WILFRID LAURIER UNIVERSITY WATERLOO, ONTARIO Sesson: Fall 2013 Fnal Exam Course No.: BU383 Ttle: Fnancal Management I Professor(s): W.J. McNally, P. Frere, B. Evertt Number of pages: 28 Length of examnaton: 2.5 hours Examnaton ads allowed: Calculator (no keyboard), Dctonary (f foregn student) The doors of the examnaton room wll be opened approxmately 10 mnutes before the start of the examnaton. Canddates wll be permtted to enter the examnaton room quetly up to one half hour after the scheduled start of the exam. Canddates arrvng late wll not be allowed any extra tme. Canddates must not begn the examnaton or attempt to read the examnaton questons untl nstructed to do so. **THE UNIVERSITY IS NOT RESPONSIBLE FOR THE LOSS OF VALUABLES BROUGHT INTO THE EXAM LOCATIONS OR CLASSROOMS WHERE EXAMS ARE BEING WRITTEN. Canddates once havng entered may not leave the exam room before completng and submttng the exam unless accompaned by a Proctor. Canddates are not permtted to submt ther examnaton and leave the examnaton room untl 1 hour after the examnaton has begun, and n no case before ther attendance has been taken. In no case may a canddate leave the room temporarly, for any reason, untl 30 mnutes after the start of the examnaton. In order that remanng canddates are not dsrupted, canddates must reman seated and may not leave the examnaton room durng the last 15 mnutes of the examnaton sesson. At the close of the examnaton perod, canddates must stop wrtng mmedately. The Presdng Offcer may seze the papers of canddates who fal to observe ths requrement and a penalty may be mposed at the dscreton of the nstructor. Canddates must submt all ther work, accordng to the nstructons of the Presdng Offcer, ncludng all materals and a copy of the examnaton paper wth ther name and student ID number wrtten on t. Unused examnaton booklets may not be taken from the examnaton room. A canddate who leaves before the examnaton s over must hand n all completed and attempted work, notes made durng the exam, and a copy of the examnaton paper wth ther name and student ID number on t. Talk or any form of communcaton between canddates s absolutely forbdden. No nformaton of any knd s to be wrtten on the queston paper or on scrap paper for the purpose of assstng other canddates. Responses to questons must not be done n an exaggerated way or n a manner that wll nvolve transmsson of nformaton to others. Canddates must reman seated durng the examnaton perod. A canddate needng to speak to the proctor (e.g. to ask for addtonal supples or to request permsson to leave the examnaton room for any reason) should so ndcate by rasng hs or her hand. Questons concernng possble errors, ambgutes or omssons n the examnaton paper must be drected to the proctor who wll nvestgate them through the proper channels. The proctor s not permtted to answer questons other than those concernng the examnaton paper. Canddates must not use or attempt to use any mproper source of nformaton. No canddates for an examnaton may brng nto the examnaton room any books, notes or other materal contanng nformaton pertanng to the examnaton unless the examner has gven nstructons that such materal wll be allowed and ths nstructon s specfed on the examnaton paper. Any tem brought nto the examnaton room s subject to nspecton. No brefcases, backpacks or other bags and carrers may be brought to the desk ste where the canddate s wrtng the examnaton. These bags should be left outsde the examnaton room. If books, notes etc. cannot be left outsde the examnaton room, they must be put at the front of the examnaton room n a place desgnated by the proctor before a canddate takes a seat. Canddates are advsed not to brng valuables to the examnaton room. No electronc or communcaton devces wll be allowed n the examnaton room, ncludng cell phones, smart phones, pagers, etc. Cell phones wll be taken away f found and an Irregularty notce wll be fled wth the Integrty Offce. Calculators are not allowed unless specfed by the nstructor and ndcated on the examnaton paper. Only non-programmable models authorzed by the nstructor wll be allowed. It s the canddate's responsblty to ascertan whether the use of calculators s permtted, and, f t s, whether any restrctons are mposed on the types of calculators that may be brought to the examnaton. Translaton dctonares (e.g. Englsh-French) or other dctonares, (thesaurus, defntons, techncal) are not allowed unless specfed by the nstructor and ndcated on the examnaton paper. Electronc dctonares are never allowed. Except for bottled water, no food or drnk s allowed n the examnaton room. Canddates wth health problems that warrant relaxaton of ths regulaton should provde medcal documentaton to the presdng offcer pror to the begnnng of the examnaton. Such students should restrct themselves to those tems and packagng that wll least dstract other examnees.
