Advanced Financial Management - Midterm Exam - Fall 2007 | BMGT 440, Exams of Financial Management

Download Advanced Financial Management - Midterm Exam - Fall 2007 | BMGT 440 and more Exams Financial Management in PDF only on Docsity! UNIVERSITY OF MARYLAND MIDTERM EXAM BMGT440 October 24, 2007 Van Munching Hall 1202; 1206 Dr. Elinda Fishman Kiss NAME ______________________________ "I pledge on my honor that I have not given or received any unauthorized assistance on this exam." Signed: _____________________________________________ Oct. 24, 2007 Multiple Choice (20 points – 2?? points each) (if there are 10 multiple choice questions. Circle the correct answer. If you change your answer, indicate the letter of the new choice to the left of the question and circle it. Also darken the appropriate circle on the SCANTRON after you have circled the answers on the exam sheet. I will look at exam sheet for any item that you have wrong on SCANTRON. 1. What is the primary goal of the corporation? A) Maximize the pay and compensation of employees and managers of the firm. B) Maximize the value of the stockholders, as they are the owners of the corporation. C) Maximize the wealth of all mistake holders if the firm wants to continue to exist. D) Maximize the societal value to minimize governmental interference. E) Minimize taxes. 2. You have an investment opportunity available to you that requires $400,000. You have no funds available but you will have income of $120,000 this year. The investment will have a payoff $433,000 at the end of the year. If the market rate is 8.25% what is the net present value? A) $33,000. B) $433,000 C) $0.00 D) $23,100 E) $30,485. 3. Aunt Ravens has promised to leave you $60 a year starting next year and have it increase at 4% a year thereafter. The payments are expected to go on indefinitely. How much has Aunt Ravens left you if your opportunity costs is 9% ? A) $ 693.33. B) $1200.00. C) $1248.00. D) $ 666.67 E) $60.00. 4. The Orioles Corp. projects to pay a dividend of $.75 next year and then have it grow at 12% for the next 3 years before growing at 8% indefinitely thereafter. The equity has a required return of 10% in the market. The price of the stock should be: A) $ 41.66 B) $ 9.375. C) $ 17.05. D) $ 59.80. E) $ 62.38. 5. If the quoted dividend yield in the paper was 2.2% and the dividend was listed as $0.72 what price is used in the calculation of dividend yield? A) The day open of $32.15. B) The day low of $32. C) The day close of $32.73. D) The day high of $33.50. 6. The payback period rule: A) Determines a cutoff point so that all projects accepted by the NPV rule will be accepted by the payback period rule. B) Determines a cutoff point so that depreciation is just equal to positive cash flows in the payback year. C) Requires an arbitrary choice of a cutoff point. D) Varies the cutoff point with the interest rate. E) Always gives the same decision as the IRR rule. 7. The depreciation tax shield is calculated by: A) The quantity (1-Tc) multiplied by depreciation. B) Revenues less expenses less depreciation. C) The quantity (Revenues-Expenses) multiplied by depreciation. D) Revenues less expenses less taxes. E) None of the above. 8. What company talked about Structured Finance? This is from Fall 2006 a. Gulf Oil b. Ernst and Young c. GEICO d. Lehman Brothers The exam speaker presentation question will be more substantive than this one. 9. A printing press has a cost of $60,000 and fits into the MACRS 5 year class for depreciation. If the company has a marginal tax rate of 40%, what is the first year's depreciation? A) $ 6,000 B) $ 7,200 C) $10,000 D) $12,000 E) $16,000 10. Consider a bond that pays 7% coupon and has 8 years to maturity. The market requires an interest rate of 8% on bonds of this risk. Note that the interest payments are made semi-annually, but the 7% and 8% are nominal (annual) rates. What is this bond’s price? A.) $942.50 B.) $911.52 C.) $941.74 D.) $1064.81 E.) $1000.00 11. When a security is added to a portfolio the appropriate return and risk contributions are: A) The expected return of the asset and its standard deviation. B) The most probable return and the beta. C) The expected return and the beta. D) The most probable return and the standard deviation of the asset. 26. All the following represent cash outflows to the firm except: a. Taxes b. Interest payments c. Purchases of new equipment d. Dividends e. Depreciation. 27. Which of the following is a use of cash? a. An increase in short-term loans. b. An increase in accounts payable. c. The sale of fixed assets. d. Dividends paid e. The sale of new bonds. 28. If the market interest rate (yield to maturity) on a bond decreases, the present value (market price) of that bond will a. increase b. decrease c remain the same 29. The Federal Funds rate is: a. The charge on loans to depository institutions by the Federal Reserve banks b. The base rate on corporate loans by commercial banks c. The charge on loans to brokers on stock exchange collateral d. The rate on reserves traded among commercial banks for overnight use e. The rate on negotiable, bank-backed business credit instrument typically financing an import order. 