BUSN 5200, Spring 2, 2010 Final Exam, Part B
Final 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 final exam (your last name).xls. 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 final exam (your last name).doc. 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 person’s spreadsheet or Word document or from the Internet is not allowed. Also, you must not give assistance to anyone else.
• Ask your instructor if you have any questions.
Exam problems begin on the next page. There are 9 questions worth a total of 51 points.
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Question 1: (Interest Rates) 6 points
a. Assume the following conditions prevail in the economy at this time:
Real rate of interest…………………..2%
Expected inflation rate……………….3%
Default risk premium………………...1%
Maturity risk premium……………….1%
Liquidity risk premium………………1%
Contractural provision risk premium...1%
Exchange rate risk premium………….1%
Tax risk premium…………………….1%
Market risk premium…………………1%
Given these conditions, what would you expect the yield on 3-Month U.S. Treasury Bills to be at this time?
b. What is a “yield curve?”
Answer:-
Part a:
Yield on 3-months US Treasury Bills is also Risk Free Rate which is equal to sum of Real rate of interest and Inflationary expectations.
Yield on 3-months US Treasury Bills = 2% + 3% = 5%
Part b:
Yield curve represents the relationship between debt’s remaining time to maturity and its yield to maturity. In Yield curve we plot the yield to maturities of dents of equal quality with different maturity. The Yield curve can be up-ward sloping, down-ward sloping and flat which are called Normal yield curve, Inverted yield curve and Flat yield curve.
Question 2: (Bonds) 9 points
Recently dealers were offering the US government’s 8.5% 2020 Treasury Bond for “142.12.” Answer the following questions about the bond:
a. What is the price in dollars of the bond?
b. What is the amount of the coupon interest payment you would receive each year if you bought the bond? (assume annual payments)
c. How many payments would you receive if you bought the bond and held it to maturity? (In other words, how many years does the bond have to go before it matures?)
d. What is the bond’s Yield to Maturity, or YTM, assuming you purchased it for the current offering price?
Question 3: (Bonds) 6 points
Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent coupon interest rate outstanding. The issue pays interest semiannually and has 10 years remaining to its maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return. What is the value of these Hewitt Packing Company bonds?
Question 4 (Stocks) 5 points
You are considering buying a stock with an expected dividend next year of $2, and a long-term growth rate of 10%. If your required rate of return is 14%, what price are you willing to pay for the stock?
Question 5: (Capital Budgeting--NPV) 6 points
Your firm is looking at a new investment opportunity, Project Alpha, with net cash flows as follows:
---- Net Cash Flows ----
Project Alpha
Initial Cost at T-0 (Now) ($10,000)
cash inflow at the end of year 1 6,000
cash inflow at the end of year 2 4,000
cash inflow at the end of year 3 2,000
a. Calculate the project's Net Present Value (NPV), assuming your required rate of return
is 10%
b. On the basis of your analysis in part a, should the project be accepted or rejected?
Question 6: (Capital Budgeting--NPV) 5 points
What is the NPV of an project with an initial investment of $1,000 that provides after-tax operating cash flows of $300 per year for four years? Assume the firm's cost of capital is 15 percent.
Question 7: (Capital Budgeting--IRR) 4 points
What is the IRR for a project if its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4?
Question 8: (Working Capital and Current Assets) 4 points
DP Dolls’ inventory has an average age of 80 days and its customers pay off their accounts receivable in 40 days. The company pays its suppliers after 30 days. Given these conditions, what is the length of the company’s Cash Conversion Cycle?
Question 9: (Working Capital and Current Assets) 6 points
DP Dolls is using the EOQ model to determine the optimum amount of toys to order. Every time DP orders, there is a fixed charge of $75. The total amount of product needed monthly is 10,000 units. The carrying cost per unit per year is $5.00.
a. What is DP’s optimal ordering quantity? (EOQ)
b. What are the total inventory costs per year for DP Dolls, assuming the number of units in each order (Q) is the EOQ quantity from part a?
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End of exam
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