Canddates are expected to wrte ther examnatons n an honest and straghtforward manner. Where there are reasonable grounds for belevng a volaton of exam protocol has occurred, the canddate wll be subject to the dscplnary procedures and sanctons accordng to the Unversty Calendar. Only currently regstered students wll be permtted to wrte the fnal exam. Examnatons conducted at Wlfrd Laurer Unversty wll be bound by WLU regulatons, regardless of where the canddate s regstered. Approved by Senate ( Oct 27/2003) Updated Sept 2012 2
ADDITIONAL INSTRUCTIONS BEFORE THE EXAM 1. Complete the personal dentfcaton porton of the multple choce answer card. Shade n the boxes below your student number on BOTH sdes of the Scantron card. 2. Your student number should be left-algned n the feld. 3. UofW students should create a 9-dgt number by addng a 0 at the END of ther UofW student number. 4. Make sure that you shade the letter A Under Test Form. DURING THE EXAM 5. Count the pages to be certan that there are no mssng pages. Ask a proctor for a new exam paper f pages are mssng. 6. No questons concernng possble errors or ambgutes wll be answered by the proctors or the Professors durng the exam. 7. If, for any reason, you thnk that the correct answer s mssng from the multple choces, then select the best avalable answer-- that s, the multple choce whch has the closest value to the correct answer. 8. Students are NOT allowed to speak to one another durng the exam or exam collecton perod. 9. You must sgn the dentfcaton sheet before leavng. 10. You are not allowed to use your own paper for rough work. Ask a proctor for scrap paper. 11. Closed book. No notes or books are permtted. 12. You are to stop wrtng mmedately upon beng told that the exam s over. AFTER THE EXAM 13. Students may NOT leave the exam hall n the last 15 mnutes of the exam. 14. Both the Scantron card and the exam MUST be handed n. 15. At the end of the exam, the proctors wll collect the Scantron cards. Please reman seated quetly. When dsmssed, place the exam n the contaners provded at the front of the exam room. # Questons Marks Approx. Tme Secton 1 Instructons 10 1 Secton 2 Pro Forma 4 4 Secton 3 Rato Analyss 4 4 Secton 4 Free Cash Flow 3 2 Secton 5 Short-Term Fnancal 1 2 Secton 6 Cash Budget 3 3 Secton 7 Stock Valuaton 6 4 Secton 8 Portfolo Theory 6 7 Secton 9 Futures and Optons 8 6 Secton 10 TVM & Fnancng 3 4 Secton 11 Bonds 5 4 TOTAL 53 44 150 mnutes 3
1. Exam Instructons (10 Questons worth 0.10 marks each) 1 Whch letter should you shade under Test Form on your Scantron card? A) A 2 Should your shaded student number be left-algned or rght-algned on the Scantron card? A) Left-algned 3 True or False? The Scantron cards are the only tem that wll be marked and wll be collected by the proctor at the end of the exam. A) True 4 True or False? I should complete the Scantron card usng a pencl. A) True 5 True or False? If I am confused about an ambguous exam queston, then I can ask the Professor a queston. A) False. 6 If the correct answer appears to be mssng from the multple choces then I should: A) Select the best avalable answer. 7 If I fnsh my exam n the last 15 mnutes of the exam perod, then: A) I should wat quetly n my seat untl I am dsmssed by the proctors. 8 Can students talk durng the exam or exam collecton perod? A) No 9 Can students contnue to wrte after the end of the exam? (For example, to complete the Scantron card.) A) No. Students who contnue wrtng wll have ther ncomplete Scantron cards collected by the Proctor and wll be marked on the bass of the ncomplete card. 10 If you send an emal to your Professor after recevng your fnal grade askng for extra marks, should you expect an answer? A) No, t wll be deleted. 4
