Financiering P 6011P0088/ Finance PE 6011P0109
Final exam
May 29, 2012
This is a closed-book exam.
Non-programmable calculators may be used provided they are noiseless, cordless, and cannot
receive or transmit data remotely.
You are allowed to use a dictionary. There is a formulae page attached to the exam. You have 3
hours for the exam. There are 30 multiple choice questions in total, equally weighted and 2 open
questions that counts for 5 points in total. There is no penalty for choosing the wrong answer. You
must put your name and student number on the two answer sheets; one for the Multiple Choice
(MC) and one for the open questions. On the MC sheet, fill in only one choice (that you think is
the best) for each question. You can only use a pencil to fill in the MC answer form and do not
forget to indicate the version code on the MC answer sheet.
Version code = 1
Please fill this in at the Multiple choice answer sheet under “Versie Code”
Note that on the MC answer sheet, answer A corresponds with 1, B with 2, C with 3 and D
with 4.
Be kindly reminded that you should rely on your own effort; no conversation is allowed during
the exam.
Please sign before you start.
Good Luck!
Q1
If a firm has only capital expenditures of $1,000, net operating income of $2,000, depreciation of
$500 and an increase in borrowing of $600 then
A) Its investment cash flow is larger than its operational cash flow
B) Its operational cash flow is larger than its financing cash flow
C) Its investment cash flow is larger than its financing cash flow
D) Its financing cash flow is larger than its operational cash flow
Answer: B
Operational cash flow = 2000 + 500 = 2500
Investment cash flow = -1000
Financing cash flow = 600
Q2
Consider two securities, A & B. Suppose a third security, C, has the same cash flows as A and B
combined. Given this information about securities A,B, & C, which of the following statements is
incorrect?
A) If the total price of A and B is cheaper than the price of C, then we could make a profit selling
A and B and buying C.
B) Price(C) = Price(A) + Price(B)
C) Because security C is equivalent to the portfolio of A and B, by the law of one price they must
have the same price.
D) The relationship known as value additivity says that the value of a portfolio is equal to the sum
of the values of its parts.
Answer: A
Q3
Which one of the following statements is false?
A) When we compute the return of a security based on the average payoff we expect to receive,
we call it the expected return.
B) The notion that investors prefer to have a safe income rather than a risky one of the same
average amount is call risk aversion.
C) Because investors are risk averse, the risk-free interest rate is not the appropriate rate to use
when converting risky cash flows across time.
D) The more risk averse investors are, the higher the current price of a risky asset will be
compared to a risk-free bond.
Answer: D
Q4
Your bank account pays interest with an EAR of 4.5%. Then the APR quote for this account
based on respectively annual, semi-annual and monthly compounding is closest to respectively:
A) 4.5%;4.45%;4.41%
B) 4.3%;4.27%;4.21%
C) 4.5%;4.43%;4.38%
D) 4.3%;4.45%;4.41%
Answer A:
Using the formula for converting from an EAR to an APR quote
With annual payments k = 1, so APR = 4.5%
With semiannual payments k = 2, so APR = 4.45%
With monthly payments k = 12, so APR = 4.41%
Use the table for the two question(s) below.
The following table summarizes prices of various default-free zero-coupon bonds (expressed as a
percentage of face value):
Q5
The yield to maturity for the three year zero-coupon bond is closest to:
A) 4.0%
B) 4.5%
C) 5.7%
D) 4.2%
Answer D: (100/88.42)^(1/3) -1= 4,19%
Q6
Based upon the information provided in the table above, you can conclude
A) that the yield curve is flat.
B) nothing about the shape of the yield curve.
C) that the yield curve is downward sloping.
D) that the yield curve is upward sloping.
Answer: D
Q7
The future value of $500 paid at the end of each of the next 25 years if the interest rate is 10% per year
is closest to:
A) 44538,52
B) 46538,52
C) 49173,53
D) 51173,53
ANSWER C
PV= (500/0,1)*(1- (1/1.1^25))= 4538,52
FV=4538,52* 1,1^25=49173,53
Q8
Which of the following costs would you consider when making a capital budgeting decision?
