fill out two papers, you can choose both handwriting or computer work, please focus more on answering 5 numerical problems in detail and make sure they are precise with fomulas and calculation instead of just one answer.
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UNFORMATTED ATTACHMENT PREVIEW
CORPORATE FINANCE FIN324 Binghamton University School of Management Kristian Rydqvist Spring 2016 Midterm Exam 1. True-false statements (25p) Answer true or false. Wrong answer costs -5 points. Right answer gives +5 points. The maximum number of points is 25p, if you answer five right and no wrong, six right and one wrong, etc. The minimum number is -50, if you answer all wrong. (a) A rights offer at a discount dilutes the stock price. (b) Financial risk of debt decreases with leverage. (c) The present value of the corporate debt tax shield increases with leverage. (d) In a perfect capital market, the firm’s investment-payout decision is separate from investors’ consumption-savings decisions. (e) Corporate tax breaks the Modigliani-Miller irrelevance theorem. (f) A Roth IRA is tax disadvantaged relative a regular savings account. (g) The expected rate of return on equity equals the expected rate of return on debt. (h) On average, the stock price increases over the ex-dividend day. (i) Corporate tax raises the cost of capital. (j) The risk premium of corporate debt decreases with corporate leverage. 2. Institutional questions (20p) (a) What is the primary difference between corporate debt and corporate equity? (b) What is the purpose of credit rating? (c) What is a 401(k) account? (d) What is share redemption? 1 3. Conceptual questions (15p) (a) What is double-entry book keeping designed for? (b) What do economists mean by decreasing returns to scale? (c) What is the fundamental accounting identity? 4. Numerical problem I (20p) The expected cash flows of a project have been estimated to 200 million per year forever. There is uncertainty. Investors are not quite sure whether the cash flows are 150 million or 250 million per year, and assess an equal probability (1/2) to each scenario. (a) The firm is half financed with risk-free debt at rate 5%. If the discount rate on equity is 15%, what is net income? (b) If shareholders are positively surprised, what is return on equity? (c) If shareholders are negatively surprised, what is return on assets? (d) What is the average return on assets and what is the operating risk premium? 5. Numerical problem II (20p) Consider a firm with a stock price of $500 per share. The price exceeds the firm’s target price level, and it considers reducing the price per share. (a) What is the new price per share, if the firm splits the stock five new for one old (S 5:1)? (b) What is the resulting price per share if the firm combines a stock split of three new for one old (S 3:1) with a stock dividend of one new for two old (F 1:2)? (c) After bringing down the price level to $50 (somehow), the firm considers making a rights offer of two new shares for one old at a 50% discount (N 1:2 – 25). What is the resulting price without the right? (d) The rights offer of the previous question (N 1:2 – 25) takes place in time near the payment of the next dividend of $5 per share. What is the new price per old share if the new shares are excluded from the dividend? 2 Formulae 0 = −I + V = T X Ct . (1 + r)t t=1 DIV . r−g DIV + I = N OI + N E. rA = rD × D E + rE × . A A rE = rA + (rA − rD ) × D . E ROE = ROA + (ROA − ROD) × D . E VL = VU + τC DL . rA = rD (1 − τC ) × E D + rE × . A A rE = rU + (rU − rD )(1 − τC ) × S= Pex = Pex = D . E Pcum × (1 + n) . Pcum + n × P0 1 × Pcum + n × P0 . 1+n 1 × Pcum + n × P0 − 1 × D 1 × D + . 1+n 1 3 ECONOMICS OF TRANSACTIONS IN FIRMS ECON483F/ECON509B/FIN520 Binghamton University School of Management Kristian Rydqvist Spring 2017 Midterm Exam 1. True-false statements (15p) Answer true or false. Wrong answer costs -3 points. Right answer gives +3 points. The maximum number of points is 15p, if you answer five right and no wrong, six right and one wrong, etc. The minimum number is -30, if you answer all wrong. (a) The IRR rule and the NPV rule are equivalent. (b) Shareholders of a non-traded family firm always want management to use the NPV rule. (c) Social security tax is regressive. (d) Under the assumptions of the class (perfect markets), taking out a personal loan or a corporate loan is a matter of irrelevance. (e) Present value is additive. (f) Early withdrawal from a Roth 401(k) account is not subject to a 10% penalty tax. (g) Share repurchases have a tax advantage over cash dividends. (h) State income tax is deductible from federal income tax. (i) Corporate debt securities are risk free. (j) Economies of scale imply decreasing returns to scale. 2. Conceptual questions (15p) (a) Why do shareholders of a widely held firm unanimously agree on the NPV rule? (b) Why do old shareholders capture the surplus in transactions between the firm and the capital market? (c) What do economists mean when they refer to the separation of corporate investment and financing decisions? 1 3. Institutional questions (15p) (a) What is a reverse stock split? (b) What is the main difference between personal income tax and capital gains tax? (c) What is the main difference between a defined benefit plan and a defined contribution plan? 4. Numerical problem I (20p) A firm makes a rights offer of one new share for four old shares at an issue price of 100 (N 1:4 – 100). (a) If the market price equals 200 on the last day before the stock goes ex, what is the ex-right market price per share? (b) What is the ex-right market price per share, if the market price equals 200 and the rights offer in the previous question (N 1:4 – 100) takes place at the same time as a stock dividend of one new share for four old shares (F 1:4)? (c) What is the ex-right market price per share, if the market price is 200, the firm makes a rights offer of one new share for four old shares at an offer price of 100 (N 1:4 100), and the next dividend of 20 per share is reserved for old shareholders? (d) What is the ex-right market price per share, if the market price is 200, the firm makes a rights offer of one new share for four old shares at an offer price of 100 (N 1:4 – 100), old shareholders receive the next dividend of 20 per share, and new shareholders receive half the next dividend of 10 per share? 5. Numerical problem II (15p) Consider a company with book value of assets equal to 100. Suppose expected net operating income (NOI) is 10, contractual interest payments on debt are 3, and expected net income 70. (a) If the company is 50% financed with debt and 50% with equity, what is the expected rate of return on debt? (b) If the company is 50% financed with debt and 50% with equity, what is the expected rate of return on equity? (c) How do you explain the difference between (a) and (b)? 2 6. Numerical problem III (20p) Suppose the expected rate of return is 4% per year, your investment horizon is 25 years, the marginal tax rate on ordinary income is 28%, and the marginal tax rate on investment income 15%. (a) What is the future value of $1,000 before-tax income, if it is invested after tax into a regular savings account? (b) If the expected withdrawal tax rate is 35%, what is the future value of $1,000 beforetax income, if it is invested into a 401(k) account? (c) If the expected withdrawal tax rate is 35%, what is the future value of $1,000 beforetax income, if it is invested after tax into a Roth 401(k) account? (d) How do you explain the different outcomes of (a)–(c)? Formulae 0 = −I + V = Pex = Pex = T X Ct . (1 + r)t t=1 DIV . r−g 1 × Pcum + n × P0 . 1+n 1 × Pcum + n × P0 − 1 × D 1 × D + . 1+n 1 WS = [100(1 − τ0 )] × [1 + r(1 − τi )]N . WP = [100(1 + r)N ] × (1 − τw ). WR = [100(1 − τ0 )] × (1 + r)N ]. rA = rD × E D + rE × . A A rE = rA + (rA − rD ) × D . E ROE = ROA + (ROA − ROD) × 3 D . E
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