MBAExam.xlsx

Inst.

Exam Instructions
You have 3 hours to complete this exam
Make sure you save your work often so you don't lose all of your work if Excel crashes.
Clearly type all of your work. You will be given partial credit for setting up the problem. Work on each problem towards the answer, but remember that not only final calculations are graded but all your work.
You may use a calculator but you must provide all solutions in excel sheet.
The exam is governed by the honor system any content sharing will result in an automatic fail on the exam
Last tab will not be graded. Use it if you want to make some side calculations, etc.
Problem:P1P2P3P4P5P6P7P8TOTAL:
[20 points][10 points][15 points][10 points][15 points][10 points][8 points][12 points]0
Points:000000000

P1- Short Qs

Answer the following 10 questions in the provided yellow space below each question.
1Depreciation is an accounting expense, but does not represent a cash flow. Therefore it is unimportant for capital budgeting decisions. True or False. Explain.
[2 points]
2What is the difference between common and idiosyncratic risk? Give an example for each type of risk.
[2 points]
3What does diversification mean and how is it related to the correlation between stocks?
[2 points]
4Do companies with high volatilities necessarily have higher expected returns? Explain
[2 points]
5What is a “yield curve”? Is it usually upward, downward sloping or flat?
[2 points]
6What does it mean if a bond trades at a premium?
[2 points]
7 It is better to give managers earnings based compensation because option based compensation encourages them to manipulate the stock price. True or False. Explain.
[2 points]
8You are evaluating an investment in Whole Foods stock. Since you plan to hold the stock for only one year, you do not have to worry about Whole Foods’ long term prospects. True or False. Explain.
[2 points]
9How is the risk of equity affected as leverage increases?
[2 points]
10Why is debt “cheaper” (lower expected return) than equity? Your answer should not rely on taxes!!
[2 points]
Total Points
0

P2- TVM

Problem 2Loans: You have decided to refinance your mortgage. You plan to borrow whatever is outstanding on your current mortgage. The current monthly payment is $2,000 and you have made every payment on time. The original term of the mortgage was 15 years, and the mortgage is exactly three years old. You have just made your monthly payment. The mortgage interest rate is 11% (APR). What is the outstanding balance on your mortgage?
[10 points]
balance

P3- Rates

Problem 3
[15 points]I. Suppose the interest rate is 11% APR with monthly compounding.
What is effective annual rate?
EAR
What is the present value of an annuity that pays $195 every month for five years? (Think about which discount rate is the proper one.)
PV
II. If the rate of inflation is 2.5 %​, what nominal interest rate is necessary for you to earn a 3% real interest rate on your​ investment?
Nominal rate should be:
FOR MULTIPLE CHOICE QUESTIONS, MARK THE CORRECT ANSWER IN BOLD OR WITH A COLOUR, SO THAT YOUR ANSWER IS CLEAR.
III. Suppose that today a six-year spot rate is 7% per year and a forward rate starting in five years is 7.5%. What is the five-year spot rate?
a. 7%
b. 7.78%
c. 7.5%
d. 6.9%
e. 4.535%
IV. Nominal interest rate is 5%. Nominal cash flow at t=1 is $50. Inflation is 2%. What is the PV of the cash flow?
a. $50 – it is exactly the same value as at t=1
b. $52.50 – we calculate PV by compounding future cash flows
c. $48.57 – first we need to calculate the real interest rate, then we use it to discount future cash flows
d. $47.62 – we use nominal rate to discount future cash flows because they are expressed also in nominal terms
e. $49.02 – we use inflation as a discunt rate

P4- Cap Bud

Problem 4The following assumptions about a company are made. The company:
[10 points]1. Produces $27,000 per year in revenues from year t=1 to year t=3.
2. Has a constant COGS/Sales of 60%, and a constant selling, general &administrative expense ratio (SG&A/sales) of 10%.
3. Buys a new car for $15,000 at t=0 treated as a capital expenditure.
4. Uses straight-line depreciation for the car purchase. The tax-life of a car is 3 years, and the salvage value is 0 for depreciation purposes.
5. Sells the car at the end of year t=2 for $11,000.
6. Faces a tax rate of 35%.
7. Has constant net working capital needs of $2,200, starting year t=1, recovered in year t=3.
I. Calculate the net income of the company in each of the three years (t= 1 to t=3) .
0123
Sales
CoGS
SG&A
Depr
EBIT000
tax000
Unlevered NI000
II. Calculate the free cash flows in each of the four years (including year 0).
0123
Unlevered NI
Capex
Depr
Change in NWC
FCF
III.What is the present value of the company at a risk adjusted discount rate of 10%?
NPV=
If we apply a discount rate of 20%, what is going to happen to the project's NPV. Answer, and explain (provide explanation of your thinking in max 2 sentences)

