Intermediate financeThese questions were from the last semester,Please read the questions and if you can solve them I’ll need your help on the final
Intermediate Finance 325, 5/14/2020 Final Exam 250 Points Total
In addition to recording your responses on iClicker, you MUST record your responses on thispaper.
True/False (10 questions, 2 points each, 20 points total) Indicate whether the sentence or statement is true (enter “A” on your clicker) or false (enter “B”).
Your firm has a number of significant long-term fixed-rate loans outstanding. Due to an outbreak of the corona virus, the yields on 10-year U.S. Treasuries have fallen by 0.60% in the last two months.
If the yield spread between U.S. Treasuries and the rate on your loans has remained constant, then your firm will likely benefit from refinancing its fixed-rate loans.
Longer duration bonds will, all else equal, have greater volatility than shorter duration bonds.
Stock A has a greater standard deviation than stock B. Stock B has a higher CAPM beta than stock A. All else equal, a well-diversified investor will prefer stock B.
Vince McMahon’s wealth has shrunk from $3.3b in Oct. 2018 to $1.9b in April 2020.
As a result, the idiosyncratic risk represented by his reported $500M investment in the XFL (he was the founder of this new sports league which attempted to compete with the National Footbal League) dramatically increased the percentage of idiosyncratic risk in his overall portfolio.
A recent Fama-French 3-factor model regression (similar to regressions you have run) results from Johnson & Johnson (JNJ) are given below:
Commented [FR1]: Edited 5/142 of 17
Notice that the coefficient on the SMB factor is negative.
The negative coefficient implies that JNJ’s return tends to move opposite that of the SMB portfolio.
Accounts Receivable increase by $8,500. All else equal, this represents a decrease in the corporation’s cash flow.
A stock’s price equals the expected present value, at the market capitalization rate, of all the stock’s future dividends.
U.S. firms, in general, have been repurchasing shares and thus net equity issues have been positive.
Recall our Zoom guest lecture from Mr. Patel (Senior VP and Treasurer, PriceSmart, Inc.). The PriceSmart Board of Directors decided that the recent lull in global economic activity represented an excellent opportunity to complete recent capital expenditure projects since the completion of these projects now is less likely to interfere with day-to-day operations.
Discounting free cash flows at the (after-tax) WACC assumes that debt is rebalanced every period to maintain a constant ratio of debt to market value of the firm.
Multiple Choice (10 questions, 4 points for each question, 40 points total) Identify the letter of the choice that best completes the statement or answers the question. For numerical problems, choose the response closest to (i.e. has the minimum absolute value from) the number you calculate.
In spring 2020, due to the global spread of the corona virus, a cruise ship operator needs to decide whether to temporarily shutdown one of its cruises and idle one of its cruise ships. Which of the following factor will likely not factor in to this decision?
a. Cost of furloughed employees d. Damage to the firm’s brand as customers are annoyed at the cancellation b. Cost of capital tied up in the cruise ship e. Cost of fuel and supplies c. Lower liability in the event that people get sick on the cruise
3 of 17
Consider the New Heritage Doll Company case and the two projects under consideration. Which of the following risks is a systematic risk (also known as “non-diversifiable risk”)? a. The technical infrastructure required to create the Design Your Own Doll collection may fail. d. High fixed costs, for either project, could lead to very poor sales (and thus negative profits) in the event the economy enters a recession. b. The Match My Doll Collection project may be overpriced and cause NHDC to miss its marketing opportunity. e. All of the risks listed here are systematic risks. c. One of the key managers, for either project, could leave the company for a better job elsewhere, thus damaging the project’s performance.
Consider the purchase of automobile collision insurance by a typical college student who owns little or no financial market assets. How would you characterize this type of insurance (i.e. the insurance contract itself) in terms of the student’s portfolio of assets? The insurance contract has:
a. a high beta, and a high expected return d. a low/negative beta, and low/negative expected return b. a high beta, but a low/negative expected return e. a high beta, and a zero expected return c. a low/negative beta, but a high expected return
Which of the following is true regarding a firm’s return (“r”) on its debt, equity, and assets? a. rA> rE > rD d. rE> rD> rAb. rD> rA> rE e. None of the other choices are true.c. rA> rD> rE
When firms award stock options to managers as incentives, they typically set the exercise price of these options equal to the firm’s:
a. stock price on the day the options are granted.c. expected stock price on the expiration date of the options.b. expected stock price one year from the day the options are granted.d. stock price on the day the manager was hired.
4 of 17
Here is a familiar graph that displays one of Miller and Modigliani’s propositions. Note that there are three graphs.
