JaffeMidtermSpring07A - The Wharton School Corporate...

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The Wharton SchoolJeffrey F. JaffeCorporate Finance (FNCE 100)Spring, 2007Midterm ExaminationPLEASE READ THESE INSTRUCTIONSInstructions:Please read the exam instructions carefully.After you read the instructions please print your name andstudent 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 University’s rules of academic conduct; the Code of AcademicIntegrity applies. To ensure the fairest possible chance for everyone, the following procedure will beused:(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 ofnotes. No other notes, books, or aids are allowed. Answer all questions for a possible 100 points. Eachquestion 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, 2007MidtermThe Wharton SchoolJeffrey JaffeCorporate Finance (100)Spring, 20071.Net Present ValueThomas 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 anannuity of 30 payments of $5m per payment, with the first payment today and subsequent paymentsat annual intervals.Tom needs to plan for his and his family’s future. Tom tells you he wants to spend $1m per year everyyear 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 25years 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 hisyounger 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 rateof 12%. Assume all cash flows are to be discounted at an annual rate of 12%. Do not tax-adjust thisdiscount rate. All numbers are nominal.Give all your answers to 3 decimal places.(a) What is the present value of his winning ticket after tax for each of the two payment options?Should he take the lump sum or the annuity?(b) What is the present value of Tom’s planned future expenditures?

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