1. Use the internet to come up with an example of a highly leveraged firm and a lowly leveraged firm. Include the firm’s name, their total assets, total liabilities, and total equity according to their most recent balance sheet.

2.A company has far more cash than it needs for operations and cannot foresee any viable investment options in the near future. Further the company has a minimal amount of very cheap (low interest rate) debt. In one or two sentences each, explain why the company should or should not take the following actions:

Issue equity to bring in more cash to the company

Return cash to shareholders in the form of dividends

Hold cash in a low-returning bank account

3. Calculate the expected return and standard deviation (square root of the variance) of the following probability distribution of returns:

Possible State of Economy Probability of State Return in State

Depression = State 1 0.10 = 10% -0.25 = -25%

Recession = State 2 0.20 = 20% -0.05 = -5%

Moderate Growth = State 3 0.45 = 45% 0.10 = 10%

Fast Expansion = State 4 0.25 = 25% 0.3 = 30%

4. You invest $50,000 with a wealth manager on December 31, 2015. Over the next five years, the wealth manager has returns of 17%, 12%, (-17%), 5% and 23%. Assuming there are no fees (BIG ASSUMPTION), how much will your initial investment be worth at the end of the fifth year? What was the wealth manager’s geometric mean ANNUAL return over that time?

5. Give an example of two variables that you think would be positively correlated (don’t use this one, but think height and weight) and two that you think would be negatively correlated (don’t use this one, but think hours of weekly exercise and weight). Provide a brief explanation of why you think these relationships exist (I won’t grade on their actual correlation but if your explanation would lead to the correlation you believe).

6. You take out a loan to buy a brand new car. The finance guy at the car dealership tells you the APR is 7%. Calculate the Effective Annual Rate (EAR) if the interest compounds annually, quarterly, monthly AND continuously.

7. Calculate the interest rate on a credit card whose balance doubles every six years (if no payments are made and no fees are charged) using the Rule of 72.

8. Calculate the NPV of a project with the following cash flows and a 10% discount rate:

Year 0 1 2 3 4

Cash Inflows $0 $125 $150 $200 $225

Cash Outflows $375 $175 $100 $50 $50

From years 5 – 9, you will receive net cash inflows of $100 per year

9. Your company’s CEO is old and senile, damaging both the company’s reputation along with the shareholders’ value. Last year, his salary and bonus combined to be $7.5 million. For $20 million, you can buy out his contract today while spending $2.5 million to recruit a new CEO (also assumed to occur today – the new CEO will have the same compensation package as the old one). You estimate that the company’s market valuation will increase shareholder value by $15 million on the same date, the date of the announcement. In addition, profits will increase by $5 million per year for the next 10 years. All payments can be viewed as being made by shareholders; calculate the payback period and IRR for shareholders on this investment.

Answer rating: 100% (QA)

1 Leverage of a company means something that amplifies profits or losses It is generally used keepin... View the full answer