Firs English Nickname), Last_—_}[anfr_2 4 ANG on h2U1f TEOR 4402 Intro to Corp Fin, Acctg & Investment Banking Midterm Exam, Oct 24, 2023 EVERYONE: a) write your UNI & name on every page; b) one cheat sheet & a simple calculator allowed; no other electronic devices! ©) “pencils down” when the end of the exam is announced; 4) scanning & uploading allowed after end of exam + 20 minutes ©) on page 1, write this pledge & sign your name “I pledge that I have nether given nor received any unauthorized aid during this examination.” [2 fe edge he “hot Laie OTE JVM rei No Fe] m1 tetnd 0 ou un '2€0f of HAN Pvt 2\ath ols a a a ‘Those taking the exam virtually: 1) must haye webcam or smartphone aimed at you 2) you may ask a question out loud before the midterm starts; after it starts, only ask questions via typing a Direct Message in the chat, 3) typing is allowed only for purposes of sending the Professor a zoom message. 4) if you are unable to print out the exam and instead use blank paper, provide the Q# and the brief description of the question in bold (e.g. “Lesson”) Note ©The total number of points is 930, ©The exam is 150 minutes © To stay on track, you should spend less than three minutes to answer a 20 point question, # The last question is worth 250 points; you should try to complete it in less than 36 minutes Page| 1First, (English Nickname), Last: Hanya tha 4 UNL JA 2unt 1) (20pts) General Partner: When a company is a “going concer” (and not about to be “liquidated”), why is the Market Value of the Stock uswally greater than ‘max(0, Market Value of Assets — the amount of debt}? Explain, TE ow Value Crete by He minket ee Be when the nathet? hobee in the premal +f if iKag (Q0pts) Stock Market Value: Ifa company has no deb, and the Market Value ofthe Stock is me a a than he Mat Value ofthe Ase, what can youn the market hk aboutthe umpany? plain, the Comtany mn he mm Aveable, lilee Bye! Issue” The mae Carte See the potent F tle teal (209 ns Flos Win aking sonny rol sn vy newest te ach Flows instead of ue Net pt oC cok y 7 Tee (cal of aset The (me more agearety toh Value cone = S Net Invae Con he di debye (ble AR), So Cant dean Peete. Oe een eb ts aoe taeda iisbOw aie afr Ot Senne By Oe bmg fe Fea : Hie Pe nest oP fem ae doit te coe ine aa Holder's. Eyuy (aps) Taraover Ratio: Alpha (Googles Turnover Rt in 202] vas 16% Ret Us, sensor nd Energy Tumor Ratos wee mach salle, ning om 1 16x? Explin why these differ by rug factor often F pr lompanis fi Geyle ae ry frst and then subscrible “he se Go reat” 40 COR, ES So Tutnaer Rachy, (20ps) raed Can uity curves intersect? Explain why or why not. Dray picture. No ty Cant Ty tyinteaeet , then + means the Lunas with oxpess a come [eel of willing The we Cunies ms — overlap fomplr ol (20ps) Inflation: Consider a weird universe where studens in 202 ate equal amounts of General STso's Chicken, and Moo Goo Gal Pan in restarans(and they eat no other fods in resturants). Cin 2023, the price of GTC increased 30%, but the cost of MGGP increased 10%, wou price changes to cause restau tion to be 20%, less than 20% or mop than TH cat he device Por Oxanyle foo fr IC gi prenaa? we exchogt the ple, tha < >First (English Nimans) Lase___ {Gaur _2h st) uv h2 241 8) (20pts) Discount Rate: Equities are risky investments, and CAPM tells us to use a discount rate that is larger than the risk free rate { t+ B*(ta- tr) }. An equity call option is an even riskier investment, so why is the rsk free: rc {11} used to discount the cash bows ‘of an equity cal option? a if re 1 Because the Cash fh of a Call option 15 de (ly a Ce bw hw rte fatale oe, ene eet to ‘islet 9) (20pts) IRR: Under which situations is ita bal ida Be IRR to pet ta decisions? Provide at least two for fyll credit my SQM ges ta the Ch flows Sign chageals ta Piggeet alegce 10) (20pts) Investing: What are she twvo most important things you leamed