Entry Test. Please consider that each point is equivalent to approximately one minute of working time. INDEX

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1 Entry Test In order to treat all students equally, no questions will be answered during the test. In case you do not understand a question, make an assumption. In any case, make sure that your assumption is explicitly stated in your solution. Please make sure you have all pages and your name is marked on each page if you separate the pages. Answers will only be accepted if given on the solution sheets. Please consider that each point is equivalent to approximately one minute of working time. NAME: INDEX 1. Accounting 12 pts 2. Finance & Investments (Beta & NPV) 18 pts 3. Strategy 10 pts 4. Economics 8 pts 5. Business Analytics 12 pts Total 60 pts GOOD LUCK! Page 1 / 11

2 1. Accounting (12 pts) a) The newly founded company Party & Co started operating on October 1, Until October 31, 2016 it recorded the following transactions: October 1 Deposited EUR 50,000 as capital in the company bank account October 2 Prepaid EUR 3,600 rent until the end of the calendar year October 4 Prepaid EUR 6,000 insurance for the next 6 months October 8 Purchased supplies, EUR 3,000, and furniture, EUR 6,000, on account; The furniture will be useful for 5 years and depreciated on a monthly basis. October 17 Performed services for Mr. Smith and received cash EUR 3,500 October 25 Paid for the furniture purchased on October, 8 October 30 Sold products and services worth EUR 4,000 on account October 31 During October, EUR 2,000 of the supplies were used Please prepare the profit and loss statement of Party & Co for the first month of operations. Is the company profitable? (6 pts) +3,500 (service revenue) + 4,000 (products and services sold) -100 (depreciation furniture) - 2,000 (supplies used) -1,000 (insurance) -1,200 (rent) = 3,200 The company is profitable! Page 2 / 11

3 b) What does the cash flow statement look like on October 31, 2016? (6 pts) 50,000 (deposit capital) -6,000 (prepaid insurance) + 3,500 (service provided, cash received) - 6,000 (furniture paid) -3,600 (rent) = 37,900 Page 3 / 11

4 2. Finance & Investments (18 pts) 2.1. Capital Asset Pricing Model - CAPM (12 pts) a) The CAPM is by definition an equilibrium model to quantify the return of individual securities under various assumptions. Briefly elaborate on the assumptions that must be made to determine the expected return of an investment (3 pts) Required assumptions concerning: R f risk free rate of interest β i the sensitivity of the expected excess asset returns to the expected excess market returns E(R m ) the expected return of the market Hence assumptions on the risk free rate of interest and the expected return of the market have to be made and the sensitivity/volatility of the individual security with respect to excess market returns taken under consideration. b) Please compute the expected rate of return for SIMCall AG, by taking the following information under consideration: The average borrowing rate amounts to 1.3%, the beta factor of SIMCall AG is 1.11 and the expected market return and risk free rate of interest amount to 4% and 0.8% respectively. Hint: E[R i ]=R f +β i (E(R m )-R f ) (3 pts) *(4-0.8) = 4.352% Page 4 / 11

5 c) Analyze the development of the beta factors for the German capital market as of , , , focusing on the Construction and the Transport & Logistics industry. Please interpret the development over time and refer also to the underlying business strategies and business models. (6 pts) Beta factor indicates whether the investment/industry is more or less volatile than the market Construction was more volatile than the market in the first two years, less volatile in 2014/15 Transport & Logistics was almost equal to the market in the first two years and became more volatile in In 2015 the beta factor decreased significantly again Example for a reference for the underlying business strategy/business model: T&L can be weather-dependent, dry years for example can hinder river traffic, hence T&L is exposed to a higher risks Any reference for the underlying strategy/business model that is straightforward is accepted Page 5 / 11

6 2.2. Investment Decisions (6 pts) a) SIMCall AG has two different project alternatives. Please compare them using the net present value method. Which alternative should SIMCall AG choose and briefly explain why. The discount rate is 5%. Do not consider any terminal value. (4 pts) i. A project with an initial investment of 1,200, generates revenues of 350 in the first year, 500 in year 2 and 600 in year 3. ii. A project with an initial investment of 1,000, generates revenues of 400 in the first year, 600 in year 2 and 800 in year 3. Additional payments of 200 are required in year 2 and 3. i (350/1,05 )+ (500/1,05^2) + (600/1,05^3) = 105 ii (400/1,05) + (400/1,05^2) + (600/1,05^3) = 262 b) What does the terminal value in a DCF calculation represent? (2 pts) The terminal value represents the value at a future point in time of all future cash flows. Page 6 / 11