2. Pro Forma In some questons, the correct answer may not be amongst the multple choces. For those questons, select the best avalable answer. Selected Fnancal Informaton Cadbury ( mllons) Year 7 Year 8 PP&E 1,904 1,761 Deprecaton 196 CAPEX 53 11 Cadbury plc s a global confectonary company. Cadbury s forecastng ts fnancal statements for Year 9. Selected fnancal nformaton for Years 7 and 8 s provded n the table. In Year 9 Cadbury s plannng to nvest 300 mllon n CAPEX. The average deprecaton rate s 10%. What s the forecasted deprecaton expense n Year 9? A) 176 B) * 206 C) 286 D) 300 E) 322 Short Term Debt Long Term Debt Interest Expense Selected Fnancal Informaton Cadbury ( mllons) Year 7 Year 8 2,562 1,189 2,551 1,973 12 Cadbury plc s a global confectonary company. Cadbury s forecastng ts fnancal statements for Year 9. Selected fnancal nformaton for Years 7 and 8 s provded n the table. What s the nterest expense for Year 9? (Assume that Cadbury s average cost of debt s 3%.) A) 36 B) 59 C) 63 D) * 95 E) 110 5 153
Selected Fnancal Informaton Scrumptous Inc. ( mllons) Year 1 Year 2 Property, Plant & Equp. 1,904 Deprecaton 212 196 CAPEX 45 53 13 Scrumptous Confectons plc s a Unted Kngdom confectonary company. Scrumptous Inc. s forecastng ts fnancal statements for Year 2. Selected fnancal nformaton for Years 1 and 2 s provded n the table. In Year 2 Scrumptous s plannng to nvest 53 mllon n CAPEX and forecasted deprecaton s 196 mllon. What s Property, Plant and Equpment (Net) n Year 2? A) 831 B) 861 C) 1,411 D) 1,441 E) * 1,761 6
Selected Fnancal Informaton Cadbury plc Year 4 ( mllons) Year 4 Forecast Revenue 4,022 5,802 Net Income 393 528 TOTAL ASSETS 8,895 10,275 LIABILITIES AND STOCKHOLDERS' EQUITY Short Term Debt 1,189 1,189 Accounts payable 1,551 Total Current Labltes 2,740 Long Term Debt 1,973 Other Labltes 648 648 Total Labltes 5,361 Shareholders' Equty Common Stock 1,036 1,036 Retaned Earnngs 2,498 Total Shareholders' Equty 3,534 Total Labltes & Shareholders' Equty 8,895 14 Cadbury plc s a global confectonary company. Cadbury s forecastng ts fnancal statements for Year 5. Selected fnancal nformaton for Year 4 s provded n the table. What s the long term debt, the plug varable, amount for the forecasted year? To forecast accounts payable use the percentage of sales method based on Year 4 fgures. Assume that no dvdends are pad n Year 5. A) 1,259 B) 1,397 C) 1,530 D) 2,027 E) * 2,138 7
3. RATIO ANALYSIS In some questons, the correct answer may not be amongst the multple choces. For those questons, select the best avalable answer. SelectedFnancalInformatonforAppleInc. 2013 2011 Sales 170,910 108,249 CostofGoodsSold 106,606 64,431 R&D 4,475 2,429 SG&A 10,830 7,599 NetIncome 37,037 25,922 Inventory 1,764 776 AccountsRecevable 24,094 13,731 FxedAssets 16,597 7,777 TotalAssets 207,000 116,371 AccountsPayable 36,223 23,879 Owner'sEquty 123,549 76,615 SelectedRatosforAppleInc. 2013 2011 ROE 0.34 1+D/E* 1.68 ROA 0.22 TAT 0.83 PM 0.24 DaysInventory 4 DaysRecevables 51 OperatngCycle DaysPayables 124 135 Cashcycle GrossMargn 0.40 R&D/Sales 0.03 SG&A/Sales 0.07 Sales/NetFxed 13.9 *InDuPontsystem,D=TotalLabltes 8
15 What s the trend (from 2011 to 2013) n proftablty to the owners? A) Increasng B) *Decreasng C) No Change 16 What varable(s) are drvng the trend n owners proftablty? I. Leverage (1+D/E) II. Net Proft Margn III. Total Asset Turnover A. I only B. II only C. III only D. I and II E. *II and III 17 Whch assets are beng managed worse over tme? A) Inventory B) Accounts Recevable C) Net Fxed Assets D) *All of the Above 18 Whch explanaton best explans the change n gross margn from 2011 to 2013? A) SG&A expenses have ncreased B) R&D expenses have ncreased C) *In Sept. 2012, after the launch of the Phone5, Apple dropped the prce of the Phone4 to mantan ts market lead n the U.S. D) Apple sold more laptop computers n 2012, and laptops have hgher margns than smartphones and tablets. 9
4. Free Cash Flow In some questons, the correct answer may not be amongst the multple choces. For those questons, select the best avalable answer. SelectedFnancalInformatonforBlackberry 2013 2012 Sales 11,073 18423 CostofGoodsSold 7639 11856 R&D 1509 1556 SG&A 2111 2600 Deprecaton 714 567 TaxRate* 48.92% 22.86% NetIncome 646 1164 Cash 2654 1774 Inventory 603 1027 AccountsRecevable 2353 3062 CurrentAssets 7101 7071 FxedAssets 2395 2733 TotalAssets 13165 13731 ShorttermDebt 0 0 AccountsPayable 1064 744 CurrentLabltes 3448 3389 Owner'sEquty 9460 10100 *TaxRatecanbeusedastaxrefundrate 19 What was operatng cash flow for Blackberry for the year ended Feb 2013? A) -$402.92 B) -$809.01 C) *-$1,173.72 D) -$1,614.00 E) $1,040.00 20 What was nvestment n net workng captal for Blackberry for the year ended Feb 2013? A) *$999 B) $3,653 C) -$510 D) -$2,621 E) $900 10
