. What should the cost of the stock be if instruments of comparative hazard are paying 12%? (a) $83. 33 (b) $142. 86 (c) $150 (d) $200 2. A venture has the accompanying money? ows: Year 0 1 2 Cash? w +12000 ? 7080 ? 6654 The IRR of these money? ows is 9%. Resources of comparable hazard pay 5%. Would it be a good idea for you to acknowledge this task? (a) Yes (b) No 3. I am thinking about purchasing a Greek government bond that vows to pay $1210 in two years’ time. Be that as it may, there is a likelihood that the Greek government will default among now and the guaranteed installment. On the off chance that the administration defaults, the bond will just compensation $500. The likelihood of default is 0. 5. What should the cost of the bond be if instruments of comparable hazard are paying 10%? (a) $1000 (b) $706. 62 (c) $413. 22 (d) $303. 68 4. I am selected a 2-year MBA program, and have quite recently begun classes.To pay the educational cost and everyday costs, I acquire $50,000 every year (paid toward the beginning of the year). The financing cost on the advance is 5%. I am sure to find a new line of work toward the finish of the two years of study. That activity will be ensured for a long time (from the date I start work), at a steady pay which will be paid toward the finish of every time of work. There are no expenses. I gauge that I will have the option to spare 1/4 of my salary, whatever my pay is. What is the base pay the activity must need to permit me to pay o? my credits inside ten years? (2pts) 2 (a) $43,050 (b) $50,000 (c) $55,752 (d) $61,339 5. A Mastercard organization o? rs me a card with 20% APR, exacerbated every day. I make acquisition of $3,000 on the card, and permit enthusiasm to gather on those buys for a year. Accepting every year has 365 days, the sum I should repay is: (a) $3,315 (b) $3,600 (c) $3,664 (d) $3,901. 30 Answer the following two inquiries regarding this data: Analysts contend that two things can occur throughout the following year: the economy can proceed for what it's worth or it can go into downturn. The profits of two stocks: General Electric (GE) and Cisco (CSCO) in every conceivable state are given beneath: State Return on GE Continue as-is 15 Recession ? 5 Return on CSCO 5 - 1 The examiners gauge the likelihood of proceeding as-is to be 0. 8 , and the likelihood of a downturn to be 0. 2. 6. What is the normal profit for a portfolio which is 120% in GE and ? 20% in CSCO? (a) 10. 04% (b) 8% (c) 2. 55% (d) 0% 7. What is the fluctuation of CSCO? (a) 1. 96%2 (b) 5. 76%2 (c) 13%2 (d) 23. 04%2 3 8. Alice can get a one-year advance at 5% at her bank, while no bank is eager to give Brad a one-year advance for under 10%. Brad has quite recently had medical procedure, and must compensation the emergency clinic $10,000 quickly, yet he has no cash today, however he will have cash in one year. So Alice o? rs Brad a proposition: she will obtain $10,000 from her bank for one year for her own, and Brad will reimburse this advance. What's more, he will pay Alice an entirety of cash today. What is the greatest sum that Brad ought to be happy to pay Alice in advance under this course of action? Alice isn't happy to consider getting more than $10,000. (2pts) (a) $454. 54 (b) $377. 18 (c) $476. 19 (d) $500 9. The hazard free loan cost today is 7%. One year prior, you purchased a benefit which is sans hazard and would pay $100 two years from the date of procurement. The hazard f ree loan fee on the date of procurement was 10%. You sell the benefit today.What is the pace of return (HPR) that you made? (a) 13% (b) 10% (c) 7% (d) 15% 10. The relationship between's Alcoa (AA) and American Express (AXP) is 0. 3. You need to frame a portfolio, putting half in each stock. What is the difference of your portfolio’s return? You have the accompanying data: AA AXP 10 12 8 16 Expected return Standard deviation of return (a) 85. 76%2 (b) 99. 2%2 (c) 121%2 (d) 144%2 11. On the off chance that you can get a 8% return (yearly e? ective) on a multi year CD from your neighborhood bank, would it be savvy to put resources into a multi year security which vows to make a solitary installment of $1000 toward an incredible finish? Expect both are similarly unsafe). This bond costs $475 now and will pay $1000 in ten years. 4 (a) Yes, the bond is better. (b) No, the bond is more regrettable. (c) Can’t tell from data given 12. You are given the accompanying data about a rrangement of two dangerous resources, An and B: Weight in A Weight in B Std. dev. of portfolio 0 1 12 0. 5 0. 5 14 1 0 16 What is the covariance among An and B? (a) 192%2 (b) 168%2 (c) 224%2 (d) Cannot be resolved 13. A ? rm in a well-working capital market has the accompanying tasks accessible. The hazard free rate is 10%. Which would it be a good idea for it to put resources into? NPV IRR X 10 15% Y 0. 