Principles of Modern Finance Sample Midterm Essay Example Essay Example

Standards of Modern Finance Sample Midterm Essay Example Paper Standards of Modern Finance Sample Midterm Essay Introduction 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 various 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 required to deliver a profit of $10 one year from now, and this profit is relied upon 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. An undertaking 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. N otwithstanding, there is a likelihood that the Greek government will default among now and the guaranteed installment. On the off chance that the legislature 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 taken on a 2-year MBA program, and have recently begun classes. To pay the educational cost and everyday costs, I get $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 consistent compensation which will be paid toward the finish of every time of work. There are no duties. 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 ne ed 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 charge card organization o? rs me a card with 20% APR, exacerbated day by day. I make acquisition of $3,000 on the card, and permit enthusiasm to accumulate on those buys for a year. Expecting every year has 365 days, the sum I should take care of is: (a) $3,315 (b) $3,600 (c) $3,664 (d) $3,901. 30 Answer the following two inquiries concerning 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 underneath: 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 C SCO? (a) 10. 04% (b) 8% (c) 2. 55% (d) 0% 7. What is the change 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 credit at 5% at her bank, while no bank is happy to give Brad a one-year advance for under 10%. Brad has quite recently had medical procedure, and must compensation the 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 acquire $10,000 from her bank for one year for her own, and Brad will reimburse this credit. Furthermore, he will pay Alice an aggregate of cash today. What is the most extreme sum that Brad ought to be eager to pay Alice in advance under this course of action? Alice isn't eager to consider obtaining more than $10,000. (2pts) (a) $454. 54 (b) $377. 18 (c) $476. 19 (d) $500 9. The hazard free loan fee today is 7%. One year back, you purchased a benefit which is sans hazard and would pay $100 two years from the date of procurement. The hazard free financing cost on the date of procurement was 10%. You sell the advantage today. Standards of Modern Finance Sample Midterm Essay Body Paragraphs 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 nearby bank, would it be savvy to put resources into a multi year security which vows to make a solitary installment of $1000 toward an amazing finish? Accept both are similarly dangerous). 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 terrible. (c) Can’t tell from data given 12. You are given the accompanying data about arrangement of two hazardous 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 activities accessible. The hazard free rate is 10%. Which would it be advisable 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 anticipated 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 depicts this venture? (2pts) (a) Graph A (b) Graph B (c) Graph C (d) Graph D 16. Offered your response to the past inquir y, what is the scope of markdown rates for which you ought to acknowledge this task? (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 exceptionally expert? table plane producer. It is thinking about structure an office to make 747s on 10,000 sections of land in the Nevada desert. It isn't thinking about some other locales. To urge Boeing to set up the office, the nearby office of business has purchased the land and has o? ered to lease it to Boeing at a lease of zero dollars for each year. Expect that this â€Å"gift† has no duty suggestions for Boeing. If Boeing somehow happened to attempt to lease the land in the open market, the lease would be $1,500 per section of land every year, payable toward the finish of every year. Building the processing plant will cost Boeing $800M (800 million dollars), of which $200M is payable today and $600M will be should be paid when the manufacturing plant starts creation. It will take one year to construct the manufacturing plant and start creation. The IRS says that the $800M cost can be deteriorated (straight-line to zero) over the? rst twenty years in which the industrial facility produces planes. In any case, 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 every year, with the? rst group 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 acquired. Crude material will be paid for one ye ar late (I. e. , crude material expenses caused in year 2 will be paid toward the finish of year 3). Deals will be paid for a long time late. Stock is consistently 0. The value Boeing will get for each plane is dubious. It may be as high as $500M, or as low as $200M. Undoubtedly, the cost will be $400M. All things considered, the value they hope to get is $350M. Boeing’s corporate o? ce is situated in Chicago. Presently 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 assembled, the CEO should make ten more? ghts a year, beginning in the? rst year of creation, with the cost per? ight being the equivalent. The cost of the? ights is caused toward the finish of year where the? ights are made. The pay of the CEO will remain? xed at $12m every year. Be that as it may, the corporate o? ce has chosen to designate $1m every time of this expense to the Nevada venture, should it be constructed, b eginning toward the finish of year 2. This portion has no assessment suggestions. Boeing has another undertaking which they needed to begin today. This undertaking 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 manufacturing plant in Nevada will possess official time, and imply that Boeing should defer beginning this task until the Nevada plant starts creation. Charges are required to be 30%. The rebate rate is 8%. 8 17. When computing money? ows for NPV, the income in the pay articulation 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 gets 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 explanation for every time of creation will be: (a) $420M (b) $422M (c) $423M (d) $438M 20. What is the working capital toward th e 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 delivering, 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 task is: (a) $20M (b) $18. 52M (c) $17. 15M (d) $1. 37M 10 We