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# Financial Management MGMT 31000

Purdue

GPA 3.68

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This 14 page Class Notes was uploaded by Landen Harvey on Saturday September 19, 2015. The Class Notes belongs to MGMT 31000 at Purdue University taught by Seoyoung Kim in Fall. Since its upload, it has received 48 views. For similar materials see /class/207957/mgmt-31000-purdue-university in Business, management at Purdue University.

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Date Created: 09/19/15

Midterm 2 PRACTICE EXAM Name no nicknames please Circle your Section XXX XXX XXX XXX 7 XXX XXX 7 XXX XXX 7 XXX 1 You are only allowed to have with you a penpencil and a calculator no books notes computers phones etc Extra scratch paper will be provided if you need it You must have your own calculator no sharing 2 Round your interim work and nal answers to the nearest three decimal places and write your nal answer in the provided boxes You must show work where applicable 3 You have 90 minutes to complete the exam There are 8 pages and 20 questions Maximum possible score is 100 out of 100 TrueFalse 4 points each Total 36 points 1 The standard deviation on a portfolio can be greater than that on every True False asset in the portfolio 2 It is easier to take control over a fum whose board of directors has True False staggered election terms 3 If Bond A has greater time to maturity than Bond B then Bond A s price True False must be more sensitive to changes in interest rate uctuations 4 Higher bond duration indicates that the bond s price is more sensitive to True False uctuations in interest rates 5 If you hold a zerocoupon bond to maturity then your annualized rate of True False return is guaranteed to equal the original yield to maturity at time of purchase assuming the issuer does not default 6 The ask price is the price at which a dealerspecialistmarket maker will True False sell a security to you 7 The effective annual rate EAR tells you the rate at which your real True False buying power increases 8 According to CAPM the risk premium on an asset is determined entirely True False by its beta and the market risk premium loutofS Midterm 2 PRACTICE EXAM Consider assets A and B both with identical standard deviations Then a portfolio with positive weights on each of these assets must have a standard deviation less than that on either asset This portfolio is not invested in any other assets Multiple Choice 5 points each Total 15 points 9 All else equal if the expected return on Stock X suddenly decreases then A The price per share decreases B The contemporaneous realized return is negative C Both A and B D Neither A nor B Which of the following is true of a bond selling below its face value A Its yield to maturity is less than the coupon rate B Its current yield is less than the coupon rate C Both A and B D Neither A nor B True False Final Answer Final Answer 11 Suppose that today you just purchased a painting for 100000 If in 10 years time t10 you were able to sell this painting for 200000 your annualized rate of return on this investment would be A Less than 10 B Equal to 10 C Greater than 10 but less than 20 D Equal to 20 E Greater than 20 20utof8 Final Answer Midterm 2 PRACTICE EXAM 12 Consider a bond with a face value of 1000 time to maturity of 10 years coupon rate of 5 paid semiannually and a yield to maturity of 8 A What is the current price of the bond 7 points F I A Ina nswer B What is the effective annual yield on this bond 5 points Final Answer 3outof8 Midterm 2 PRACTICE EXAM 13 Consider a parvalue bond with a face value of 1000 yield to maturity of 10 and time to maturity of 10 years What is its current yield 5 points Final Answer 14 Suppose firm X is not currently paying dividends You expect that the firm will pay its first dividend in the amount of 1 per share in four years at time t4 You expect to receive an annual dividend of 1 every year thereafter forever The expected return is 10 What is the current price per share 7 points Final Answer 4outof8 Midterm 2 PRACTICE EXAM 15 Suppose firm X just paid its annual dividend of 1 per share For the next 10 years ending t10 you expect dividends to grow at a rate of 10 after which point you expect dividends to grow at a rate of 5 thereafter forever The expected return is 8 What is the current price per share 5 points Final Answer SoutofS Midterm 2 PRACTICE EXAM 16 Suppose Firm X just paid out 30 million in dividends It s earnings at time t0 is 100 million its total assets are currently 1 billion and it has 30 million shares outstanding The rm must keep a constant diVidend payout ratio and cannot issue any debt or equity Assuming the percentage of sales approach if the required rate of return is 10 what is the maximum justi able price per share today under these conditions 5 points Final Answer 6outof8 Midterm 2 PRACTICE EXAM 17 What is the average beta across all assets 1 point Final Answer 18 Firm X just paid its annual dividend of 10 cents per share Its next annual dividend is expected to be 20 cents per share and is expected to remain