rob_winter_07_final_ans

# rob_winter_07_final_ans - FINANCE 350 WINTER 2007 BUSINESS...

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F INANCE 350, W INTER 2007 I NSTRUCTOR : R OBERT S CHONLAU B USINESS F INANCE L EWIS 212 Final Exam Name Formulas: Variance: Assumptions for the entire exam (unless noted differently in the problem): β D = 0 Risk-free rate: 5% Expected return on the market: 12% Capital structure changes do not affect real investment policy. The corporate tax rate is 35%. * 1 2 2 2 2 2 2 2 2 2 2 1 1 1 ( _ ) * *(1 ) ( _ .) * *(1 )* : ( ) ( )* 2 ( , ) 2 n m n e d f m f P A A B B A B A B P A A B B A B A B AB r FV PV m PV ordinary annuity CF r r r CF PV growing perp r g E D WACC r r E D E D CAPM E R r r r w w w w Cov R R w w w w Co τ β σ ρ = + = - + = - = + - + + = + - = + + = + + 2 2 2 2 ( , ) 2 A B A B AB P A A B B A B A B AB v R R w w w w = = + + 2 ( ) ( ) 1 2 0 ... (1 ) (1 ) (1 ) L U D D t A E D V V PV TS Costs r D PV TS r CF CF CFt NPV CF r r r E D E D E D = + - = = + + + + + + + = + + + You have 2 hours to work on this exam. You might not finish the exam—that’s okay just do as much as you can. If you don’t know how to do a problem then skip it and come back to it later. Good luck!

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(1) True or False: Both the NPV and the internal rate of return methods recognize that the timing of cash flows affects project value. [1] TRUE (2) True or False: For investment horizons greater than 20 years, long-term corporate bonds traditionally have outperformed common stocks. [1] FALSE bond is less risky so less return, (3) True or False: The project cost of capital depends on the use to which that capital is put. [1] The mining industry trying to do cereal, the risk is different. TRUE (4) True or False: Assume you have two identical firms that only differ in the amount of equity and debt in their capital structures. Firm A is 100% equity and firm B is 10% debt and 90% equity. Given the risk of bankruptcy associated with debt, firm B is worth less to investors than firm A. [1] FALSE (5) In 1 or 2 sentences define what a “workout” is as defined in the assigned reading for Chapter 15,. [2] Before you enter the bankruptcy, the creditor and management negotiate deals to prevent bankruptcy. (6) In 1 or 2 sentences state what the pecking order theory says. [2] (7) In 1 or 2 sentence explain what the primary and secondary markets are for stocks. [2]
(8) A market that is semi-strong form efficient [2] a. Incorporates all publicly-available information into prices b. Incorporates only past price history into prices c. Incorporates all information into prices d. Incorporates all past information, but not any expectations about the future into prices. (9) What is the relationship between an investment's rate of return and its yield to maturity for an investor that does not hold a bond until maturity? [3] a. Rate of return is lower than yield to maturity. b. Rate of return is higher than yield to maturity.

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## This note was uploaded on 04/07/2008 for the course FIN 350 taught by Professor Schonlau during the Winter '08 term at University of Washington.

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rob_winter_07_final_ans - FINANCE 350 WINTER 2007 BUSINESS...

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