This portion of the exam is worth 72% of your final exam grade. The other 30% was handed out in the last class. If you do not have the information from the last class, you will need to contact me to receive the questions specific to your exam (each student is assigned different questions for the 30%). You need to print out both portions of the exam and bring them to the last class. Last class attendance is mandatory (unless arranged ahead of time)

Final Exam - Fin 500 For each page tab, please enter your name. Complete each problem and print out your answers. Hand in these 9 problems with your 3 assigned questions at the next class. Your 3 assigned questions were provided in the last class. If you did not attend class and you have not received an email from me regarding your 3 assigned questions, you need to contact me by telephone ASAP or you will not pass this exam. Attendence is mandatory at the last class unless you made arrangements with me ahead of time. 1 Name:_______________________________________________________________________ Problem 1 Goodman: Required return = = Landry: Required return = = d. If you formed a portfolio that consisted of 50% Goodman stock and 50% Landry stock, what would be its beta and its required return? The beta of a portfolio is simply a weighted average of the betas of the stocks in the portfolio, so this portfolio's beta would be: Portfolio beta = e. Suppose an investor wants to include Goodman Industries' stock in his or her portfolio. Stocks A, B, and C are currently in the portfolio, and their betas are 0.769, 0.985, and 1.423, respectively. Calculate the new portfolio's required return if it consists of 25% of Goodman, 15% of Stock A, 40% of Stock B, and 20% of Stock C. Beta Goodman Stock A Stock B Stock C 0.769 0.985 1.423 Portfolio Weight 25% 15% 40% 20% 100% Portfolio Beta = Required return on portfolio: = = = Risk-free rate 3 + Market Risk Premium * Beta Name:_______________________________________________________________________ Problem 2 VR Corporation has the opportunity to invest in a new project, the details of which are shown below. What is the Year 1 cash flow for the project? Sales revenues, each year Depreciation Other operating costs Interest expense Tax rate a b c d e 42,500.00 10,000.00 17,000.00 4,000.00 35% $ 16,351.00 $ 17,212.00 $ 18,118.00 $ 19,071.00 $ 20,075.00 4 Name:_______________________________________________________________________ Problem 3 Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? Stock A Stock B Price $ 25.00 $ 25.00 expected growth (constan 10% 5% Required Return 15% 15% a b c d e Stock A has a higher dividend yield than Stock B. Currently the two stocks have the same price, but over time Stock B's price will pass that of A. Since Stock A's growth rate is twice that of Stock B, Stock A's future dividends will always be twice as high as Stock B's. The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist. Stock A's expected dividend at t = 1 is only half that of Stock B. 5 Name:_______________________________________________________________________ Problem 4 The IRR of normal Project X is greater than the IRR of normal Project Y, and both IRRs are greater than zero. Also, the NPV of X is greater than the NPV of Y at the cost of capital. If the two projects are mutually exclusive, Project X should definitely be selected, and the investment made, provided we have confidence in the data. Put another way, it is impossible to draw NPV profiles that would suggest not accepting Project X. a b TRUE FALSE 6 For f. above only complete discounted payback for project A . Name:_______________________________________________________________________ Problem 6 Last year Baron Enterprises had $350 million of sales, and it had $270 million of fixed assets that were used at 65% of capacity last year. In millions, by how much could Baron's sales increase before it is required to increase its fixed assets? a b c d e $ $ $ $ $ 170.09 179.04 188.46 197.88 207.78 9 Name:_______________________________________________________________________ Problem 7 Which of the following is NOT normally regarded as being a barrier to hostile takeovers? a b c d e Targeted share repurchases. Shareholder rights provisions. Restricted voting rights. Poison pills. Abnormally high executive compensation. 10 Name:_______________________________________________________________________ Problem 8 Companies A and C each reported the same earnings per share (EPS), but Company A's stock trades at a higher price. Which of the following statements is CORRECT? a b c d e Company A trades at a higher P/E ratio. Company A probably has fewer growth opportunities. Company A is probably judged by investors to be riskier. Company A must have a higher market-to-book ratio. Company A must pay a lower dividend. 11 Your name:_________________________________________________________________________ Print clearly Capital Structure decisions involve the ways a firm's assets are financed and are often presented as a percentage of the type of financiing used such as debt, preferred stock, and common equity. As with all financial decisions, a firm should try to set a capital structure that maximizes the stock price, or shareholder value. This is called the optimal capital structure; it is also the debt-equity mix that: Chose one: a b c d maximizes the net income minimizes the weighted average cost of capital (WACC) maximizes the WACC maximizes the dividends Related to capital structure decisions, please review the list below and circle ALL items that are correct. 1 A decrease in debt financing increases the risk of bankruptcy, and managers are encouraged to invest in high risk projects 2 In an event of liquidation, creditors will get their claims over the firms assets before common shareholders. 