30. Which of the following would reduce the external financing needed if all other things are held constant? a. an increase in the dividend payout ratio. b. a decrease in the profit margin. c. an increase in the capital intensity ratio. d. an increase in the expected sales growth rate. e. a decrease in the firm’s tax rate. 31. The Present Value of $100 to be received 100 years from today at an interest rate of 0% per year is: a. Approximately zero. b. $34.25 c. $100.00 d. $122.30 e. $270.48. 32. Assume two bonds with the same coupon payments and par values but different periods to maturity. If interest rates should rise five (5) basis points, the price of the longer term bond would generally: a. Rise by more than that of the shorter term bond. b. Rise by less than that of the shorter term bond. c. Rise by the same amount as the price of the shorter term bond. d. Fall by the same amount as the price of the shorter term bond. e. Fall by less than the price of the shorter term bond. f. Fall by more than the price of the shorter term bond. 33. Which of the following is true about zero-coupon bonds? a. Price (interest rate) risk is eliminated over the life of the bond. b. Credit risk is eliminated. c. They sell at a premium over par. d. Reinvestment risk is eliminated, until the bond matures. e. They carry no income tax liability (you do not have to pay taxes on the income). 34. When a project's NPV exceeds zero, a. The project will also be acceptable using payback criteria. b. The IRR should be calculated to insure that the project's projected rate of return exceeds the cost of capital. c. The project should be accepted without any further consideration, assuming we are confident that the cash flows and the cost of capital have been properly estimated. 35. A standby underwriting arrangement provides the: a. Company with methods to cancel the offering. b. Company with an alternative investment banker if there is conflict between the issuer and the agent. c. Investment banker with an oversubscription privilege to ensure profits are earned. d. Company with an alternative avenue of sale to ensure success of the rights offering. e. Investment bankers with an added syndication for the rights offering. f. Investment bankers a “Green Shoe” option. g. Company with a firm commitment from a negotiated underwriter. h. Company with a general cash offer. i. Company a shelf-registration. 36. The first public equity issue that is made by a company is referred to as: A) a rights issue. B) a general cash offer. C) an initial public offering. D) a seasoned equity issue. E) a private placement. F) a syndicate. 37. The Modigliani-Miller Proposition I without taxes states: A) A firm cannot change the total value of its outstanding securities by changing its capital structure proportions. B) When new projects are added to the firm the firm value is the sum of the old value plus the new. C) Managers can make correct corporate decisions that will satisfy all shareholders if they select projects that maximize value. D) The determination of value must consider the timing and risk of the cash flows. 38. A “short answer” question from Eskimo Pie, for example: How did group 2 calculate the P/E (price earnings ratio) for the industry; what information from the case did they use? What did Wheat First propose that Eskimo Pie do with the $13 million in cash that it had accumulated? Why would Nestle wish to acquire Eskimo Pie? Are there any potential synergies? List some potential synergies. How did group 1 calculate the free cash flows for the valuation of the price at the IPO? List some shortcomings of the Multiples Approach to pricing an IPO? State some reasons given by group 2 for and against the IPO approach and for and against the Nestle offer; list both pros and cons. There are also short answer questions from current events – using print Wall Street Journal from Tuesday, October 23, 2007, or on-line journal from evening of Mon. Oct. 22, 2007 Where did the S&P 500 close on Monday, October 22, 2007? http://online.wsj.com/public/us What was the closing (ask) yield on the ten-year note on Monday, October 22, 2007? What was the closing (ask) yield on the two-year note on Monday, October 22, 2007? What is the coupon rate on the two-year note? What is the coupon rate on the ten-year note? What is the maturity date of the ten-year note? What is the maturity date of the two-year note? For the Treasury coupon rates and yields and maturity dates, see http://online.wsj.com/mdc/public/page/2_3020-treasury.html What was the Federal-Funds target rate on Monday, October 22, 2007? http://online.wsj.com/mdc/public/page/mdc_bonds.html?mod=mdc_topnav_2_3012 or http://www.federalreserve.gov/newsevents/press/monetary/20070918a.htm or http://www.federalreserve.gov/fomc/fundsrate.htm What is the price of oil per barrel? http://online.wsj.com/mdc/public/page/mdc_commodities.html?mod=mdc_topnav_2_3014 What is the U.S. dollar price of one Euro? http://online.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000