21 What was CAPEX for Blackberry for the year ended Feb 2013? A) $1,681 B) -$338 C) $2,019 D) $1,000 E) *$376 11
5. Short-term Fnancal Management In some questons, the correct answer may not be amongst the multple choces. For those questons, select the best avalable answer. 22 Whch company s lkely to have the shortest cash converson cycle? A) Loblaws Grocery Stores B) Hudson s Bay Department Stores C) Delotte and Touche Accountants D) Mattel Inc. (toy company) E) *Ar Canada 12
6. Cash Budget In some questons, the correct answer may not be amongst the multple choces. For those questons, select the best avalable answer. The Schwety Confectonery Co. s a UK based manufacturer of chocolate and non-chocolate confectonery, best known for ts Schwety Mnt Balls. Recent sales (Nov Dec) and a sales forecast are provded n the top row of the table. Schwety collects 20% of sales n the month of the sale, 40% n the followng month, and 40% two months later. Schwety purchases ts chocolate and other raw materals one month pror to the expected sales. Its cost of goods sold s 45% of sales. Schwety s pays ts supplers one month after the purchase of raw materals. General and admnstratve expenses are $3.5M per month. Taxes are $2M per month. The company wll have a cash balance of $6M at the start of January. Construct a cash budget for Schwety for the months of January, February, and March and answer the questons that follow. Schwety Confectonery Co. Sales Forecast and Cash Budget ($000,000s) Nov Dec Jan Feb March Aprl Sales Forecast $13.2 $13.6 $12.8 $11.3 $11.6 $10.1 Cash Sales Collectons from last month Collectons from 2 months ago - Total Cash Inflows Purchases From Supplers - Payments to Supplers General & Admn Expenses 3.50 3.50 3.50 Taxes 2.00 2.00 2.00 Total dsbursements Net Cash Flow Begnnng cash balance $6.00 Plus: Net Cash Flows Endng Cash balance $6.00 13
23 What are total cash nflows n January? A) $11.30 B) $11.72 C) $12.44 D) $12.80 E) *$13.28 24 What are total cash dsbursements n February? A) $7.09 B) $8.59 C) $9.75 D) *$10.59 E) $11.25 25 What s the cash balance at the end of March? A) $10.90 B) *$11.50 C) $12.70 D) $13.00 E) $13.70 14
7. Stock Valuaton In some questons, the correct answer may not be amongst the multple choces. For those questons, select the best avalable answer. 26 Dscraft Inc. s expected to pay an annual dvdend of $1 n one year. (Dscraft pays ts dvdends annually.) The dvdend s expected to grow at a rate of 3% n perpetuty. Investors requre a 12% return on the stock. Estmate the market prce of the shares of Dscraft n one year's tme just before the next dvdend s pad. A) $10.44 B) $11.44 C) $11.94 D) *$12.44 E) $13.44 27 Google shares are tradng for $415. Google doesn t currently pay a dvdend. Google s EPS ths year was $6.85 per share. Most analysts expect that Google wll start payng dvdends n three year s tme and they expect that the frst annual dvdend wll be $8 per share. If the dvdends subsequently ncrease at a constant percentage rate n perpetuty, then what growth rate s currently prced nto the stock? Google nvestors requre a 12% rate of return. A) *10.5% B) 10.75% C) 11% D) 11.25% E) 11.5% 28 Four Seasons Inc. s expected to pay a dvdend of $0.25 per share next year from expected earnngs of $10 per share. Dvdends and earnngs are expected to grow at a constant rate n perpetuty of 3.5%. Investors n Four Seasons expect a 12% rate of return. What s the P/E rato for Four Seasons (based on forward (next year s) earnngs)? A) *0.29 B) 2.94 C) 3.25 D) 11.47 E) Not Enough Informaton 15
