Part 1: Concepts. (25 points, 5 each) 1.1). The possibility of conflict of interest between the stockholders and management of the firm is called: a.

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1 Part 1: Concepts. (25 points, 5 each) 1.1). The possibility of conflict of interest between the stockholders and management of the firm is called: a. The shareholders conundrum. b. Corporate breakdown. c. The agency problem. d. Corporate activism. e. Legal liability Answer: C 1.2) Which of the following would most likely be considered the most liquid asset? a. A share of IBM common stock. b. A bond issued by AT&T c. A piece of collectible artwork. d. A lot of commercial real estate. e. A share of Citibank preferred stock. Answer: a 1.3) You are evaluating two annuities. They are identical in every way, expect that one is an ordinary annuity and the other is an annuity due. Which of the following is FALSE? a. The ordinary annuity must have a lower present value than the annuity due. b. The ordinary annuity must have a lower future value than the annuity due. c. The annuity due must have the same present value as the ordinary annuity. d. The two annuities will differ in present value by a factor of (1+r). e. The annuity due and the ordinary annuity will make the same number of payments over time. Answer: C 1.4) Which bond would most likely posses the LEAST degree of interest rate risk? a. 8% coupon rate, 10 years to maturity b. 10% coupon rate, 10 years to maturity c. 12% coupon rate, 10 years to maturity d. 8% coupon rate, 20 years to maturity e. 12% coupon rate, 20 years to maturity answer: C 1.5) The Fisher effect includes which of the following aspects of investment returns? I. Liquidity risk. II. Default risk. III. Inflation risk. II only. III only I and II only II and III only I, II and III. Answer: b

2 No partial grades in part 1

3 Part 2: calculations. (25 points) You are given the following income statement and balance sheet of a firm. ( all numbers are $ in millions) Net Sales 9,625 Cost of goods old 5,225 Depreciation 1,890 Earnings before interest and taxes 2,510 Interest paid 850 Taxable income 1,660 Taxes 581 Net income 1,079 Addition to retained earnings 679 Dividends paid Cash 1, Accounts 1,150 2,863 payable Accounts 2,460 3,975 Notes 2,600 1,628 receivable payable Inventory 1, Total 3,750 4,491 Total 5,320 5,120 Longterm 7,000 7,600 debt Net fixed 19,300 21,720 Common 5,500 5,700 assets stock Retained 8,370 9,049 earnings Total assets 24,620 26,840 Total liabilities 24,620 26,840 For part a,b,c,e,f, use only the data in the income statement and the balance sheet. (4 points)what is the firm s operating cash flow for 2001? OCF=EBIT+Depr-T= =3819 (4 points) What is the firm s net capital spending for 2001? Net Capital spending = Depr+ change of net fixed assets = 1890+( )=4310 (4 points) What is the firm s change in net working capital for 2001? Change in NWC= NWCend-NWCbeg=( )-( )=-941 (3 points) What is the firm s cash flow from assets for 2001?

4 CF from assets = OCF- net cap. Sp. change in NWC= (-941)=450 (5 points) What is the firm s cash flow to creditors for 2001? CF to creditors = Interest net new borrowing = 850-( )=250 (5 points) What is the firm s cash flow to shareholders for 2001? CF to shareholders = Div- net new equity raised = 400-( )=200 For all parts, no points if wrong formula used. for part a,b,c; two points off if the raw data not used. for part e,f; 3 points off if the raw data not used. for all parts; 1 point off with mistake in numbers. 3. (25 points) You wish to buy a new home. The price is $387,500 and you plan to put 20% down. Your lender will lend you the remainder at 9% fixed APR for 30 years, with monthly payments to begin in one month. (ignore taxes, and up-front points and charges) a. (9 points) how much will the monthly payments be? PV=C*(1-1/(1+r)^t)/r with PV=387500*.8=310000, t=360, r=9%/12. Solve for C= No point with wrong formulation; 2 points off with calculation errors; 3 points off with PV, t or r is not correct. b. (8 points) assume you pay off the load over the 30-year period as planned, what will the total cost (principal + interest + down payment) of the house be? Total cost = C* *0.2= points if the principal, interest or down payment is correctly identified. No points for calculating FV. c. (8 points) what will be the outstanding balance of the loan be after ten years assuming you make the first 120 payments exactly on time? This is equivalent to balloon payment. Approach 1: balance = C*(1-1/(1+r)^240)/r = Approach 2: balance = [PV- C*(1-1/(1+r)^120)/r] (1+r)^120 3 points if only [PV- C*(1-1/(1+r)^120)/r] found in approach (25 points) Massey Co. has 10 percent coupon bonds making annual payments with a YTM of 7.01 percent. The current yield on these bonds is 7.80 percent. Assume the face value is $1,000. a. (10 points) how much the bond price is? Price P=C/curr yield = 100/.078 = No points with wrong formula. b. (15 points) How many years do these bonds have left until they mature? P= C*(1-1/(1+r)^t)/r+F/(1+r)^t => P-C/r=(F-C/r)/(1+r)^t => t=log((p-c/r)/(f-c/r))/log(1+r)=16 years

5 no points with wrong formula (5 points with mistakes in formula); 3 points off with correct formula but not solving t. 2 points off if wrong numbers used. E120 Fall 04, Prof Oren Midterm 1 Key PAGE 3 of NUMPAGES 3