MBAA 518 MIDTERM DOWNLOAD Question 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 longlived assets. (True, False, Uncertain and explain your response)
Question 2 Explain intuitively why it is that present values decrease as the discount rate increases.
Question 3 Having risen from virtually nothing in the early 1980s, stocks and stock options comprised roughly half of the average CEO compensation in public US firms in 1995. [Source: The Economist, May 4, 1996, p. 80] While this increase in pay for performance helps to align the interests of managers and shareholders, it also makes managers more focused on the short-term and more risk averse. (True, False, Uncertain and explain your response)
Question 4 10 / 10 pts Assume that all you have available are data for the following ratios and your firm and your industry. Total Asset Turnover = Revenues/Assets Total Margin
= 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
Question 5 When risk averse investors choose portfolios and assets to include in them, volatility is not the way they should measure risk. (True, False, Uncertain and explain your response)
Question 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 80 percent of par. What is the YTM?
Question 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.
Question 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?
Question 9
The returns on QRC stock and an investor’s portfolio over three years are given in the table below. 1.
Based on this data, compute the volatility of the portfolio and briefly describe how to interpret it. 2. Based on this data, calculate the correlation between QRC and the portfolio, and briefly describe what it means. Show your work. 3. Suppose the portfolio represents the portfolio of all wealth. What is QRC’s market beta?
Year QRC Portfolio 1 5.0% 19.0% 2 -3.0% 14.0% 3 13.0% 9.0%
Question 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).