Exam seminar

ECON263
 Feedback on assignment/tips
 Use a proper calculator!
 Explain all concepts in your answer
 Difference between 1 and 2? Explain both -> compare
 Math: show the formula and numbers you are using
 Have an answer-sentence
 Correlation does not require that they affect each other
 E(x)=p(1)*E(1) + p(2)*E(2) + p(3)*E(3),
 Var(x)= p(1)*(E(1)-E(x))² + p(2)*(E(2)-E(x))² + p(3)*(E(3)-E(x))²
 Var(HH)=0,3(3/2-3,9)² + 0,3(7/2-3,9)² + 0,4(3/2-3,9)² =3,5
 Exam 2021 Q1
 In 2020, Munnbind AS’s opening balance showed fixed assets (anleggsmidler) worth 7 950
000kr. The closing balance shows fixed assets worth 8 520 000kr. Depreciation during 2020
was 1 520 000 kr. How much did Munnbind AS invest in fixed assets during 2020.
 Exam 2021 Q1
 In 2020, Munnbind AS’s opening balance showed fixed assets (anleggsmidler) worth 7 950
000kr. The closing balance shows fixed assets worth 8 520 000kr. Depreciation during 2020
was 1 520 000 kr. How much did Munnbind AS invest in fixed assets during 2020.
 Exam 2021 Q1
 In 2020, Munnbind AS’s opening balance showed fixed assets (anleggsmidler) worth 7 950
000kr. The closing balance shows fixed assets worth 8 520 000kr. Depreciation during 2020
was 1 520 000 kr. How much did Munnbind AS invest in fixed assets during 2020.
 Fixed assets CB = Fixed assets OB + purchase – depreciation
 Purchase = Fixed assets CB – Fixed assets OB + depreciation
 Exam 2021 Q1
 In 2020, Munnbind AS’s opening balance showed fixed assets (anleggsmidler) worth 7 950
000kr. The closing balance shows fixed assets worth 8 520 000kr. Depreciation during 2020
was 1 520 000 kr. How much did Munnbind AS invest in fixed assets during 2020.
 Fixed assets CB = Fixed assets OB + purchase – depreciation
 Purchase = Fixed assets CB – Fixed assets OB + depreciation
 Purchase = 8 520 000 – 7 950 000 + 1 520 000 = 2 090 000
 Question 2
 In 2020, Munnbind AS earned a net profit of NOK 800,000. Munnbind AS can choose to retain
this profit; alternatively, the firm can choose to distribute the profit to its shareholders through
dividend payments. Discuss pros and cons for the firm of paying dividends. Discuss pros and
cons for the shareholders of dividend payments versus profits being retained by the firm.
 Question 2
 In 2020, Munnbind AS earned a net profit of NOK 800,000. Munnbind AS can choose to retain
this profit; alternatively, the firm can choose to distribute the profit to its shareholders through
dividend payments. Discuss pros and cons for the firm of paying dividends. Discuss pros and
cons for the shareholders of dividend payments versus profits being retained by the firm.
 Reduces liquidity, might make new projects unfeasible
 Perfect capital markets; shareholders are indifferent
 Realistically; shareholder often like dividends
 Could be good for the firm (easier to raise capital through stocks)
 Question 4A
 Calculate the value of a zero-coupon corporate bond that pays out its principal amount 500 m
EUR in 10 years’ time. The relevant interest rate is 2%.
 PV=F/(1+r)^n=500m/1.02^10=410m
 Question 4B
Firm Market share  Explain the Herfindahl index
Gjensidige 26%  H=0.26²+0.21²+0.14²+0.11²+0.06²+0.06²+0.04²+
If 21% 0.04²+0.04²+0.04²=0.157
Tryg 14%  Low value, high competition
SpareBank 11%  H=0.47²+0.14²+0.11²+0.06²+0.06²+0.04²+0.04²+
DNB 6% 0.04²+0.04²=0.266
Eika 6%  More concentrated market
Frende 4%
 H=0.26²+0.21²+0.14²+0.11²+0.06²+0.06²+0.04²+
Storebrand 4%
0.04²+0.08²=0.160
Protector 4%
 Barely different from the original
Codan 4%
 Exam 2022, Q3A
 Windy ASA is a green energy company that operates wind farms. The firm has assets worth 5
000 m NOKs and equity worth 1 000 m NOKs. The interest rate that applies to Windy is 5%.
 A) Calculate Windy’s debt-to-equity ratio. Is it high, low or pretty much normal?