7 3. Strategy (10 pts) In business today, it s universally assumed that speed is good that the fleet thrive while the laggards struggle just to survive. This belief is perhaps most strongly expressed in the concept of first-mover advantage. The company that leads the way into a new market, the thinking goes, locks in a competitive advantage. However, recent studies highlight that early movers are considerably less profitable than later entrants. Although pioneers do enjoy several advantages, they also suffer from disadvantages, which eventually overwhelm the gains First-mover advantages (4 pts) Please provide at least two arguments that explain why being first to market can turn into sustainable competitive advantage (first-mover advantage). First-movers should gain cost advantages by moving through the experience curve ahead of competitors, by gaining control over scarce inputs, and by establishing patents or other forms of technology leadership. Also, because of the relatively high switching costs, first-movers should have to spend less on advertising and other marketing efforts First-mover disadvantages (4 pts) Please provide at least two arguments that explain why being first to market can cause difficulties in succeeding in the market (first-mover disadvantage). Followers can learn from the mistakes and successes of their predecessors, reducing their own investment requirements as well as their risks. In addition, followers can frequently adopt new and more efficient processes and technologies, whereas first-movers often remain entrenched in their original ways of doing things. Page 7 / 11

8 3.3. Real life example (2 pts) Please describe in two or three sentences a real life case where a firm failed to succeed as a first-mover. Nokia was the first-mover in the mobile phone business did not manage to defend its position in the smartphone market. Netscape, the first to market an Internet browser, could not prevent the rise of Microsoft s browser, Explorer. GO Corporation was founded in 1987 to create portable computers, an operating system, and software with a pen-based user interface. The system that failed because the inventors were too far ahead of their time. Napster as the first-mover in distributing digital music failed to develop a strategy proposition that was in alignment with record labels, was finally forced to shut down due to copyright infringements. In contrast, Apple s itunes managed to achieve the support of all major music companies. Page 8 / 11

9 4. Economics (8 pts) Larissa and Sebastian want to start a craft beer brewery in their garage. Total costs C(x) are linear and comprise fixed costs for the equipment and variable cost for every cask (x) of beer, and revenues R(x) are assumed to be concave in x. a) The figure below depicts total costs and revenues dependent on the quantity of casks. Indicate the fixed costs, the break-even point, and optimal profitmaximizing quantity. (3 pts) Fixed cost Break-even optimal b) Now, assume that total costs and revenues can be described by the functional forms C(x) = 4, x, and R(x) = 320 x 2 x 2, respectively. Calculate the break-even quantity and the profit-maximizing quantity. (5 pts) Break-even: R(x) = C(x) 320x 2x 2 = x 2x 2 240x = 0 x 2 120x x = 60 ± = 60 ± 1600 = 60 ± 40 There are two quantities where profit is zero, x=20 and x=100. (x=20 is sufficient as answer.) Profit Maximization: R (x) = C (x) 320 4x = 80 4x = 240 x = 60 Producing 60 cask is the optimal, profit-maximizing, solution. Page 9 / 11

10 5. Business Analytics (12 pts) Below you find short descriptions of three companies as well as three income statements and the assets of the corresponding balance sheets. (All items are expressed as percentage of a company s total revenues, that is, all amounts are divided by total revenue for the year Banking operating income is used instead of revenues in case of a bank.) Which column of the financial statement belongs to which company? Link the letter of the company with the column number and provide the main reason for your choice. (Which item(s) on the financial statements are crucial for your decision?) A: Erste Group Bank AG is one of the largest financial services providers in Central and Eastern Europe serving 15.7 million clients in over 2,700 branches in 7 countries. B: Flughafen Wien AG (Vienna Airport) is the fixed-base operator at Vienna International Airport in Schwechat and primarily provides aeronautical services, ground handling and security services. C: Nestlé S.A. is a Swiss transnational food and drink company. It is the largest food company in the world measured by revenues and other metrics in Page 10 / 11

11 Firm # Income statement Total Revenue/Banking Operating Income 100.0% 100.0% 100,0% Cost of goods sold/revenue/other banking operating expenses -50.2% -58.4% -57.8% Depreciation/Amortization -4.2% -20.3% -7.5% Marketing and Administration -23.3% -3.2% -18.2% Research and Development -1.9% -0.1% 0.0% Income Taxes -3.7% -4.6% -5.8% All other items, net -6.1% 1.8% 4.7% Net Income 10.6% 15.2% 15.5% Balance Sheet - Assets Cash and Marketable Securities 6.5% 0.7% 958.3% Inventories 9.2% 0.7% 4.3% Receivables (Current + Noncurrent) 13.8% 8.6% 2,091.3% Other Current Assets 3.6% 14.3% 60.5% Long Term Investments 9.7% 33.5% 14.7% Property, Plant, and Equipment 29.8% 229.0% 38.4% Goodwill and Intangible Assets 58.4% 1.4% 23.4% Other Noncurrent Assets 8.2% 0.4% 5.0% Total Assets 139.2% 288.6% 3,196.0% Number Firm Reason(s) inventory, intangibles 1 C Property (high depreciation), no inventory 2 B Cash & Receivables 3 A Page 11 / 11