Which rates correspond to the graphs labeled “A,” “B,” and “C”?
a. A = return on assets; B = return on debt; C = return on equityd. A = return on debt; B = return on assets; C = return on equity b. None of the other selections is correct. e. A = return on equity; B = return on debt; C = return on assets c. A = return on assets; B = return on equity; C = return on debt
According to Miller and Modigliani (M&M), the value of the firm is independent of the firm’s capital structure. Which of the following would violate the assumptions they used to establish this result? a. The firm has no debt. d. The firm has recently initiated paying a dividend after not ever paying one previously. b. The firm has a debt ratio greater than 50%. e. None of the other choices violate any of M&M’s assumptions. c. Investors are only able to borrow money at interest rates much greater than the firm. 5 of 17
According to the Pecking Order Hypothesis, which of the following sources of financing will managers want to use last. a. Retained earnings d. Long-term bonds b. Short-term bank financing e. Common stock c. Medium-term bonds
Which of the following will increase the value of a call option? a. Stock price decreases. b. The exercise price increases. c. The stock price volatility decreases. d. The time to maturity decreases. e. All of the other choices will decrease the value of a call option.
Consider the annuity worksheet (Holden, Ch. 2) that you completed.
Choose the correct Excel formula that should be entered into cell B12. Your formula must correctly calculate the PV of each of the cash flows from line 11and you must be able to copy it across all the cells in the range b12:g12.
a. =b11/(1+$b$5/$b$6)^$b10 d. =b11/(1+$b$5)^$b10 b. =$b11/(1+$b$5)^$b10 e. None of the other formulas is correct. c. =b11/(1+$b$5)^b10
6 of 17Short Answer (8 questions, 10 points each, 80 points total) You will need to show your work to get any partial credit in this section.
Here are the results from running the Fama-French 3-factor model on Amazon (stock ticker symbol “AMZN”).
What was the alpha? Was alpha positive or negative? Was it statistically significant at the 5% level? Please indicate your answers below. (Write alpha as a % with two decimal points, e.g. 1.23%.)
alpha = __
Was alpha Positive or Negative? Significant or Insignificant?
The market value of Fauci, Inc. common stock is $60 M and the market value of its debt is $40 M. The beta of the company’s common stock is 1.3, the beta of the firm’s debt is 0.2, and the expected market risk premium is 5%. If the Treasury bill rate is 1%, what is the firm’s cost of capital? (Assume no taxes.)
Answer: ___
You are given a CBOE quotation for options available on Google stock (see the attached CBOE quotation). Find the value of the May 14 put option with a strike price of $560.00. (Assume a riskfree rate of 0.00% for purposes of this problem.)
Answer: ___7 of 17
The current price of Estelle Corporation stock is $50. In each of the next two years, this stock price will either go up by 20% or go down by 20%. The stock pays no dividends. The one-year risk-free interest rate is 5% and will remain constant. Using the Binomial Model, calculate the price of a oneyear call option on Estelle stock with a strike price of $50.
C_50 = $ __8 of 17
Consider Circular File’s market value balance sheet (recall that the face value of bonds is $50 and the bonds are due 1 year from now):
Market ValuesNet Working Capital $ 20 Bonds Outstanding $25Fixed assets $ 10 Common Stock $ 5$ 30 $30
A) Suppose that Circular scrapes up $5 in cash and pays a cash dividend. Who gains and who loses from this maneuver? What is the market value of assets after the dividend?
Biggest Loser is ___
Market value of assets, after dividend, is ___
B) Suppose that Circular halts operations, sells its fixed assets, and converts net working capital into $20 cash. Unfortunately, the fixed assets fetch only $6 on the secondhand market. The $26 cash is invested in Treasury bills. Who gains and who loses from this maneuver? What is the market value of assets after the restructuring?
Biggest Loser is ___
Market value of assets, after restructuring, is ___
9 of 17
List two different sensible reasons for a firm to merge with another firm. Also list two different dubious reasons for a firm to merge.
Sensible reason #1:
Sensible reason #2:
Dubious reason #1:
Dubious reason #2:
Due to the covid pandemic and the declaration of a national disaster, the U.S. Small Businss Administration is offering small firms subsidized loans through its Economic Injury Disaster Loan program. An additional $50b was added to this program in April 2020. The loan limit has been reduced (as of May 2020) to $150,000 per firm. The terms of the loan are 3.75% APR, monthly payments, and a maturity of 30 years.a) Calculate the monthly payment on this loan. (Assume an amortizing loan, i.e. there is no “balloon” payment at the end of the loan.)
Answer = __b) Suppose the terms of the loan were changed. Keep the interest rate (3.75% APR) and the amount of the loan ($150K) the same. However, suppose the first 12 months of payments are deferred. What is the new payment amount? Note that there are now only 29 years of payments with the first payment coming 13 months from today. (Note: these are the actual terms of the EIDL program.)
Answer = _
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