A) Sunk cost
B) Opportunity cost
C) Interest expense
D) Fixed overhead cost
Answer: B
Q9
Food For Less (FFL), a grocery store, is considering offering one hour photo developing in their
store. The firm expects that sales from the new one hour machine will be $150,000 per year. FFL
currently offers overnight film processing with annual sales of $100,000. While many of the one
hour photo sales will be to new customers, FFL estimates that 60% of their current overnight
photo customers will switch and use the one hour service. The costs of sales for one hour photo
and overnight film processing is 70% of sales. The level of incremental earnings associated with
introducing the new one hour photo service is closest to:
A) $30,000
B) $90,000
C) $120,000
D) $150,000
Answer A
Incremental sales = $150,000 - (cannibalized sales) = 150000 - 0.60 × 100,000 = $90,000
Costs of sales = 70% of 90,000 = $63,000
Incremental earnings = 90,000 – 63,000 = $27,000
Q 10
You are deciding between two mutually exclusive investment opportunities. Both require the same
initial investment of $10 million. Investment A will generate $2 million per year (starting at the end of
the first year) in perpetuity. Investment B will generate $1.5 million at the end of the first year and its
revenues will grow at 2% per year for every year after that. Which investment has the higher IRR?
Which investment has the higher NPV when the cost of capital is 7%?
A) Project A has the highest IRR. Project B has the highest NPV.
B) Project B has the highest IRR. Project B has the highest NPV.
C) Project B has the highest IRR. Project A has the highest NPV.
D) Project A has the highest IRR. Project A has the highest NPV.
Answer: A
Q 11.
Your firm would like to evaluate a proposed new operating division. You have forecasted cash flows
for this division for the next five years,(cash flows at the end of each year) and have estimated that the
opportunity cost of capital is 12%. You would like to estimate a continuation value. You have made
the following forecasts for the last year of your five-year forecasting horizon (in millions of dollars):
i. You forecast that future free cash flows after year 5 will grow at 2% per year, forever. Estimate the
continuation value in year 5.
ii. You have identified several firms in the same industry as your operating division. The average P/E
ratio for these firms is 30. Estimate the continuation value assuming the P/E ratio for your division in
year 5 will be the same as the average P/E ratio for the comparable firms today.
A) i) $132. ii) $870
B) i) $1122. ii) $1500
C) i) $235. ii) $2500
D) i) $1632. ii) $5700
Answer B
For the next two questions assume zero-coupon yields on default-free securities are as summarized in
the following table:
Q 12
What is the price today of a two-year, default-free security with a face value of $1000 and an annual
coupon rate of 7%? Does this bond trade at a discount, at par, or at a premium?
A) $1050.90; at a premium
B) $1021.81; at a premium
C) $1000; at par
D) $995.63; at a discount
Answer A: Price = 70/1.04+1070/1.043^2 = $1050.90 (so at a premium)
Q 13
Consider a four-year, default-free security with annual coupon payments and a face value of $1000
that is issued at par. What is the coupon rate of this bond?
A) 4.567%
B) 5.145%
C) 4.321%
D) 4.676%
Answer D
Q 14
A firm is expected to pay a $3.50 dividend at the end of this year. If you expect the dividend to grow
by 5% per year forever and VBC's equity cost of capital is 11%, then the value of a share of VBS
stock is closest to:
A) $35.00
B) $55.00
C) $60.00
D) $86.00
Answer C: P = 3.5/(0.11-0.05) = 58.33
Q 15
A firm is expected to generate the following free cash flows over the next five years:
After then, the free cash flows are expected to grow at the industry average of 4% per year. Using the
discounted free cash flow model and a weighted average cost of capital of 14%.
What’s the continuation value at the end of year 5 and what is the enterprise value at date 0?
A) The continuation value at date 5 is 842.4M; the enterprise value at date 0 is 1050.4M.
B) The continuation value at date 5 is 842.4M; the enterprise value at date 0 is 636.37M.
C) The continuation value at date 5 is 860.2M; the enterprise value at date 0 is 636.37M.
D) The continuation value at date 5 is 860.2M; the enterprise value at date 0 is 1050.4M.