29 Motor Homes Inc. (MHI) s presently n a stage of abnormally hgh growth because of a surge n the demand for motor homes. The company expects earnngs and dvdends to grow at a rate of 20% for the next 4 years, after whch tme there wll be no growth (g=0) n earnngs and dvdends. The company's last dvdend was $1.50. MHI has a beta of 1.6, the return on the market s currently 12.75%, and the rsk-free rate s 4%. What should be the current prce per share of common stock? A) *$15.17 B) $17.28 C) $22.21 D) $19.10 E) $16.20 30 Yesterday, Macallan Corp pad out $1.7308B n dvdends and repurchased $4.3983B worth of shares. Macallan has 1.12B shares outstandng and pays all of ts dvdends and makes ts repurchases at the end of each year. Because of the slow-down n the economy, analysts expect that next year Macallan wll hold dvdend payments constant at yesterday s level and cancel ts stock repurchase program. Two years from now, analysts forecast that total payouts wll return to the level of yesterday. After that date analysts expect that total payouts wll grow at an annual rate of 2% n perpetuty. Assume that nvestors requre a 10% rate of return on Macallan s shares. Whch of the followng s closest to the Total Payout Model estmate of the stock prce today? A) $58 B) $60 C) $62 D) *$64 E) $66 16
31 [Warnng: Ths queston s qute dffcult.] Today s Jan 1. AgrCorn has 300 mllon shares outstandng and they are tradng at $6.44. Last week, AgrCorn Inc. pad out $50 mllon n dvdends and repurchased $100 mllon worth of shares. Analysts expect AgrCorn s payouts to grow at 3% per annum n perpetuty. The next payouts wll occur n approxmately one year. The dvdends wll be pad on Dec 29 and the repurchase wll occur on Dec 31. How many shares wll AgrCorn repurchase on Dec 31, assumng that t pays the far prce for those shares? Investors requre a return of 11%. Dvdends ($000,000) Repurchases ($000,000) Total Payouts Yesterday $50 $100 $150 In 1 Year $51.5 $103 $154.5 In 2 Years $53.045 $106.09 $159.135 A) 11.994 mllon B) 12.769 mllon C) 13.994 mllon D) *14.769 mllon E) 15.994 mllon 17
8. Portfolo Theory In some questons, the correct answer may not be amongst the multple choces. For those questons, select the best avalable answer. 32 Horzons BetaSML Funds offer a group of mutual funds that are desgned to put nvestors at varous ponts along the Securty Market Lne. One of Horzons products, called the Market Bear Plus Fund, s desgned to lose approxmately twce as much, on a percentage bass, as any ncrease n the ndex when the ndex rses over a gven perod. The Bear Plus fund s constructed by shortng market ndex unts (exchange traded funds whch mmc the market ndex) and nvestng the proceeds n rsk free securtes. Refer to the SML, drawn below. There are four regons ndcated from left to rght, regon 1, 2, 3 and 4. In whch regon s the Bear Plus fund postonng nvestors? A) 1 B) 2 C) 3 D) 4 E) *None of the above. Securty Market Lne Expected Return 20% 15% 10% 5% 0% 1 2 3 4 0.0 0.5 1.0 1.5 2.0 2.5 Beta 18
33 Horzons BetaSML Funds offer a group of mutual funds that are desgned to put nvestors at varous ponts along the Securty Market Lne. One of Horzons products, called the Market Bull Plus Fund, s desgned to provde a return that s twce the market ndex s return. The Bull Plus fund s constructed by borrowng money and then buyng market ndex unts (exchange traded funds whch mmc the market ndex). If the cost of borrowng s 4.5% and the expected return on the market s 10%, then what are the portfolo weghts for the Horzons Bull Plus fund? (w = the portfolo weght on the market ndex. The weghts n the multple choces are NOT n percentage form, so w=1 s the same as w=100%.) A) w =1 B) w=1.82 C) w = 2 D) w=2.5 E) *w=2.82 34 Dellah Jones has a portfolo of stocks A and B. See the table below for detals. What s the correlaton between the two stocks? A B Portfolo Weghts 40% 60% Expected Return 15% 20% Standard Devaton 20% 22% 11.5169% A) 1.0 B) * 0.5 C) 0 D) 0.5 E) 1.0 35 You want to buy $20,000 worth of shares n Tootse Roll Industres Inc. on margn, but you only have $10,000 of your own money to nvest. The remanng $10,000 s borrowed by ssung the rsk free asset (T-Blls). Tootse Roll has a beta of 0.75. What s the beta of the portfolo? A) 0.75 B) 1.25 C) *1.50 D) 1.75 E) 2.00 19