P5- Bonds

Problem 5I. A government bond issued by Portugal with a 3.6% coupon rate has a remaining time to maturity of 2 years. It has just made a coupon payment.
[15 points]Coupon payments are made annually. The face value is €100
a) Draw a timeline of the (promised) cash flows from now (time 0) until maturity (time 2).
[Below the line, enter the promised cash flows.]
Time012
CF
b)The current price is €80. Calculate the yield to maturity expressed as an APR with annual compounding
YTM/APR
FOR MULTIPLE CHOICE QUESTIONS, MARK THE CORRECT ANSWER IN BOLD OR WITH A COLOUR, SO THAT YOUR ANSWER IS CLEAR.
II. Explain why the yield of a bond that trades at a discount exceeds the​ bond's coupon rate.
a) Because the value of the bond is​ discounted, the return on the bond is reduced and the yield exceeds the coupon.
b) The​ bond's coupon yield is irrelevant. It trades at a discount because investors avoid these bonds.
c) The bond can be purchased for a​ discount, which gives it an​ "extra return";​ hence, the yield exceeds the coupon.
d) The bond is trading at a discount because investors​ don't like the bond.
III. Suppose a​ seven-year, $1,000 bond with a 6.57 % coupon rate and semiannual coupons is trading with a yield to maturity of 4.18%.
Is this bond currently trading at a​ discount, at​ par, or at a​ premuim? Explain.
The bond is currently trading…
a) … at a premium because the coupon rate is greater than the yield to maturity
b) … at par because the coupon rate is equal to the yield to maturity
c) … at a discount because the coupon rate is greater than the yield to maturity
d) … at a premium because the yield to maturity is greater than the coupon rate.
Bond price1000
Cupon rate6.57%
Maturity4.18%

P6- Comps

Problem 6
[10 points]A PE firm is considering buying FootWorks company, which is a sport shoes producer in the US. The seller, who is not very inclined to sell but has said he might do so for $1,300MM.
PE's junior analyst collected information on some companies listed in the stock market to make a comparison. Current summary data is given in the table.
Market DataUnder ArmourAdidasReebokFootlockerPrada
EV/EBITDA10.312.711.39.99.1
I. Which comps should the PE firm use for the most precise valuation? Why?
II. What would be the valuation using EV/EBITDA, knowing that FootWorks' EBITDA for 2017 was €220MM, and debt for 2017 was €1,120MM, and cash was €40MM ?
mkt value of equity
III. Should the PE firm buy Footworks? Explain:

P7- Risk & CAPM

Problem 7FOR MULTIPLE CHOICE QUESTIONS, MARK THE CORRECT ANSWER IN BOLD OR WITH A COLOUR, SO THAT YOUR ANSWER IS CLEAR.
[8 points]
I. Explain why the risk premium of a stock does not depend on its diversifiable risk.
a) Investors can remove diversifiable risk from their portfolio by diversifying. They therefore do not demand a risk premium for it.
b) Investors​ don't care about diversifiable risk and so​ don't hold any.
c) Although investors must hold diversifiable​ risk, they​ don't care about​ it, so there is no risk premium.
d) Investors care about diversifiable​ risk, but hedge their positions so they​ don't demand a risk premium.
II. Suppose the market portfolio has an expected return of 12% and volatility of 20%, while​ Microsoft's stock has a volatility of 30%.
Given its higher​ volatility, should we expect Microsoft to have an equity cost of capital that is higher than 12%?
a) Yes, although some of​ Microsoft's risk is​ diversifiable, enough is systematic so that it should have a higher return than the market.
​b) No, volatility includes diversifiable​ risk, and so cannot be used to assess the equity cost of capital.
​c) Yes, higher volatility implies higher​ risk, so Microsoft is riskier than the market and should therefore have a higher return.
d) There is not enough information in this problem to answer this question definitively.

P8- Firm Valuation

Problem 8You are a consultant hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product is $9 million. The product will generate (before tax) free cash flow of $550,000 the first year, and this free cash flow is expected to grow at a rate of 5% per year forever. Markum has an equity cost of capital of 10.3%, a debt cost of capital of 6%, and a tax rate of 55%. Markum maintains a constant debt-equity ratio: it is financed in 50% with debt and in 50% with equity.
[12 points]
I.      What is the NPV of the new product line (including any tax shields from leverage)?
NPV (in milion)

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