Finance Mid term-I’ve made notes

| June 2, 2016

Question
FINC 5000, Summer 2015

Mid-Term Exam, Part B

Midterm Exam Part B, Problems
Directions: You may complete the exam in Excel or in Word.
If you choose to complete the exam in Excel, open the Excel program and create a new
spreadsheet named mid-term exam (your last name). Then answer the following questions on
the spreadsheet. You may put each problem on a separate tab in the spreadsheet if you like.
Save the file when you are finished, then submit the exam on the course website just as you
would a normal homework assignment.
If you choose to complete the exam in Word, open the Word program and create a new
document named mid-term exam (your last name). Then answer the following questions on the
document. Be sure to show your calculations! Save the file when you are finished, then
submit the exam on the course website just as you would a normal homework assignment.
Reminders:
In Excel, use formulas in the spreadsheet to solve the problems so your instructor can see how
you arrived at your answers. If your instructor cannot determine how an answer was
calculated, no credit will be given for that answer. If a question calls for a text answer, such as
a few sentences or a short paragraph, create a text box on the spreadsheet and enter your text in
the box. In Word, be sure to show clearly how you arrived at your answers by entering the
calculations as text. If your instructor cannot determine how an answer was calculated, no
credit will be given for that answer.
Be sure to complete the exam by the deadline posted for it. Late submissions without good
reason will be assessed a penalty.
Be sure to put your name on the spreadsheet or in the Word document.
You must complete the exam by yourself, without assistance from anyone else. Copying and
pasting from another persons spreadsheet or Word document or from the Internet is not
allowed. Also, you must not give assistance to anyone else. That means you may not send
your files, or parts of your files to anyone else and you may not receive files, or parts of files
from anyone else.
Ask your instructor if you have any questions.

Exam problems begin on the next page. There are seven questions worth a total of 40
points.
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Page 1

FINC 5000, Summer 2015

Mid-Term Exam, Part B

Question 1: (Financial Statement Analysis) 10 points
Consider the following sets of financial statements and answer the questions that follow:

Page 2

FINC 5000, Summer 2015

Mid-Term Exam, Part B

a. Which firm is the most liquid? Why? (Justify your answer with at least two ratios).
b. Which firm is the most profitable? Why? (Justify your answer with at least two ratios).
c. Construct a Du Pont equation (use the extended, or modified version shown in the Week 1,
chapters 2 & 3 lesson notes) for each firm and comment on the sources of each firms ROE
as revealed by the equation.
Question 2: (Time Value of Money Monthly Loan Payments) 5 points
Best Buy has a 65 4K Ultra HD TV on sale for $1,999.99. If you could borrow that amount
from First National Bank of St Louis at 4% for 1 year, what would be your monthly loan
payments?
Question 3: (Time Value of Money Present Value) 4 points
You have figured out that you will need $800,000 to finance your childs college education when
she turns 18, which will be 16 years from now, so you decide to invest in zero-coupon bonds,
which will mature in 16 years and will pay off $800,000 at maturity. How much would you have
to invest in zero-coupon bonds today to reach your goal, assuming the going rate on such bonds
is currently 3.5% per year?
Question 4: (Risk & Return) 4 points
You hold a portfolio of stocks consisting of the following:
Stock
Caterpillar
CitiCorp
Wendys
Boeing

Beta
0.6
0.8
1.0
1.2
Total:

Current Value
$20,000
$21,000
$22,000
$27,000
$90,000

a. What is the beta of the portfolio?
b. You have decided to sell Boeing for $27,000 and to use the proceeds to buy $27,000 of Nike
stock with a beta of 1.4. After the transaction is complete, what will be the new beta of the
portfolio? (Disregard any commissions on the buy and sell transactions.)

Page 3

FINC 5000, Summer 2015

Mid-Term Exam, Part B

Question 5: (Risk & Return) 3 points
a. Define the Capital Asset Pricing Model. (DOES NOT NEED TO BE DONE)
b. Explain what a stock’s "beta" is. (DOES NOT NEED TO BE DONE)

c. If the risk-free rate is 1% and the expected rate of return on the stock market is 9%, what is the
required rate of return per the CAPM for a stock that has a beta of 1.3?
Question 6: (Bond valuation) 8 points
a. Curley’s Company’s bonds have 10 years remaining to maturity. Interest is paid annually, the
bonds have a $1,000 par value, and the coupon interest rate is 4%. The bonds have a yield to
maturity (YTM) of 5%. Given these conditions, what should be the current price of these bonds?
b. Larry’s Company’s bonds have 8 years remaining to maturity. Interest is paid annually, the
bonds have a $1,000 par value, and the coupon interest rate is 4%. The bonds have a current
market price of $890. Given these conditions, what should be the yield to maturity (YTM) of
these bonds?
Question 7: (Stock Valuation) 6 Points
a. Define the Efficient Markets Hypothesis. (DOES NOT NEED TO BE DONE)

b. Financial theorists generally define three forms of market efficiency: the weak-form, the
semi-strong-form, and the strong-form. Explain these three forms. (DOES NOT NEED TO BE
DONE)

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