Financial Management

2017_Winter_--_Test_2C_10am_--_Solutions.docx-Test 2 – Winter 2017 –

Exam2_Solutions.docx-Econ 134A John Hartman Test 2,

Econ 134A John Hartman Test 1, Form A October 21, 2015 Instructions: YOU WILL TURN IN YOUR SCANTRON AND THE PROBLEMS PAGE. MAKE SURE ALL WORK AND ANSWERS ARE PROVIDED ON THESE. BUBBLE IN YOUR TEST FORM, NAME, AND PERM NUMBER ON YOUR SCANTRON. You have 40 minutes to complete this test, unless you arrive late. Late arrival will lower the time available to you, and y

Test1A_Fall2015.docx-Econ 134A John Hartman Test 1,

Question 1a • Given: We have a stock that will pay $14 per year with the next dividend paid later today. In 3 years, company can retain all earnings and earn 11% over the following year. Discount rate is 8% • What is the present value of the stock if it continues to be a cash cow? PV=14 + 14/.08 =189 Question 1b • Given: We have a stock that will pay $14 per year with the next dividend paid later today. In 3 years, company can retain all earnings and earn 11% over the following year. Discount rate is 8% • Should the company retain its earnings? Yes, because rate of return is greater than discount rate 11% > 8% Also, NPV>0 (see 1c) Question 1c • Given: We have a stock that will pay $14 per year with the next dividend paid later today. In 3 years, company can retain all earnings and earn 11% over the following year. Discount rate is 8% • How much does the stock’s PV change if the company retains its earnings ? NPV=-14/1.08^3 + (14*1.11)/1.08^4 = .3087 Question 2 • We have a zero coupon bond sold for $500 on March 8 2016. When sold on the date, the YTM was 2.63%. The maturity date is March 8, 2046. • If the YTM on June 8 2016 was 2.51%, what did the bond sell for on this date? • March 8 2016: • PV=Face/(1.0263)^30 • 500=Face/(1.0263)^30 • Face=1089.43 • June 8 2016: • PV=1089.43 / (1.0251)^29.75 • PV=521.08 Question 3 • Machine is purchased today for $5000. First maintenance cost is $50 two years from today. That cost is paid annually and grows 4% every year. Last maintenance cost is 9 years from today. What is the EAC if EAR is 10% and machine lasts 12 years? • PV of costs= • EAC: • X= 774.02 Question 4 • Stock currently sells for $50 and pays X dividend every year starting one year from today. The stock has a beta value of 1.5. Risk free rate is 5% and the risk premium is 6%. What is X? • CAPM: • Perp: • X/.14 = 50 • X= 7 Question 5 • Company gives stockholders expected rate of return of 20% if company is unlevered. company’s cost of debt is 12%. Stockholders are currently owning 25%. What fraction of the company’s value is held by bondholders? • Let X be proportion held by bondholders • .2 = .12X + .25 ( 1-X) • .13X=.05 • X= .3846 Question 5 • Company gives stockholders expected rate of return of 20% if company is unlevered. company’s cost of debt is 12%. Stockholders are currently owning 25%. What fraction of the company’s value is held by bondholders? • Also use M/M II Question 6 • On July 5, 2013, Lauren borrowed 100,000. She ﬁnanced the loan with equal monthly payments over 84 months, starting August 5, 2013. The SAR is 15% compounded month. On August 5, 2016, Lauren makes a balloon payment in addition to the regular payment. The loan has a .5% penalty charged on the amount of the balloon payment. What is the balloon payment? 1) Find monthly payment 2) Find remaining regular balloon payment: 84-37 payments= 47 payments left 3) Total Payment = Balloon * 1.005 = 68,614.28

ECON | 134A and 234A | Financial Management | question bank | Question 1a • Given: We have a

________________________________________________________________ Your name and Perm # Econ 234A John Hartman Test 1 February 11, 2014 Instructions: You have 60 minutes to complete this test, unless you arrive late. Late arrival will lower the time available to you, and you must finish at the same time as all other students. Each question shows how many points it is worth. Show all work in order to receive credit. You will receive partial credit for incorrect solutions in some instances. Clearly circle your answer(s) or else you may not receive full credit for a complete and correct solution. Cheating will not be tolerated during any test. Any suspected cheating will be reported to the relevant authorities on this issue. You are allowed to use a nonprogrammable four-function or scientific calculator that is NOT a communication device. You are NOT allowed to have a calculator that stores formulas, buttons that automatically calculate IRR, NPV, or any other concept covered in this class. You are NOT allowed to have a calculator that has the ability to produce graphs. If you use a calculator that does not meet these requirements, you will be assumed to be cheating. Unless otherwise specified, you can assume the following:  Negative internal rates of return are not possible  All equivalent annual cost problems are in real dollars You are allowed to turn in your test early if there are at least 5 minutes remaining. As a courtesy to your classmates, you will not be allowed to leave during the final 5 minutes of the test. Your test should have 4 problems, some with multiple parts. The maximum possible point total is 36 points. If your test is incomplete, it is your responsibility to notify a proctor to get a new test. For your reference, an example of a well-labeled graph is below: Grading: Filling in name, perm #, & having photo ID 1 /1 ( automatic unless something is incorrect ) Problems _____/35 Total score _____ For the following problems, you will need to write out the solution. You must show all work to receive credit. Each problem (or part of problem) shows the maximum point value. Provide at least four significant digits to each answer or you may not receive full credit for a correct solution. 1. (11 points) Suppose that you are advising a couple just about to get married about how much they need to save for college for their future children. They plan on having 2 children, one 3 years from today and the other 5 years from today. Each child will start college 18 years after being born. You estimate the children’s annual cost of education will be $80,000 per year per child, payable at the beginning of each school year. We assume four years of college expenses for each child. The effective annual interest rate is 6%. When you ask the couple how they plan to save for their children’s college funds, they tell you that they want to make 15 equal deposits of $ X each year, starting two years from now. The total of these payments will be exactly enough to cover all of their children’s college expenses. Find X . ( Note: You can use the next page to solve this problem also. )

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