The exam consists of both short answer and quantitative questions. The short answers are just that "short". Typically 4 to 6 sentences (maximum) should be enough for a complete response. Some of the short answer questions are true/false/uncertain and explain your response. Make sure you provide an explanation. The quantitative problems are similar to homework problems you have completed. Make sure to show your work for all of the quantitative problems. Simply providing a response will result in no points being awarded.

Some of these questions will require you to upload an Excel or Word file.Be sure to have Excel and Word available before you begin taking the exam.

1. During periods of high inflation, U.S. firms have strong incentives to purchase short-lived assets and frequently replace them, rather than investing in long-lived assets. (True, False, Uncertain and explain your response) 2. Explain intuitively why it is that present values decrease as the discount rate increases 3. To reduce agency problems, both monitoring and incentive alignment methods rely on the threat of punishment. (True, False, Uncertain and explain your response) 4. Assume that all you have available are data for the following ratios and your firm and your industry. Total Asset Turnover Total Margin = Revenues/Assets = EBIT/Revenues Net Profit Margin = Earnings/Revenues Times Interest Earned = EBIT/Interest Return on Equity = Earnings/Equity If you want evaluate the effectiveness of your company's operating managers and you can only use one of the measures, which one should it be and why? 5. CAPM implies that the only two assets that matter to every investor in corporate stocks and bonds are the risk-free Treasury Bill and the market portfolio of world-wide wealth. (True, False, Uncertain and explain your response) 6. Rau Inc. has 7.0 percent coupon bonds on the market with 9 years to maturity. The bonds make semi-annual payments and currently sell for 90 percent of par. What is the YTM? You will upload an Excel spreadsheet that shows all of your work and the solution. 7. JJ Enterprises is considering the purchase of a new machine that will produce thumb drives. The new machine will require an initial investment of $100,000 and has an economic life of five years and will be fully depreciated by the straight line method. The machine will produce 15,000 thumb drives per year with each costing $2.00 to make. Each will be sold at $4.50. Assume JJ Enterprises uses a discount rate of 14 percent and has a tax rate of 34 percent. What is the NPV of the project and should JJ Enterprises make the purchase. You will upload an Excel spreadsheet that shows all of your work and the solution. 8. ZXC has 20 annual lease payments remaining in its contract. The next one for $2.5m is due in 4 months. The payments decrease with the equipment value by 4% per year. Using a 12% discount rate, what is today's present value of the remaining lease payments? 9. Choosing One Portfolio. The following table shows your predictions of the future returns on three mutual funds. Treasury Bills currently earn 4%. To invest all your wealth, you are limited to choosing a portfolio of only one of these three funds along with T-Bills. You are risk averse and able to borrow and short-sell. Which one of the three risky funds do you choose to invest in. Simple calculations or a graph may be helpful to illustrate your choices. 10. What is the price of a T-Bond with exactly 24.5 years to maturity and coupons with rate 5.875% paid semi-annually? Its yield is 6.5% BEY (Bond Equivalent Yield is semi-annually compounded). You will upload a Word Document that shows all of your work and the solution. Compare Fund A to Fund B. Which do you prefer? Explain. T-Bills Fund A Fund B Fund C E[rp] 4% 16% 16% 10% \\delta pp 25% 20% 12% \\beta pp .90 1.00 0.60 You will upload a Word Document that shows all of your work and the solution