The table below shows hstorcal data for the Turtle Income fund, the Hare Growth fund, the S&P 500 (Market), and U.S T-Blls. Average Return Turtle Hare Market T-Blls 10% 13% 12% 5% Std Dev. 8.5% 17.9% 11.9% 0% Beta 0.7143 1.4 1 0 36 Draw a graph wth average returns on the Y-axs and Beta on the X-axs. Plot the rsk-free return (T-Blls) and the rsk/return combnaton of the market. Draw n the SML. Plot the two funds on the graph. How do the two funds compare to the SML? A) *Turtle plots on the lne, Hare plots below B) Hare plots on the lne, Turtle plots below C) Both plot below the lne D) Both plot above the lne E) None of the above 37 Bg Brother Holdng Co. just pad (yesterday) a dvdend of $1. The dvdend s pad annually and s expected to grow at a rate of 5% n perpetuty. The current market prce of ths stock s $10. Bg Brother s beta s 1.25, the rsk free rate s 3%, and the expected return on the market s 9%. Is the stock overvalued or undervalued at $10? A) Overvalued B) *Undervalued C) Farly Valued 20
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9. Futures and Optons In some questons, the correct answer may not be amongst the multple choces. For those questons, select the best avalable answer. Pulte Homes, Inc., (NYSE: PHM), based n Bloomfeld Hlls, Mch., s a FORTUNE 150 company wth operatons n 27 states. In 2012, the company delvered 45,630 homes n the U.S. and generated consoldated revenues of $14.7 bllon. To hedge the prce rsk assocated wth one of ts major nputs, Pulte uses lumber futures contracts whch trade on the Chcago Mercantle Exchange (CME). The CME Random Length Lumber futures contract calls for delvery of 110,000 board feet (110 MBF) of random length 8-foot to 20-foot nomnal 2- nch x 4-nch peces. (1 MBF s 1,000 board feet of lumber.) The delverable speces are: Western Spruce, Pne, and Fr. The acceptable grades are #1 and #2 of the structural lght framng category. Wood must be kln dred to a mosture level of 19 percent. Lumber of each length, must be banded together, poly or paper wrapped and loaded on one 73' flatcar. The ntal margn (per contract) s $1,600 and the mantenance margn s $1,000. In October of last year, Pulte bought 100 CME lumber contracts for March delvery at a futures prce of $300 per MBF. It s now the frst week of March and the cash prce for lumber s $263 per MBF. Today s futures prces are quoted n the table below. Futures Prce $0.00/MBF Expry Month VOL March 262.50 900 4000 May 278.70 146 416 July 283.00 2 26 39 How can Pulte complete ts futures trade? Open Interest I. Sell the 100 CME contracts that they purchased n Oct. II. At maturty take delvery of the lumber III. Enter nto a short poston n 100 CME March lumber contracts. IV. Buy 100 CME May lumber contracts. A) I or II B) *II or III C) I only D) II only E) IV only 22
40 If Pulte completes ts poston today by executng an offset (reversng) trade, then what are ts cumulatve profts on the futures poston? A) *-$412,500 B) $412,500 C) -$3,750 D) $3,750 41 Armand Hammer s the rsk manager at Pulte. Armand took a long poston n 100 contracts last October at a futures prce of $300. He made the mnmum ntal margn depost of $160,000. On Feb 6, the futures prce was $305/MBF and the balance n hs tradng account was $215,000. On Feb 7, a NAFTA Chapter 19 adjudcaton panel announced that U.S. tarffs on Canadan softwood lumber were a volaton of NAFTA and must be reduced. The U.S. Department of Commerce ssued a press release announcng that t would obey the rulng. The antcpated ncrease n lumber supply caused futures prces to fall to $280/MBF. Armand receved a margn call from hs broker. How much must Armand depost nto hs tradng account? A) $100,000 B) $150,000 C) $160,000 D) *$165,000 E) $275,000 23
