FIN+4414+-+First+Midterm+Exam+-+Spring+2011+-+Code+B+-+Solutions-1

FIN+4414+-+First+Midterm+Exam+-+Spring+2011+-+Code+B+-+Solutions-1

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FIN 4414 – First Midterm Exam - Code B - Solutions Page 1 Name (Printed) ______________________________________ Section ___________ FIN 4414 Financial Management Sections 2109 and 2111 First Midterm Exam – Code B – Solutions March 2, 2011 Note: This midterm exam consists of 3 short essays, worth 10 points each, and 14 problem-oriented questions, worth 5 points each. By turning in this exam I am confirming that all work on this exam is my own and that I have not received help from other individuals in answering the specific questions on this exam. Student’s Signature __________________________________________________________
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FIN 4414 – First Midterm Exam - Code B - Solutions Page 2 Score _______________ 1. In the space provided below, discuss (1) why buying an option is like borrowing money on a non-recourse basis, (2) what we mean by the term “embedded interest” and what effect this would have on an option’s price, and (3) why the concept of embedded interest implies that American call options will never be exercised before their expiration date. Various Responses Are Acceptable 2. In the space provided below, discuss the concept of an embedded insurance premium within a call option’s price from the viewpoint of both the writer and the buyer of the call options, discuss how this impacts the price of the option, and then show how embedded insurance is related (if at all) to Put-Call- Parity. Various Responses Are Acceptable 3. In the space provided below, discuss Daniel Pink’s main premise as shown in the video, “A Whole New Mind”, discuss how this relates to Abundance, Asia, and Automation, and then discuss whether you agree or disagree with this premise, and why. Various Responses Are Acceptable Problem-Oriented Questions, Worth 5 Points Each You are given the following information (partially filled table) for Problems 4 - 6: Statement Year 0 Year 1 Year 2 Year 3 Revenue $95,000.00 $85,000.00 $80,000.00 COGS -$57,000.00 -$51,000.00 -$48,000.00 Depreciation -$32,500.00 -$19,500.00 -$13,000.00 EBIT $5,500.00 $14,500.00 $19,000.00 Interest $0.00 $0.00 $0.00 EBT $5,500.00 $14,500.00 $19,000.00 Taxes -$2,200.00 -$5,800.00 -$7,600.00 Net Income $3,300.00 $8,700.00 $11,400.00 EOY Cash $0.00 $35,800.00 $64,000.00 $88,400.00 EOY Fixed Assets $65,000.00 $32,500.00 $13,000.00 $0.00 EOY Equity $65,000.00
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FIN 4414 – First Midterm Exam - Code B - Solutions Page 3 NOPAT BOY Invested Capital WACC EVA Present Value at Year 0 Total Present Value 4. Assume the data in the table above, that the original investment is $65,000, that no additional investment in assets is made after Year 0, that cash flow is not paid out to the investors but is simply added to the cash account on the balance sheet, and that the shareholders' required rate of return (r S ) is equal to 10 percent. Also assume that this project (firm) will be liquidated at the end of Year 3 and that all proceeds (cash) are then distributed to the shareholders. Given this information, determine the economic value
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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FIN+4414+-+First+Midterm+Exam+-+Spring+2011+-+Code+B+-+Solutions-1

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