inthis class regarding investing for your long-term future? @ nea the 7 of inst tate OD. caleuote He tne when to allt all the ov] Ost 11) 20pts) Movie: You saved up $40 to watch a movie with a friend, but after the first fen minutes, you ‘both realize you don’t like the movie. Do you continue to watching, or do you get your money's, ‘worth and watch the entire movie? Explain, be TS Sunk Costs . if 1 Ga do ror Yu (uahle a in ths tine UN ome 12) (20pts) Regression: When calculating a company’s equity Beta, is it OK to use titee years of weekly date to regres stock prices against index price? Explain Fi Ne, we eee te fl the tena a i 15) ters ates Tevet seu st ran ike Fatt Ban idea a" Le | Famings forthe S&2PS00 have not changed but interest rates ise, based on CAPM: A) shuld the anasins,| SAL? index ise oral? B) After the market adjust to thers in rates, isthe expected return ose 4) the next few yeas of the SP50 index arg oral tun efor een ne sony ES AY wtensl votes y2se, SCR REBT ret eaacal So Spteo a ay a veel BPI r ma t 3 = ARERR) TE) PL ee ceiunt nk 14) (20pts) Revolvers: aug is Ps a jon why revolver loans Ive a floating rate coupon ifstead of a Roane fixed rate coupon” Charged aaa Beowse th chets or bore it non paynes hep Stable, ino Certain OCtount ao (erard perive/ Go the wt shout be flaciy t+ od se unt the per Page |3/First, (English Nickname), Last: Yu 2 UNI: mr Ui ir, 15) 20pis) Covenants: Why do Leveraged Loans typically have more covenants than Investment Grade on Becaase Lewwjed Loans ak Mae TSPd Teds mort. Oe Kdaats to Yedute the Sh Otlnase the Lean ey nec he Collec teof 16) (20pts) Loan Syndication: What is a key reason why large Corporatt Loans (e.g. a $1bn loan) are syndicated? Too puch visk te Cam for one ov ye Loon ponder. nud to separete the viske 17) Q0pts) Assignment vs Participation: Why does assignment ofa loan require the borrower's approval, but participation does not require borrower approval? Bocanse paveiipacion oes — Cheage th Yeletmsttp betweq © borrower ond leer. 18) (GORI) Invest: Given: Your cost of capital is 20%. A project’s cash flows (below) have an IRR of 23.6%, higher than your cost of capital. (Inthe table below T2 is one year after TI, which is one year after TO.) Would you invest in this project? Explain why. Time (yrs) [0 zi +2,500 | +5,000__ | -10,000 No. heawe the first two ttrms are poste wthis Citantin, | ERR Shovld be over than’ 77% 1 t when the pect is Food fe 19) 20pts) Gain on Sale: If Landis sold (or ash ata gain (compared tots colt using the “Indirect Method”, what adjustments to Net Income (any) are o be made to calculate the Statement of Cash Align Be oi Capital BHA, dees thooge Taig THA. [ cuase Lon |S me Canitet Agee , 50 jie ded te 20) (G0p4) Compounding: Given the investments below, al with he same risk characterises and" © AVL ‘maturing in one year. Which one would you prefer (assuming you could reinvest CFs at the stated tne af iere)? Show your work | aad ict notet enlih bescligunss dapententnenty Jolt © Quarterly: paying 9.9% ie. four coupons of 2.475%, compounded quaetly /,/5y"] + Monthy paying 9.8% ie 12 coupons of 081667% compounded monthly /\ Joy casa)" ya Compu th wesalts ane] Rarvtery netted is (aver Chole ths ong Pees ———_——————— EeFirst, (English Nickname), Last: HAN Rus 2HANG owt M2417 21) GEOUBES] Machines: You are to choose between two machines that do the same job, but have different Drices ($12,000 vs $14,000), different lives (4yrs vs Syrs) and different costs per year ($3,000 vs $3,100), Assuming you need a machine forever (ie. machines will be replaced repeatedly), and a discount rate of 10%, which michin do you ik? { a Gs) [0 3 4 3 12,000 sam 0 -3,000 3,000 replace B “14,000 [3,100 3,100 3,100 -3,100 [3,100 replace l qv \GSt Ke Afyooo + (© apex te = \ywooo + 1384. howe Pvc) = 25PBh44 Ag: sete * Ue te j Ay: Aap th Ae Ae. Grose A 