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Unformatted text preview: The Wharton School Jeffrey F. Jaffe Corporate Finance (FNCE 100) Spring, 2007 Midterm Examination PLEASE READ THESE INSTRUCTIONS Instructions: Please read the exam instructions carefully. After you read the instructions please print your name and student ID and sign the exam at the bottom. 1. Please do not open the exam until you are told to do so. 2. The exam is administered under the Universitys rules of academic conduct; the Code of Academic Integrity applies. To ensure the fairest possible chance for everyone, the following procedure will be used: (a) No one may leave the room during the last 10 minutes of the examination period. (b) When time expires, remain seated and silent. Pass your exam to the nearest aisle. (c) Anyone seen writing after time expires will forfeit 20 points. 3. This exam book has 16 , double-sided, numbered pages, including this page. 4. The exam is closed book, but you may use a calculator and both sides of an 8.5 x 11 inch sheet of notes. No other notes, books, or aids are allowed. Answer all questions for a possible 100 points. Each question is worth 20 points. You have 2 hours. 5. Only written re-grade requests submitted with a completely unaltered exam paper can be considered. 6. If you use your calculator, please provide inputs so that we may provide partial credit where appropri- ate. First 3 Letters of Last Name: Name (Print): Student ID Number: Signature: 1 February 26th, 2007 Midterm The Wharton School Jeffrey Jaffe Corporate Finance (100) Spring, 2007 1. Net Present Value Thomas James, who just won the Pennsylvania lottery, has hired you as his financial advisor. Tom can take the lottery payout in two ways, a) as a 50 million ($50m) lump sum payment, or b) as an annuity of 30 payments of $5m per payment, with the first payment today and subsequent payments at annual intervals. Tom needs to plan for his and his familys future. Tom tells you he wants to spend $1m per year every year for the next 25 years, with the first payment today and the last payment 24 years from today. After that, he expects to spend twelve $2m payments at two-year intervals, with the first payment 25 years from today and the last payment 47 years from today. Once these expenses are accounted for, Tom will invest any remaining money in a trust fund for his younger brother Bob, which his younger brother will receive on his 21st birthday ten years from today. Tom pays tax at a rate of 40% on all payments he receives. Tom can borrow or lend at a nominal rate of 12%. Assume all cash flows are to be discounted at an annual rate of 12%. Do not tax-adjust this discount rate. All numbers are nominal. Give all your answers to 3 decimal places....
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This note was uploaded on 10/06/2010 for the course FNCE 100 taught by Professor Jaffe during the Spring '10 term at UNC Asheville.
- Spring '10
- Corporate Finance