640fall2012MT solution - Name Financial Management(BUSI 640...

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Name:_______________________________ Financial Management (BUSI 640) Professor Faulkender Midterm Exam: Fall 2012 1) The exam is open book and open notes. You may use Excel and a calculator. 2) Point totals for each question are specified in parentheses. There are 220 total points. 3) Circle your numerical answers. This makes it easier for me to find them. Show all calculations and the inputs of all values solved for using your calculator or Excel. This allows me to determine how your numbers were arrived at. If you get stuck on the math, tell me what the correct answer should be based on your intuition. Incorrect numerical answers based on the correct logic will receive partial credit. 4) Your answer should be given in the space provided. If you need more space, feel free to write on the back of the page, but clearly mark the question number you are answering. If you would like to add pages from your Excel spreadsheet, please staple them following the corresponding question. You may also upload your spreadsheet to Blackboard. 5) As always, I expect you to abide by the honor code. I trust that no one will give or receive assistance which gives them an unfair advantage over other students. You should not speak about the exam to anyone who has not yet completed it. Please write the following below, consistent with the Smith School Honor Code: "I pledge on my honor that I have not given or received any unauthorized assistance on this exam." 6) Statements by you which are true, but do not answer the question, will not raise your score. Statements that are incorrect will reduce your score. Question Score 1 (45) 2 (40) 3 (40) 4 (50) 5 (45) Total (220 possible)
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1. Having recently graduated with his MBA at the Smith school and taking a job in investment banking, Rick is considering the purchase of a platinum edition Cadillac Escalade (this version includes four within-headrest monitors connected to the onboard DVD entertainment system, a 6.2L V8 engine, and 22” chrome rims). With tax and license, the vehicle will cost $92,000. a. Rick will use $20,000 of his signing bonus towards the down payment and finance the rest. Since he lives in New York and rents an apartment, he will borrow the remaining $72,000 from the dealer’s financing partner over a five-year period with monthly payments at a 4.8% simple annual interest rate. Under those terms, what do you estimate to be the monthly payment? (10) b. One of Rick’s colleagues, Ben, is looking at the same vehicle. However, he lives in New Jersey where he owns a home and will use the equity in his house to finance the purchase. Ben will pay all $92,000 using his home equity line of credit and pay it off over the next seven years making constant monthly payments. The line of credit also carries a 4.8% annual rate but because the loan is considered a mortgage for tax purposes, the interest payments are tax deductible (Ben’s taxable income in a calendar year is lower by the amount paid in mortgage interest that year). If Ben’s marginal tax rate (federal and state) is 32%, what is his effective monthly payment on the vehicle? By “effective”, I am looking for the constant out-of-pocket monthly payment net of the reduction in taxes from the mortgage interest deduction. (15)
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c. Rick and Ben’s managing partner, Eric, makes significantly more money than they do
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  • Fall '12
  • Michael

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