Mathematics Assignment #75260

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FIN 6406 – Corporate Finance Len Lin Fall 2018 MIDTERM EXAM Due: 5:30pm on 9/24/2018 READ THESE INSTRUCTIONS!

1. This exam is worth a total of 100 points.

2. You should electronically submit your midterm exam via email to [email protected] with

detailed calculations. You may submit separate files in excel, pdf or word format. You will title the email “YOUR NAME – Midterm”. Good luck!

Problem 1 [10 points] In 1803, the U.S. doubled in size with the Louisiana Purchase. That well-known real estate mogul Napoleon Bonaparte sold us 827,000 square miles (529,280,000 acres–there are 640 acres in a square mile). We paid $15 million. Assume that part of the US is worth an average of $6,000 per acre in 2018. What is the annual rate of return of this purchase for the U.S.? Problem 2 [10 points] John won a $75 million lottery today. The payout is the following: John gets $2.5 million today and $2.5 million each year for the next 29 years. How much money worth today for the lottery assuming John’s federal tax rate is 39.6%, state tax is 8.5% and his annual discount rate is 10%? Problem 3 [10 points] You are offered the opportunity to put some money away for retirement. You will receive 10 annual payments of $4,500 each beginning in 26 years. If you desire an annual interest rate of 12% compounded monthly, answer the following two questions:

a. How much would you be willing to invest today? b. How much would the money worth at the end of your last payment (i.e., in year 35)?

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Problem 4 [10 points]

The following table illustrates the balance sheets for ABC Corporation

Answering the following questions.

a. What is the total current assets in 2015 for ABC Corporation? b. What is the total assets in 2015 for ABC Corporation? c. What is the total current liabilities in 2015 for ABC Corporation? d. What is the total liabilities in 2015 for ABC Corporation? e. What is the net working capital in 2015 for ABC Corporation? f. What is the equity in 2015 for ABC Corporation?

Problem 5 [20 points]: Answering the following questions.

a. What's the future value of an initial $100 after 3 years if it is invested in an account paying 8% annual interest and compounded annually? How about if the interest is compounded hourly?

b. What is the present value of $100 to be received in 3 years if the annual interest rate is 8% and compounded annually? How about if the interest is compounded daily?

c. Suppose someone offered to sell you a note calling for the payment of $1,200 in three years. They offer to sell it to you for $880. You have $880 deposit in a bank that pays a

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9.5% nominal rate with daily compounding, and you plan to leave the money in the bank unless you buy the note. The note is not risky--you are sure it will be paid on schedule. Should you buy the note? Check the decision in three ways: (1) by comparing your future value if you buy the note versus leaving your money in the bank, (2) by comparing the present value of the note with your current bank account, and (3) by comparing the effective annual rate on the note versus that of the bank account.

Problem 6 [20 points]: Answering the following questions.

a. What is the value of a 5-year, $1,000 par value bond with a 9 percent annual coupon if its required annual rate of return is 10 percent? Does the bond sell at par?

b. What would happen to the value of the above 5-year bond over time if the required annual rate of return remained at 10 percent?

c. What is the yield to maturity (YTM) on a 10-year, 9 percent annual coupon, $1,000 par value bond that sells for $1,050?

d. Suppose a 10-year, 10 percent, semiannual coupon bond with a par value of $1,000 is currently selling for $1,135.90, producing a yield to maturity (YTM) of 8 percent. However, the bond can be called after 5 years for a price of $1,025.

1. What is the bond's yield to call (YTC)? 2. If you bought this bond, do you think you would be more likely to earn the YTM

or the YTC? Why?

Problem 7 [20 points] You borrow a GPM of $280,000 with annual payments and 15-year term. The interest rate is 4.5% and the payment factors from year 1 to year 15 are: 50%, 50%, 50%, 50%, 50%, 75%, 75%, 75%, 75%, 75%, 100%, …, 100%. Questions:

1. What are the annual payments for years 1 to 15? 2. What is remaining balance at the end of each year? 3. What are the interest payment and principal payment for years 1 to 15?