3 An increase in debt financing increases the taxes that a company owes. 4 An increase in debt financing beyond a cretain point increases the risk of bankruptcy and financial distress. 5 Interest paid on debt is deducted from the firms pretax income, thus reducing the amount of taxes that it owes. 13 Final Exam - Fin 500 For each page tab, please enter your name. Complete each problem and print out your answers. Hand in these 9 problems with your 3 assigned questions at the next class. Your 3 assigned questions were provided in the last class. If you did not attend class and you have not received an email from me regarding your 3 assigned questions, you need to contact me by telephone ASAP or you will not pass this exam. Attendence is mandatory at the last class unless you made arrangements with me ahead of time. 1 Name:_______________________________________________________________________ Problem 1 Goodman: Required return = = Landry: Required return = = d. If you formed a portfolio that consisted of 50% Goodman stock and 50% Landry stock, what would be its beta and its required return? The beta of a portfolio is simply a weighted average of the betas of the stocks in the portfolio, so this portfolio's beta would be: Portfolio beta = e. Suppose an investor wants to include Goodman Industries' stock in his or her portfolio. Stocks A, B, and C are currently in the portfolio, and their betas are 0.769, 0.985, and 1.423, respectively. Calculate the new portfolio's required return if it consists of 25% of Goodman, 15% of Stock A, 40% of Stock B, and 20% of Stock C. Beta Goodman Stock A Stock B Stock C 0.769 0.985 1.423 Portfolio Weight 25% 15% 40% 20% 100% Portfolio Beta = Required return on portfolio: = = = Risk-free rate 3 + Market Risk Premium * Beta Name:_______________________________________________________________________ Problem 2 VR Corporation has the opportunity to invest in a new project, the details of which are shown below. What is the Year 1 cash flow for the project? Sales revenues, each year Depreciation Other operating costs Interest expense Tax rate a b c d e 42,500.00 10,000.00 17,000.00 4,000.00 35% $ 16,351.00 $ 17,212.00 $ 18,118.00 $ 19,071.00 $ 20,075.00 4 Name:_______________________________________________________________________ Problem 3 Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? Stock A Stock B Price $ 25.00 $ 25.00 expected growth (constan 10% 5% Required Return 15% 15% a b c d e Stock A has a higher dividend yield than Stock B. Currently the two stocks have the same price, but over time Stock B's price will pass that of A. Since Stock A's growth rate is twice that of Stock B, Stock A's future dividends will always be twice as high as Stock B's. The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist. Stock A's expected dividend at t = 1 is only half that of Stock B. 5 Name:_______________________________________________________________________ Problem 4 The IRR of normal Project X is greater than the IRR of normal Project Y, and both IRRs are greater than zero. Also, the NPV of X is greater than the NPV of Y at the cost of capital. If the two projects are mutually exclusive, Project X should definitely be selected, and the investment made, provided we have confidence in the data. Put another way, it is impossible to draw NPV profiles that would suggest not accepting Project X. a b TRUE FALSE 6 For f. above only complete discounted payback for project A . Name:_______________________________________________________________________ Problem 6 Last year Baron Enterprises had $350 million of sales, and it had $270 million of fixed assets that were used at 65% of capacity last year. In millions, by how much could Baron's sales increase before it is required to increase its fixed assets? a b c d e $ $ $ $ $ 170.09 179.04 188.46 197.88 207.78 9 Name:_______________________________________________________________________ Problem 7 Which of the following is NOT normally regarded as being a barrier to hostile takeovers? a b c d e Targeted share repurchases. Shareholder rights provisions. Restricted voting rights. Poison pills. Abnormally high executive compensation. 10 Name:_______________________________________________________________________ Problem 8 Companies A and C each reported the same earnings per share (EPS), but Company A's stock trades at a higher price. Which of the following statements is CORRECT? a b c d e Company A trades at a higher P/E ratio. Company A probably has fewer growth opportunities. Company A is probably judged by investors to be riskier. Company A must have a higher market-to-book ratio. Company A must pay a lower dividend. 11 Your name:_________________________________________________________________________ Print clearly Capital Structure decisions involve the ways a firm's assets are financed and are often presented as a percentage of the type of financiing used such as debt, preferred stock, and common equity. As with all financial decisions, a firm should try to set a capital structure that maximizes the stock price, or shareholder value. This is called the optimal capital structure; it is also the debt-equity mix that: Chose one: a b c d maximizes the net income minimizes the weighted average cost of capital (WACC) maximizes the WACC maximizes the dividends Related to capital structure decisions, please review the list below and circle ALL items that are correct. 1 A decrease in debt financing increases the risk of bankruptcy, and managers are encouraged to invest in high risk projects 2 In an event of liquidation, creditors will get their claims over the firms assets before common shareholders. 3 An increase in debt financing increases the taxes that a company owes. 4 An increase in debt financing beyond a cretain point increases the risk of bankruptcy and financial distress. 5 Interest paid on debt is deducted from the firms pretax income, thus reducing the amount of taxes that it owes. 13