The continuation value = V(5) = 81*1,04 / (14%-4%) = 842.4
Enterprise value = V (0) = 42/1.14 + 45/1.14^2 + 65/1.14^3+70/1.14^4+(81+842.4) / 1.14^5 =
636.37M
Q 16
The enterprise value of CCM is equal to $ 396 million. If CCM has $200 million of debt, $ 50
million of excess cash and 8 million shares of stock outstanding, then the share price for CCM is
closest to:
A) $49.50
B) $12.50
C) $30.75
D) $24.50
Answer: C
Equity value = $396 - $200(debt)+ Cash (50) = $246 million / 8 million shares = $30.75
Q 17
Suppose Google has a Beta of 1.7 and Unilever has a Beta of 0.8. The risk-free rate is 3.5% and the
market risk premium is 6.5%. The expected return from a portfolio that consists 70% of Unilever and
30% of Google is closest to:
A) 7.79%
B) 10.5%
C) 12.8%
D) 6.7%
Answer: B. Betaportfolio = 0.3*1.7 + 0.7*0.8 = 1.07
E[Rporfolio] = 3.5 + 1.07*(10-3.5) = 10.455
Q 18
Consider the following statements:
(1) Firms that show returns with high volatility have low Betas, because they have a lot of
idiosyncratic risk.
(2) Stocks with negative Betas are a bad investment because they will always underperform the
market.
A) Both (1) and (2) are correct
B) Only (1) is correct; (2) is false
C) Only (2) is correct; (1) is false
D) Both (1) and (2) are false
Answer: D
Q 19
Consider the following statements:
(1) Higher total risk is always compensated for by a higher return
(2) The beta of a security that has returns independent of the market is -1
A) Both (1) and (2) are correct
B) Only (1) is correct; (2) is false
C) Only (2) is correct; (1) is false
D) Both (1) and (2) are false
Answer: D
Use the table for the two questions below.
Consider the following Price and Dividend data for General Electric Company:
Q 20
Assume that you purchased General Electric Company stock at the closing price on December 31,
2008 and sold it after the dividend had been paid at the closing price on January 26, 2009. Your
dividend yield for this period is closest to:
A) -8.15%
B) 0.75%
C) 0.70%
D) -8.80%
Answer: C
Explanation: C) = div / P0 = .10 / 14.64 = .0068
Q 21
Assume that you purchased General Electric Company stock at the closing price on December 31,
2008 and sold it after the dividend had been paid at the closing price on January 26, 2009. Your
total return rate (yield) for this period is closest to:
A) 0.75%
B) -8.80%
C) 0.70%
D) -8.15%
Answer: D
Explanation: D) = (P1 + D1 - P0) / P0 = (13.35 + .10 - 14.64) / 14.64 = -.08128
Q 22
JRN Enterprises just announced that it plans to cut its dividend one year from now from $2.50 to
$1.50 per share and use the extra funds to expand its operations. Prior to this announcement,
JRN's dividends were expected to grow at 4% per year and JRN's stock was trading at $25.00 per
share. With the new expansion, JRN's dividends are expected to grow at 8% per year indefinitely.
Assuming that JRN's risk is unchanged by the expansion, the value of a share of JRN after the
announcement is closest to:
A) $25.00
B) $15.00
C) $31.25
D) $27.50
Answer: A
Explanation: A) Two steps.
Step #1 solve for rE, rE = Div1 / P0 + g = 2.50 / 25.00 + .04 = .14 or 14%
Step #2 solve for new stock price: P0 = Div1 / (rE - g) = 1.50 / (.14 - .08) = 25.00
Q 23
Which of the following is not a systematic risk?
A) The risk that oil prices rise, increasing production costs
B) The risk that the Federal Reserve raises interest rates
C) The risk that the economy slows, reducing demand for your firm's products
D) The risk that your new product will not receive regulatory approval
Answer: D
Q 24
Which of the following statements is false?
A) Securities that tend to move more than the market have betas higher than 0.
B) Securities whose returns tend to move in tandem with the market on average have a beta of 1.
C) Beta corresponds to the slope of the best fitting line in the plot of the securities excess returns
versus the market excess return.
D) The statistical technique that identifies the bets-fitting line through a set of points is called
linear regression.
