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1FINANCE (FIN 3001, Section 11) FALL 2012 INTERMEDIATE FINANCE PROFESSOR: ARTHUR WILSON NAME_______________________ FINAL EXAM (30 points) Please...

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1FINANCE (FIN 3001, Section 11) INTERMEDIATE FINANCE FALL 2012 PROFESSOR: ARTHUR WILSON NAME_______________________ FINAL EXAM (30 points) Please confine your work to these sheets (including the backs). Write clearly. Include your name. Clearly mark your answers. If you wish to add a sentence or two to clarify your answers, you may receive partial credit (this is a good idea). Good Luck! Multiple Choice (1 point each) 1) A firm has total debt of $1,420 and a debt-equity ratio of .28. What is the value of the total assets? a) $3,986 b) $1,818 c) $2,800 d) $6,491 e) $5,071 f) Other, specify. 2) You are borrowing $5,270 to buy a car. The terms of the loan call for monthly payments for 4 years at a 5.50 % interest. What is the amount of each payment? a) $122.56 b) $98.41 c) $123.99 d) $97.86 e) $126.14 f) Other, specify 3) Jefferson & Sons is evaluating a project that will increase annual sales by $80,000 and annual costs by $40,000. The project will initially require $145,000 in fixed assets that will be depreciated straight-line to a zero book value over the 10 year life of the project. The applicable tax rate is 34 %. What is the operating cash flow for this project? a) $31,330 b) $25,500 c) $23,170 d) $16,830 e) $26,400 f) Other, specify 4) Hickock Mining is evaluating when to open a gold mine. The mine has 70,000 ounces of gold left that can be mined, and mining operations will produce 7,000 ounces per year. The required return on the gold mine is 12 %, and it will cost $16 million to open the mine. When the mine is opened, the company will sign a contract that will guarantee the price of gold for the remaining life of the mine. If the mine is opened today, each ounce of gold will generate an aftertax cash flow of $443 per ounce. If the company waits one year, there is a 58 % probability that the contract price will generate an aftertax cash flow of $493 per ounce and a 42 % probability that the aftertax cash flow will be $403 per ounce. What is the value of the option to wait? a) $267,828.62 b) $233,765.98 c) $50,632.64 d) $126,687.55 e) $-66,716.15 f) Other, specify. 5) The outstanding bonds of Winter Time Products provide a real rate of return of 3.20 %. The current rate of inflation is 2.10 %. What is the nominal rate of return on these bonds? a) 5.30 % b) 5.37 % c) 5.32 % d) 5.35 % e) 5.39 % f) Other, specify.
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6) Miller Brothers Hardware paid an annual dividend of $1.65 per share last month. Today, the company announced that future dividends will be increasing by 2.80 % annually. If you require a 8.5 % rate of return, how much are you willing to pay to purchase one share of this stock today? a) $28.11 b) $31.41 c) $60.58 d) $29.76 e) $58.93 f) Other, specify 7) A researcher has determined that a two-factor model is appropriate to determine the return of a stock. The factors are the %age change in GNP and an interest rate. GNP is expected to grow by 4.5 %, and the interest rate is expected to be 2.4 %. A stock has a beta of 1.5 on the %age change in GNP and a beta of -1.2 on the interest rate. If the expected rate of return for the stock is 9.2 %, what is the revised expected return of the stock if GNP actually grows by 2.6 % and interest rates are 3.9 %? a) 4.55% b) 5.8% c) 8.49% d) 8.81% e) 6.94% f) Other, specify 8) In a world with taxes and financial distress, when a firm is operating with the optimal capital structure: I. the debt-equity ratio will also be optimal. II. the weighted average cost of capital will be at its minimal point. III. the required return on assets will be at its maximum point. IV. the increased benefit from additional debt is equal to the increased bankruptcy costs of that debt. a) I and IV only b) II and III only c) I and II only d) II, III, and IV only e) I, II, and IV only f) Other, specify. 9) The WACC approach to valuation is not as useful as the APV approach in leveraged buyouts because: a) there is greater risk with a LBO. b) the capital structure is changing. c) there is no tax shield with the WACC. d) the value of the levered and unlevered firms are equal. e) the unlevered and levered cash flows are separated which cannot be used with the WACC approach. f) Other, specify 10) Cell Tower stock has a current market price of $40 a share. The one-year call on Cell Tower stock with a strike price of $41.5 is priced at $3 while the one-year put with a strike price of $41.5 is priced at $1. What is the risk-free rate of return? a) 8.36 % b) 8.91 % c) 9.86 % d) 9.36 % e) 9.21 % f) Other, specify
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