 Debt/Equity = (5000-1000)/1000 = 4, higher than normal
 Question 3B
 Windy wants to build a new wind farm and needs 500 m NOKs now. Windy plans to finance
the new farm by issuing a 15-year zero-coupon corporate bond.
 Does a bond with a principal payment F = 1 000 m NOKs cover Windy’s cost if Windy
successfully sells the bond at a price equal to its value?
 F/(1+r)^n=1000/1.05^15=481 < 500
 How would Windy’s leverage change if it successfully sold the bond?
 D/E=(4000+481)/1000=4.48, leverage increases.
 Should we expect that a higher or lower interest rate than 5% applies to Windy after it
successfully sells the bond?
 Higher, as the company is more risky
 Question 3C
 Suppose that, instead of issuing a bond, Windy wants to issue stocks to cover the 500 m NOKs
cost of the new wind farm: issue 10 million stocks at a price 50 NOKs each. You expect each
stock of Windy to pay out a dividend of 2 NOK per stock from next year onwards until forever
(the relevant interest rate is 5%). Would you buy some of Windy’s newly issued stocks? Why
(not)?
 To find the fundamental value of the stock, we can use the formula for perpetual pay-out:
 C/r=2/0.05=40 < 50, stock is not worth it
 Question 3D
 The new wind farm was financed somehow and built. The farm is expected to generate a gross
return of 540 m NOK with 40% chance, 500 m NOK with 40% chance, and of 450 m NOK
with 20% chance in present value terms. What is the expected gross return of the farm? What is
the expected ROI of the farm?
 E(x)=0.4*540+0.4*500+0.2*450=506
 ROI=(E(x)-cost)/cost=(506-500)/500=1.2%
 Question 4
 You know the following facts about a market. Only three firms A, B and C operate in the
market. The Herfindahl index is 5000. The cross-price elasticities for the firms’ products are
𝜂𝐴𝐵 = 𝜂𝐵𝐴 = 1, 𝜂𝐴𝐶 = 𝜂𝐶𝐴 = −1 and 𝜂𝐵𝐶 = 𝜂𝐶𝐵 = −2. The Lerner indices for the firms are LA
= 0.1, LB = 0.2 and LC = 0.2. Based on this information, which of the following statements can
be true?
 Question 4
 You know the following facts about a market. Only three firms A, B and C operate in the
market. The Herfindahl index is 5000. The cross-price elasticities for the firms’ products are
𝜂𝐴𝐵 = 𝜂𝐵𝐴 = 1, 𝜂𝐴𝐶 = 𝜂𝐶𝐴 = −1 and 𝜂𝐵𝐶 = 𝜂𝐶𝐵 = −2. The Lerner indices for the firms are LA =
0.1, LB = 0.2 and LB = 0.2. Based on this information, which of the following statements can
be true?
 Question 4
 You know the following facts about a market. Only three firms A, B and C operate in the
market. The Herfindahl index is 5000. The cross-price elasticities for the firms’ products are
𝜂𝐴𝐵 = 𝜂𝐵𝐴 = 1, 𝜂𝐴𝐶 = 𝜂𝐶𝐴 = −1 and 𝜂𝐵𝐶 = 𝜂𝐶𝐵 = −2. The Lerner indices for the firms are LA =
0.1, LB = 0.2 and LB = 0.2. Based on this information, which of the following statements can
be true?
 Herfindahl, cross-price elasticity and Lerner index
 AB is positive -> substitutes
 CA is negative -> compliments
 BC is negative -> compliments (stronger than CA)
 A has little market power, B and C has some
 The statements does not have to be true
 Question 4 a-d
 a. The firms split the market equally.
 No, Herfindahl, 0.33²*3=/=5000
 b. Products A and B are substitutes.
 Yes, positive cross-price elasticity, 𝜂𝐴𝐵 = 𝜂𝐵𝐴 = 1
 c. Products A and C are substitutes.
 No, negative cross-price elasticity, 𝜂𝐴𝐶 = 𝜂𝐶𝐴 = −1
 d. Products B and C are complements.
 Yes, negative cross-price elasticity, 𝜂B𝐶 = 𝜂𝐶B = −2
 Question 4 e-h
 e. The firms produce a homogeneous product and compete in prices.
 No, difference in market power (Lerner)
 f. The firms produce differentiated products and compete in prices.
 Yes, cross-price elasticity, change in price affect demand for all
 g. The firms produce a homogeneous product and compete in quantities.
 Yes, even if they can set higher price due to market power, they compete in quantities
 h. The firms produce differentiated products and compete in quantities.
 Yes, cross-price elasticity, change in quantum affect demand for all
Other questions?
Good luck on the exam!