Answer: A
Q 25
Consider a five-year lease for a $12,000 bottling machine, with a certain residual market value of
$2,697.70 at the end of the five years. Assume that there is no risk that the lessee will default on the
lease. If the risk-free interest rate is 6% APR with monthly compounding, the lease payment for a fair
market value lease is closest to:
A) 186,38
B) 192,38
C) 225,41
D) 230,86
Answerr B
PV(LEASE PAYMENT)= 12,000 -(2,697.70 /1,005^60)=10,000=L + Lx 1/0,005x (11/(1+0,005)^59= L=192,38
Q 26
Your firm purchases goods from its supplier on terms of 6/9, net 45. The effective annual cost to your
firm if it chooses not to take advantage of the trade discount offered is closest to:
A) 75.87%
B) 82.87%
C) 87.26%
D) 96.87%
Answer: ANSWER C =(100/94)^(365/(45-9)) -1= 0,872637
Q 27
The quarterly working capital levels for ABC corporation are presented in the following table (in $
millions):
Quarter
1
2
3
4
Cash
605
625
175
1,000
Accounts Payable
835
910
1,055 1,145
Accounts Receivable 585
745
1,260 760
Inventory
410
540
725
375
Assume these projections also hold for the long-term. If the firm uses the matching principle, the
amount of long-term financing it needs to finance its working capital requirements is closest to:
A) around $770 million
B) around $1,100 million
C) around $1,275 million
D) around $2,435 million
Answer: A
Quarter
1
2
3
4
Working capital 765 1,000 1,105 990
Long-term financing is required for the permanent working capital which equals the minimum level of
working capital. This occurs at quarter 1 in the amount of $765 million.
Q 28
Consider the following statements
I: By increasing the accounts payable days the firm decreases its cash cycle.
II: If net working capital levels can be reduced without negative side-effects this reduces the value of
the firm.
A) Both statements are false
B) Statement I is true, statement II is false
C) Statement I is false, statement II is true
D) Both statements are true
Answer: B (if NWC is reduced this increases firm value)
Q 29
Which of the following statements is false?
A) An aggressive policy would involve financing even some of the plant, property, and equipment
with short-term sources of funds.
B) According to the matching principle in finance, we should recognize expenses in the same period
when the related revenues are recognized.
C) Operational lease is viewed as a rental for accounting purposes
D) Leasing is a form of financing. Therefore, we should compare leasing to other financing options
(and not to buying).
ANSWER B
Q 30
A short-term bank loan that is often used until a firm can arrange for long-term financing is called
A) a committed line of credit.
B) a short-term mortgage loan.
C) a bridge loan.
D) a single, end-of-period-payment loan.
Answer: C
Open questions (use separate Answer sheet!):
Question 1 (2.5 points)
Between May 7th and May 14th , after the outcome of the elections where parties that rejected the
conditions of the bailout got the majority in Greece, the Yield to Maturity on a ten-year Greek
Government bond increased significantly.
a. Give two likely explanations for the development in the yield to maturity of this bond over
this time period. Relate in your answer to the determinants of bond prices. Do not use
more than five lines.
b. Is the yield to maturity in this specific case equal to the expected rate of return of the
bondholders? Motivate your answer in no more than two lines
Answer a: Investors estimate a higher default probability and thus only willing to buy the bond at
lower prices (and thus higher implied YTM). At the same time, investors flight to other bonds
issued by other Euro governments (flight to quality), which pushes down the prices even further
(and at the same time increases the Yield to maturity) of Greek government bonds. (1.5 point)
Answer b: No in this case the yield to maturity is higher than the expected rate of return; the yield
to maturity is equal to the expected rate of return when all promised payments will be made. (1
point)
Question 2 (2.5 points)
A firm has assets that generate cash flows that increase at the same rate as inflation (i.e., at 3% per
year). You may assume that this firm lasts forever. The expected cash flow one year from now is
equal to €15,000. The firm’s opportunity cost of capital is 12%.
a. What is the firm’s real discount rate?
b. Compute firm value by first using nominal (where the effect of inflation is included) and
subsequently using real cash flows (where the effect of inflation is left out). When should
they yield the same firm value?
Answers:
a. Real discount rate1,12/1,03=1,0874, thus: 8,74% (1 point)
b. Value in nominal terms: V = 15000/0,12-0,03 = 166666,67, value in real terms
15000/1,03/0,0874=166666,67. Will always yield the same value. (1.5 point)