Question Sheet Mid Exam Finc 5000

MID Exam VERSION A:

FINC 5000 SUFE IMBA

5 September 2015 IMBA MORNING COHORT

QUESTION SHEET MID EXAM FINC 5000

Instructions/Read this before you begin

You are familiar with the Exam regulations of SUFE before you start to do this Exam and you have read the Academic Integrity Code. Violating Exam Procedures may result in 0 (zero) score and disciplinary measures from the School.

OPEN BOOK-OPEN PPT EXAM

You are not allowed to use WIFI during the test!

Topics Tested in this Exam

Framework of Finance & Fundamental Concepts in Finance

Financial Statement Analysis/Financial Ratio’s

Time Value of Money and Firm Valuation

Risk & Return, Portfolio Theory

Read carefully! Good Luck.

MULTIPLE CHOICE QUESTIONS (25 points: 5 questions 5 points each)

NOTE THAT YOUR Multiple Choice Question Answers should be on Page 2!

1: A portfolio is comprised of 60% Equity (E), and 40% Debt (D).

You have the following information:

The Expected Return on this Portfolio is:

A: 10.23%

B: 9.44%

C: 9.76%

D: 8.91%

2: The Standard Deviation of the Return on the Portfolio in question 1 is:

A: 18.77%

B: 18.78%

C: 19.21%

D: 19.49%

ANSWERS:

3: You invested $ 1 Million at the beginning of 2008 in an S&P500 Index fund. Your rate of return for 2008 was -38.6%. What rate of return in 2009 would have been necessary for your portfolio to recover to its original value?

A: 38.87%

B: The present value of 38.6%

C: 51.28%

D: Non of the above

4: Respondents from diversified companies in the emerging world report that they have structural advantages that help them create value. They claim that it allows them to:

A: Mainly allow them to diversify further in emerging markets

B: Mainly allow them to enter developed markets

C: Provides more opportunities to reinvest earnings in new businesses

D: Makes it more difficult to find investors

Source: The READER from MC Kinsey uploaded in week 3.

5: Good governance and choosing the right BoD remains a challenge for US (and other countries’)companies. Which of the following statements is true:

A: The Sarbanes Oxley Act and the Dodd Frank Act require companies to appoint less independent directors and this does not help good governance

B: Big companies continue to make extraordinary appointments: IAC Media appointed Chelsea Clinton (daughter of Bill Clinton) 31 years old in their BoD

C: When Lehmann Brothers went bankrupt 8 of their 10 BoD members were independent so having enough independent directors is not good governance

D: BoD members are part timers and they do not have the time, knowledge and incentives to monitor companies the way they should.

Source: The READER from the Economist uploaded in week 2.

ANSWERS MULTIPLE CHOICE QUESTIONS:

Start Open Questions-Short Answer

Q1) Portfolio Theory: (30 points; a and b 5 points ; c and d 10 points)

Assume you know the following about 2 risky assets D and E:

REQUIRED:

a)  Calculate the Expected Return on D and E (5 points)

b)  Calculate the Expected Return for a Portfolio consisting of 40% D and 60% E (5 points)

c)  Calculate the Standard deviations on the Returns of D and E which are a measure of the risk related to investing in D and E (10 points)

d)  Now calculate the Standard Deviation on the Return of the 40% Debt/60% Equity Portfolio (10 points)

ANSWER:

a)  E(rD)=8% E(rE)=12% (multiply the probabilities with each scenario’s return and add the result up.

b)  40/60 Portfolio: E(rP)= 0.4*8%+0.6*12%=10.4%

c)  STDEV(rD)= 13.59% STDEV(rE)= 29.18%

d)  STDEV(rP)= 17.88%

OR

Q2) Intrinsic Firm Value (20 points)

Assume that we are today in 2014….

A company has estimated the following (future) Free Cash Flows for:

2015: $1,293.4M

2016: $4,875.0M

2017: $5,450.0M

2018: $6,025.0M

After 2018 (from 2019 onwards) the company assumes Free Cash Flow to grow with 3%. The WACC% in 2015 is supposed to be 8.3% but is going to go up yearly with 0.1% until 2019 when it reaches 8.7% and then stays there. The company has no debt and 1 Billion shares outstanding.

REQUIRED:

Calculate the Intrinsic Firm Value of the company per 1st January 2015 (20 points) Show your Calculation.

ANSWER:

Present value calculation by year: 2 points

Terminal value calculation (Perpetuity formula): 4 points

Discounting 4 years at 4 different WACC’s from 8.6% to 8.3% 4 points

Total correct: 2 points

No dimension/Currency minus 2 points!

The Firm value is:

$1,194 M+$4,149M+$4,267M+$4,331M+ $56,583M= $70,524 Million USD.

Q3) Dividend Growth Model (Valuation securities) (25 points; a 10 points and b 15 points)

An investor estimates to receive the following dividends per share :

2015: $ 0.50

2016: $ 0.66

2017: $ 0.83

2018: $ 1.00

At the end of 2018 (after having received the dividend for that year) this investor estimates that the share can be sold for $50.25.

REQUIRED:

a)  If the Required Return on Equity is 11.1% (the discount factor) what is the estimated Value of the stock per 1st January 2015? (10 points)

b)  If the investor would keep the stock (forever) and would continue to receive the dividend while dividends keep growing with 7.7% after the year 2018 what would be the value of the stock if the Required Return stays at 11.1%? (15 points)

ANSWER:

a)  Value(1st January 2015)= $0.50/(1.111)+$0.66/(1.111)^2+$0.83/(1.111)^3+$1/(1.111)^4+$50.25/(1.111)^4=$ 35.23

b)  Calculate the terminal value in 2016: DIV(2015)*(1+7.7%)/(11.1%-7.7%)= $31.67

Now: $0.50/(1.111)+$0.66/(1.111)^2+$0.83/(1.111)^3+$1/(1.111)^4+$31.68/(1.111)^4=$ 23.04

END OF MID EXAM

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