Download Key to Final Spring 2008 | Corporate Financial Management | FIN 4360 and more Exams Finance in PDF only on Docsity! Finance 4360; Key to Final; Spring 2008; 9:00 Class Note: For all problems requiring calculations, you will only earn points for setting up solutions. You will not earn any points for calculating or solving anything. “Setting up solutions” means writing down the appropriate equation or equations and plugging in as many numbers as possible. For later steps in multi-step problems, you can plug in unsolved variables...variables you have set up to solve but have not actually solved. Example: X = (2 + 3)3.5; Y = X/7.31. 1. Given the following returns for Barnes & Noble (BKS) and the Standard & Poor’s 500 (S&P500), calculate the volatility and beta of Barnes & Noble. Return on: Year BKS S&P500 1 -23% -18% 2 40% 13% 3 13% 11% 4 50% 6% 5 1% 14% 150134023 5 1 BKSR ; eq [+4]; R[+1x5]; 5[+2] ;150134023 4 1 22222 BKSBKSBKSBKSBKSBKS rrrrrRVar BKSBKS RVarRSD eq [+4]; R[+1x5]; 4[+2] 146111318 5 1 & PSR ;146111318 4 1 2 & 2 & 2 & 2 & 2 && PSPSPSPSPSPS rrrrrRVar eq [+4]; R[+1x5]; 4[+2] PSBKSPSBKSPSBKSPSBKSPSBKSPSBKS rrrrrrrrrrRRCov &&&&&& 1416501113134018234 1 , eq [+9]; R[+1x10]; 4[+2] PS PSBKS RVar RRCov & &, ; eq [+10] 2. Explain how debt in a firm’s capital structure creates potential conflicts between the firm’s stockholders and its creditors. Note: In your discussion you should identify the potential conflicts. 1) firms may overinvest in high risk projects => if in financial distress, stockholders may have net gain from high risk even if negative NPV project => stockholders have residual claim and limited liability => stockholders get benefit if firm does well but don’t lose as value drops below what owed b/h => bondholders have fixed claim => bondholders don’t get upside but do have downside of risk 2) firms may fail to undertake positive NPV projects => if high chance of default, b/h get much if not all of project’s benefit => stockholders may have net loss if they provide funding (but receive little benefit) 3) firm may help stockholders cash out => stockholders want to get any cash out if possible => loss if sell assets below value to get cash out Finance 4360; Key to Final; Spring 2008; 9:00 Class 4) firm can issue debt with the same claim as existing debt and then repurchase equity => dilutes claim of original bondholders
