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Exam 1 (Thursday) - ANSWERS BADM 115 – Fall 2008 – Professor Isabelle Bajeux-Besnainou 1. The bond has semiannual coupons, so enter the following data into your financial calculator: N = 12 × 2 = 24; I/YR = 8 ÷ 2 = 4; PMT = 90 ÷ 2 = 45; FV = 1000; and then solve for PV = -\$1,076.23. V B = \$1,076.23. 2. Step 1: Calculate the market risk premium RP M using the information for Partridge: 13% = 6% + RP M (1.4) RP M = 5%. Step 2: Now calculate the required return for Cleaver: r s = 6% + (5%)0.8 = 10%. 3. Correct answer: “ The monthly payments will decline over time”. Monthly payments will not decline over time, they will stay the same. The percentage paid toward interest declines over time. Interest due for every payment gets progressively smaller, which means that the portion toward principal gets larger. If the interest rate is lower, less is paid toward interest. 4. EBITDA = \$22,500,000; NI = \$5,400,000; Int = \$6,000,000; T = 35%; DA = ? EBITDA \$22,500,000 DA 8,192,308 EBITDA – DA = EBIT; DA = EBITDA – EBIT EBIT \$14,307,692 EBIT = EBT + Int = \$8,307,692 + \$6,000,000 Int 6,000,000 (Given) EBT \$ 8,307,692 Taxes (35%) 2,907,692 NI \$ 5,400,000 (Given) 65 . 0

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