Apple Inc. Stock: AAPL: NASDAQ Stock Prce: 477.05 Volume: 5,453,332 Contract Expry: November Calls Puts Premum Vol Op Int Strke Premum Vol Op Int 410 0.700 10 4,840 420 0.800 55 4,042 430 1.200 83 6,205 38.600 45 3,741 440 1.950 40 4,814 30.100 150 5,632 450 3.100 267 6,983 22.100 187 5,010 460 5.100 150 4,598 15.500 2,356 9,365 470 8.100 613 7,498 10.300 986 10,128 480 12.700 371 3,375 6.500 482 9,327 490 19.700 56 2,064 0.450 176 5,136 500 42 Refer to the table of Apple stock opton prces. Whch of the followng optons are n-the-money? I. The $440 Call. II. The $490 Call. III. The $410 Put. IV. The $490 Put. A) I and III B) I and IV C) II and IV D) II and III E) *I and IV 43 What s the ntrnsc value of the $490 Call? A) *$0 B) $6.45 C) $6.50 D) -$12.95 E) $12.95 24
44 What s the tme premum of the $480 Put? A) $0 B) $2.95 C) $7.35 D) *$9.75 E) $12.70 45 If you purchased the $490 Call today, then how hgh would the prce of Apple s shares have rse n order for you to break even and earn $0 of proft on the call opton? A) $483.50 B) $490 C) *$496.5 D) $509.70 46 If you wrote a $480 Put durng the summer when the stock prce was $500 and the put premum was $6.00 (per share). The stock prce has fallen almost consstently snce and you fear that t wll contnue to fall. You have decded to execute an offset trade to close out your short poston. What s your proft (per share)? A) -$12.70 B) *-$6.70 C) -$6.00 D) $6.70 E) $12.70 25
10. Tme Value of Money In some questons, the correct answer may not be amongst the multple choces. For those questons, select the best avalable answer. 47 You plan to retre at age 65. You want to wthdraw $100,000 from your savngs account every year startng on your 65 th brthday. You expect to you earn 3% on your savngs n retrement. Today s your 26 th brthday. You wsh to make equal annual deposts nto your savngs account on your brthdays (startng today) and contnung untl your 65 th brthday. How much must you depost each year f you earn 5% on your nvestments? A) *$12,685.29 B) $9,023.99 C) $13,143.63 D) $12,213.20 E) $12,315.81 48 You just took out a $12,000 loan for your small busness. The loan has a three year term and repayment s n the form of three equal end-of-year payments of $4,953.316. The nterest rate on the loan s 11.5%. Consder the fnal loan payment. How much prncpal do you pay n the fnal payment? A) $4,292.44 B) $4,342.22 C) $4,392.44 D) *$4,442,44 E) $4,492.44 26
One year ago you sgned a 4 year lease on a Honda Cvc. The stcker prce on the car was $21,000, you made no downpayment, the lease rate was 4%, and the monthly payments (startng at the tme of sgnng) were $263.12. The buyout was $10,920 due at the end of the lease term. Now (one year after sgnng the lease but just before the 13 th lease payment) Honda has just released the new Cvc. You want to get out of your lease on the old Cvc and lease one of the new ones. To escape from your lease, Honda Canada Fnance wll requre you to pay the dfference between the amount of prncpal that you repad over the frst year and the amount that the vehcle has deprecated n value. For example, f you pad $2,000 of prncpal over the frst year, but the vehcle actually deprecated by $2,500, then you would pay the dfference of $500. Assume that the cvc deprecates on a straght-lne bass from ts purchase prce to the buyout prce. 49 What s the sze of the payment that you must make to Honda Canada Fnance (just before the 13 th lease payment)? A) $119.17 B) *$148.88 C) $202.56 D) $256.72 E) $298.34 27
11. Bonds In some questons, the correct answer may not be amongst the multple choces. For those questons, select the best avalable answer. 50 Consder a two year coupon bond ssued today wth a face value of $1,000 and a 6% coupon rate. Suppose that yelds on zero coupon bonds wth terms one and two are 6% and 7% respectvely. What s your best estmate of the prce of the bond next year after the frst coupon? A) *$981.40 B) $982.45 C) $985.25 D) $992.50 E) $962.25 51 Consder a Sears zero coupon bond and a Government of Canada zero coupon bond both maturng n ten years. The current yeld to maturty on the Sears bond s 5.3% compared to the Gov t bond yeld of 4.5%. The hgher yeld on the Sears bond reflects Sear s hgher probablty of default. Hstorcally, the dfference between the yelds of the two bonds has been 1.2%. Ths dfference s called the