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finsampsol - Your Name University of California Berkeley...

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1 of 10 Your Name:_________________ University of California - Berkeley Haas School of Business UGBA103 Prof: Richard Stanton S a m p l e F i n a l E x a m Instructions: This is a 3 hour closed book and closed note exam, though you may refer to notes on both sides of a single 3” x 5” index card. There are a total of 120 points. You may use a calculator, but not its accompanying manual. Show all work. Write down any equation you are using. Answers that only contain a number and a list of buttons punched on your calculator will receive very little credit. This test contains 10 pages. The last question is # 8 . Jargon section: (10 points) In the space provided below write a brief (one or two sentence) definition or explanation for each of the following terms. If appropriate, a small, well-labeled diagram will be acceptable. Minimum Variance Frontier: Arbitrage: Market Risk: Interest Rate Swap: Operating Leverage:
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2 of 10 Problem Section: 1. 5 points. You have the following information: Risk free interest rate: r Expected return on market portfolio: R m Beta of stock X: β Assuming the CAPM holds, what is the expected return on stock X? E[Rx] = r + β (Rm - r) 2. 10 points. Sony Corp. is considering expanding its presence in the personal computer market. Management is trying to determine the appropriate market capitalization rate to use for these new projects. They have the following information on other PC manufacturers: Company Equity Beta D/E ratio Debt Rating Compaq 1.70 0.35 AAA Zeos 2.20 1.10 BB Suppose that AAA debt is virtually risk-free, but that the beta of BB-rated debt is about 0.30. Also, the current risk-free rate is 6%, and the expected excess return on the market is 8%. Assume no taxes. Estimate an appropriate market capitalization rate for the project. Answer: Ba = (E Be + D Bd)/(E+D) = (Be + D/E Bd)/(1+D/E) Ba(compaq) = (1.7 + .35*0)/(1+.35) = 1.26 Ba(zeos) = (2.2 + 1.1*.30)/(1+1.1) = 1.20 Estimate Beta for PC project = 1.23 MCR = rf + B*E[Rm-rf] = 6% + 1.23(8%) = 15.84%
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3 of 10 3. 10 points. Compaq is considering manufacturing in-house the internal modem card in its new line of computers. Currently, they purchase the cards from an outside supplier at a cost of $50/card. The project has a 4-year horizon, and they have made the following estimates:
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finsampsol - Your Name University of California Berkeley...

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