3% Z - 5 22% OCC 22% 5% 6% (a) X in particular (b) Z just (c) X and Y (d) X and Z (e) All three 5 14. You are thinking about putting resources into a bond. This bond costs $300 now and pays $550 in ten years. What is the IRR of this venture? (a) 1. 06% (b) 6. 25% (c) 8. 33% (d) 9. 01% Answer the following two inquiries utilizing the accompanying data: A task has the accompanying expected money ? ows. Year 0 1 2 Expected money? ow ? 370 814 ? 447. 7 The IRR of these money ? ows is 10%. 15. Which of the NPV capacities on the accompanying page best portrays this task? (2pts) (a) Graph A (b) Graph B (c) Graph C (d) Graph D 16.Given your response to the past inquiry, what is the scope of rebate rates for which you ought to acknowledge this venture? (a) 10% in particular (b) Greater than 10% (c) Less than 10% (d) Always acknowledge, with the exception of at 10% (e) Always dismiss 6 NPV 10% Discount rate 10% Discount rate Graph A Graph B NPV 10% Discount rate 10% Discount rate Graph C Graph D 7 Answer the following six inquiries utilizing the accompanying data: Boeing is an expert? table plane maker. It is thinking about structure an office to fabricate 747s on 10,000 sections of land in the Nevada desert. It isn't thinking about some other sites.To urge Boeing to set up the office, the nearby office of trade has purchased the land and has o? ered to lease it to Boeing at a lease of zero dollars for each year. Accept that this â€Å"gift† has no expense suggestions for Boeing. If Boeing somehow managed to attempt to lease the land in the open market, the leas e would be $1,500 per section of land every year, payable toward the finish of every year. Building the industrial facility will cost Boeing $800M (800 million dollars), of which $200M is payable today and $600M will be should be paid when the processing plant starts creation. It will take one year to manufacture the industrial facility and start production.The IRS says that the $800M cost can be deteriorated (straight-line to zero) over the ? rst twenty years in which the processing plant produces planes. Be that as it may, Boeing expects that the interest for the 747 will in the long run evaporate, thus they intend to scrap the plant after the ? rst ten years of creation. They expect the piece will be sold for $100M. Boeing anticipates that the office should create and sell three Boeing 747 planes per year, with the ? rst clump prepared before the finish of year 2. Crude materials cost $100M per plane, and work costs will be $120M per year. Work costs will be paid toward the year' s end in which they are incurred.Raw material will be paid for one year late (I. e. , crude material expenses brought about in year 2 will be paid toward the finish of year 3). Deals will be paid for a long time late. Stock is constantly 0. The value Boeing will get for each plane is dubious. It may be as high as $500M, or as low as $200M. No doubt, the cost will be $400M. By and large, the value they hope to get is $350M. Boeing’s corporate o? ce is situated in Chicago. At present the CEO and his sta? make 120 ? ights a year in the corporate stream. Each ? ight costs $200,000. On the off chance that the Nevada office is fabricated, the CEO should make ten more ? ghts a year, beginning in the ? rst year of creation, with the expense per ? ight being the equivalent. The expense of the ? ights is caused toward the finish of year wherein the ? ights are made. The compensation of the CEO will remain ? xed at $12m every year. In any case, the corporate o? ce has chosen to assign $ 1m every time of this expense to the Nevada venture, should it be assembled, beginning toward the finish of year 2. This allotment has no expense suggestions. Boeing has another venture which they needed to begin today. This task has a solitary after-charge money in? ow of $20 million one year after it is begun (and no other in? ws or out? ows). Building the processing plant in Nevada will possess official time, and imply that Boeing should defer beginning this task until the Nevada plant starts creation. Charges are relied upon to be 30%. The rebate rate is 8%. 8 17. When computing money ? ows for NPV, the income in the salary explanation toward the finish of every time of creation will be (a) $600M (b) $1050M (c) $1200M (d) $1500M 18. The normal money ? ow the ? rm acquires from rejecting the plant following ten years of creation is (a) $70M (b) $90M (c) $100M (d) $190M (e) $280M 19.The cost that you will appear in the salary articulation for every time of creation will be: (a) $4 20M (b) $422M (c) $423M (d) $438M 20. What is the working capital toward the finish of the second year of creation? (a) ? $300M (b) $750M (c) $1050M (d) $1800M 21. What is your net money ? ow two years after the plant has quit creating, that is, toward the finish of year 13? (a) $0 (b) $735M (c) $750M (d) $1050M (e) $1800M 9 22. The PV today of the open door cost from deferring the other venture is: (a) $20M (b) $18. 52M (c) $17. 15M (d) $1. 37M 10