yeld spread. Today the yeld spread s only 0.8%. You expect that the yeld spread wll wden back to ts hstorc value over the next few days. Assume that both yelds wll change equally to brng the spread back to ts hstorc poston and assume that the md-pont of the spread wll stay where t s. What are the antcpated prce changes for the two bonds? A) *Sears -$11.21, Canada +$12.45 B) Sears +$11.21, Canada -$12.45 C) Sears +$11.21, Canada +$12.45 D) Sears -$11.21, Canada -$12.45 52 You have just purchased a 15-year, $1,000 par value US Government bond for $909.20. The yeld to maturty on the bond s 8.6%. What s the coupon rate? A) 8.6% B) 15.0% C) 7.0% D) 9.0% E) *7.5% 28
53 The current spot rate on bonds wth maturty of 4 years s 1%. If bonds wth a maturty of 5 years have a spot rate of 1.5% then what s the mpled one-year forward rate that starts n 4 years? A) *3.5% B) 3.7% C) 2.2% D) 3.2% E) 2.7% 54 Whch of the followng s a correct statement? A) The roll-over has nterest rate rsk. The lock-n has re-nvestment rate rsk. B) *The roll-over has re-nvestment rate rsk. The lock-n has nterest rate rsk. C) Only long-term bond holders, who hold to maturty, are faced wth nterest rate rsk. D) Re-nvestment rate rsk s the rsk that the coupon-re-nvestment rate s dfferent from the yeld to maturty. 29
12. Fnal Exam Formula Sheet PVIF 1 (1 ) -n n, (1 ) n PVIFA PVIFA - Due -n PV FVe FVIF n n, (1 ) 1 -n 1 n 1- (1 FVIFA (1 1 n, ) n, ) 1 -n 1 n 1- (1 ) (1 ) FVIFA - Due (1 ) 1 (1 ) n, m (1 kt) (1 k ) ft t-1 t-1 EIR 1 1 j 1 1 m 2 NAB Prncpal for front-end fees, dscount nterest and compensatng balance. BondEquvalent 2 m t n, 1 FV - Prce 365 Yeld k n = k r + + k r Prce Term YTM = k r + INF + MRP + LRP + DRP P bond C (1 k 1 C FV ) (1 k ) 2 2 P zero $FV n n P n bond $C 1(1 kd) n (1 n ) kd (1 kd) 1 $FV Pt P HoldngPerodReturn P t1 t 1 D P t t1 Pt P Holdng Perod Return P t1 t1 C P t t1 P t1 D (1 k) t D k P t1 D0 (1 g) t (1 k) t D0 (1 g) k - g D1 k - g TP (1 g) k - g TP k - g 0 1 P Po EPS 1 Payout Rato k - g COV(k,k j j j ) k D1 g P 0 Po BVPS E = mc 2 Prce Bookvaluepershare 30
k E(k ~ ) k E(k ~ ) k ~,k ~ n COV( 1 2) Pr 1 1 2 2 E(k E(k p ) x 1 Pr k E(k) 1 n 1) Prk 1 1 E(k )... x 1 n E(k n ) n 1 x 2 E(k ) k 2 a f 2 (1 x) (E(k M 2 2 b ) k 2x(1 x) f ) a,b a b T = p E(k ) - k x 1 1 f... x n n COV(k,k 2 2 2 M 2 M M 2 d. ) Free Cash Flow = Operatng Cash Flow CAPEX Change n NWC NWC = Current Assets Current Labltes NWC = (Current Assets Cash) (Current Labltes Short-term Debt) Total Debt = Short-term Debt + Long-term Debt Current rato Quck rato Inventory turnover # Days Inventory (Days sales n nventory) Recevables turnover # Days Recevable (Days sales n recevables) Current Assets Current Labltes Current assets - Inventory Current labltes Cost of goods sold Inventory Inventory *365 COGS Sales Accounts recevable AccountsRecevable *365 Sales AccountsPayable # Days Payable (Days Payables) * 365 COGS NWC to Total Captal Fxed asset turnover NWC Total Assets - Current Labs. Sales Net fxed assets 31
Total asset turnover Debt rato Debt/equty rato Equty multpler Tmes nterest earned Cash Flow to Debt Asset Coverage (Collateral Rato) Net Proft margn Gross Margn Return on assets (ROA) Return on equty (ROE) Prce/earnng rato Market-to-book rato Dvdend Payout Dvdend Yeld EBITDA Sales Total assets Total Labltes Total assets Total Labltes/Total equty Total assets/total equty EBIT Interest CashFlow TotalDebt Net IncomeDeprecaton Short term Long termdebt Long termtangbleassets Short term Long termdebt Net ncome Sales Sales - Cost of Goods Sold Sales Net ncome Total assets Net ncome Total equty Prce per share Earnngs per share Market value per share Book value per share Dvdends Net Income Dvdends per share Market prce per share Earnngs Before Interest, Taxes, Deprecaton and Amortzaton ROE = ROA x [1 + D/E] [1 + D/E] = Total Assets/Owner s Equty D = Total Assets Owner s Equty = Total Labltes ROA = Net Proft Margn x Total Asset Turnover 32
Operatng Cycle = Days Inventory + Days Recevables Cash Cycle = Operatng Cycle - Days Payables Net t = Net t-1 + CAPEX t - Depr t 33