constant each year thereafter 5 points Suppose the risk free rate is 3 the market risk premium is 10 and a marketmodel regression yields alpha and beta estimates of 001 and 080 respectively The standard deviation of Firm X s past returns is 35 Under CAPM what would be the current price per share of Firm X Final Answer 7outof8 Midterm 2 PRACTICE EXAM 19 You have just purchased a parvalue bond with face value of 1000 and yield to maturity of 10 The bond makes annual coupon payments and matures in 10 years What is your realized return if you sell the bond next year right after you collect the annual coupon payment at which point the market s required rate of return has decreased to 5 5 points Final Answer 20 Draw the capital market line assuming that the rate at which you can borrow money is greater than the rate at which you can invest in the riskless asset ie the rate at which you lend money to the government Label your gure clearly 4 points 80utof8 Midterm 1 PRACTICE EXAM NAME Name no nicknames please Circle your Section XXX XXX 7 XXX XXX 7 XXX XXX 7 XXX You are only allowed to have with you a penpencil and a calculator no books notes computers phones etc Extra scratch paper will be provided if you need it You must have your own calculator no sharing Round your answers to the nearest three decimal places and write your final answer in the provided squares You must show your work where applicable to receive credit You have 90 minutes to complete the exam There are 6 pages and 14 questions Maximum possible score is 100 out of 100 TrueFalse 4 points each Total 20 points 1 5 Book value of shareholders equity can sometimes be negative True False Earnings management is when managers use their discretion to make True False accounting choices that depict the true nancial condition of the rm Cash ow to shareholders must be less than or equal to net income True False Retained Earnings refers to how much cash the rm is keeping on hand True False One assumptionconstraint in deriving the Sustainable Growth Rate is that True False the rm cannot issue any equity loutof6 Section Midterm 1 PRACTICE EXAM NAME Section 6 If the equity multiplier NE is equal to 21 then what is the debt to equity ratio 10 points Final Answer 7 You just received 500 from your friend today You will not be receiving any additional money next year Your bank pays you 5 annually on your savings deposits and will lend you money at a rate of 10 annually You would like to maximize your spending such that you spend the exact same amount X at both time t 0 and t 1 What is X 10 oints FinalAnswer 8 An investment pays 10 per year forever starting three years from now What is the present value of all future cash ows from this investment if the relevant discount rate is 5 10 points Final Answer 20utof6 Midterm 1 PRACTICE EXAM NAME Section 9 Firm X has 75000 in total assets addition to retained earnings of 5000 dividend payout ratio of 030 and a debt to equity ratio of 080 Final Answer a What is its return on assets 3 points b What is its return on equity 2 points Final Answer 3outof6 Midterm 1 PRACTICE EXAM NAME Section Balance Sheet for Year Ending 2008 and 2009 Assets Liabilities Shareholders Equity 2008 2009 2008 2009 Total Debt Current Assets 2000 3000 Current Liabilities 1000 1500 LongTerm Debt 2000 3000 Fixed Assets 8000 12000 Total SHE Common Stock 4000 6798 Retained Earnings 3000 3702 TOTAL 10000 15000 TOTAL 10000 15000 2009 Income quot Sales 5000 Cost of Goods Sold 1000 General admin expenses 1000 Depreciation 1200 Earnings before interest and taxes 1800 Interest paid 0 Taxable Income 1800 Taxes paid 35 630 Net Income 1170 10 Total 15 points Sales are projected to increase by 20 Cost of goods sold generaladmin expenses current assets and xed assets are expected to increase at the same rate as sales Depreciation is always equal to 10 of the amount of xed assets and the interest rate on longterm debt is 0 The dividend payout ratio remains at 40 Suppose that the rm is not allowed to increase its current liabilities and must maintain a constant total debt ratio Provide the following information based on your 2010 Pro Forma statements 2010 Pro Forma 15 points Total Debt Total SHE Net new LTD issued New net equity issued 4outof6 Midterm 1 PRACTICE EXAM NAME Section Answer the questions 11 to 14 using the nancial statements provided on the previous page 11 What was the cash ow from assets in 2009 5 points 12 What was the operating cash ow in 2009 5 points Soutof6 Final Answer Final Answer Midterm 1 PRACTICE EXAM NAME Section 13 Assuming that all costs and assets increase at the same rate of sales ie the of sales approach and no external nancing is allowed what is the maximum possible growth rate this rm can expect for future sales ie 2010 based on the 2009 nancial statements 10 points Final Answer 14 Suppose that in 2009 the rm was operating at 70 of its xed asset capacity If the rm were operating at full capacity how much more in xed assets would the rm need to achieve 8000 in sales based on the 2009 nancial statements 10 points Final Answer 6outof6

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