22) (ROBB) Lottery: A lottery is held. The wihier of the lottery could choose between a) a $1,000mm. ‘payment now or b) a Geometric Annuity, where there are 30 annual payments, the first payment of '$45mm would be one year from now, and each subsequent payment would be previous payment. Assuming a7% Discount Rae (compounded annually, should he winner pick the immediate payment orth Geometric Annuity? ao Vea) = foro Ce ye) ] PW AS pap ast S& Chyose fmmedtote — pay not 23) ps) Tangent When drawing the Capital Market Line fom Ue risk e investment tothe Eiicient Fortier (EF, shoul he ie dram be ongent tothe EF (eg. why not dra the ines hat ititersetsthe EF)? Explain es, it shuld. 2f thy intersecte, me Gan fod pie with Same SR hot bigher tetny easily Tht pula be 24s) CAPM: hi sre 25% an he sped eta ofthe Marisa hat WP) the Equity Risk Premium i 8%), andthe stock ofa company has a Beta of 14, according to CAPM, ‘what the stocks expected return? ECw)-rf = By [EGa) - vf] Page |S E Gals )4 UeL- tok) 4 to] c Afo eyFirst, (English Nickname), Last: Hoar wi A NB) UNI het g 25) (2SURSTAIISERCABATW) The table below was created by an analyst to evaluate the cash flows of a now project. Most of the numbers in this table are incorrect! Your task is to analyze the first phase ofthe analysis and decide whether to make the investment. (Analysis of funding the project would be done in a second phase.) Read the footnotes (below) careflly. Based on the footnotes, fix the “Original Analysis” and briefly explain why you changed each row. Original Analysis ($000) 9 1 2 a 4 Investment in Machinery (2,000) 8,000 Working capital (4,000), Research and development (2,000) Revenue 20000 21,600 73,200 24,800 ‘Operating costs (60% of revenue) (12,000) (12,960) (13,920) (24,880) Depreciation (straight line 6 yrs) (44000) (4,000) (4,000) (4,000) Interest expense @ 12.0% (3360) (3360) (3.360) (3.360) est 401,280,920 2,560 Taxes @ 24% fs) 307] fas] 68) Net cash flow (28,000) 486 331459 (9,846 NPV @ 12.0% Discount Rate ($17,282.70) Footnotes: The project Requiresa S24MIM investment in machinery. The Cost of Capt is 12 seer ator Sales Revenue: Assume 5,000 motors are sold on the very last day of year 1, each at price of ‘4,00/motor. $400 motors ae sold on the last day of Yr2; 8,800 on the last day of Yr3 and 6,200 om she fst day of Yr NOTE: Each year, the price grows 8¥% (eon the last day of Yr, the price would Apyoo be $400/motor, Yr 3 S840, ete.) But, the analyst forgot to tke inflation into account inhisanabsis-44|0 see, 4 f30.5 Working capital: Assume 40% of Sales Revenue is “on ceount” Operating Costs: Assume that Operating costs (COGS+SGA) are 60% of Sales Revenue, Depreciation: The project lasts for four years and the project and! working capital unwind at that time, But, assume straight-line depreciation for 6 years for both Income Page| 6wn ABU Statement and tax purposes. At EOY4 the machine will be sold (assume sold at the estimated salvage value based on the straight-line depreciation for 6 years). Fis (Engl Nidan, tas: Haat Zhe wi Interest Expense: 12% to finance the purchase of the machinery and working Br = RAD Expense + Sales Revenue - Optg costs —Depreciation - Interest Expense Tax: 24% of income, if income is positive (0% if income is negative)First, (English Nickname), Last: } onal 2 he un helt to fis) Beginof gov. «ova, «ova. OYA (20pts) ‘nvstmt in Machine v0 000 ee (20pts) Chg in Wie Capital Gove Be WPL 1952-44 (20pts) Recovery of Wkg C (20pts) Tot wig Cap nvstmt Gaz) (IB) cis ° 13 ° 0 Ceci own in “SG paagad vt | (20pts) operating costs (\pooo) U>be$y (1354.9) 1225-464 {20pts) Depreciation (4ovo0) (ovo) (4v00) (4ov0) (20pis) int Expense @ 12% v Ones 20" | eer Gooo Jo]r hr + | ee 4h2) CarFafy 4ys te) UTI. 0736) | ops Addsbarkepepreciatin — 000 ovo Lpood 00 aoe \Upove) (Abe 2) G12 ish SP. = They | (20pts) Discount Factors i M2 Losey | et Page| 8