Midterm Exam Part B

Midterm Exam Part B, Problems

Directions: You may complete the exam in Excel or in Word.

• If you choose to complete the exam in Excel, open the Excel program and create a new spreadsheet named mid-term exam (your last name). Then answer the following questions on the spreadsheet. You may put each problem on a separate tab in the spreadsheet if you like. Save the file when you are finished, then submit the exam on the course website just as you would a normal homework assignment.

• If you choose to complete the exam in Word, open the Word program and create a new document named mid-term exam (your last name). Then answer the following questions on the document. Be sure to show your calculations! Save the file when you are finished, then submit the exam on the course website just as you would a normal homework assignment.

Reminders:

• In Excel, use formulas in the spreadsheet to solve the problems so your instructor can see how you arrived at your answers. If your instructor cannot determine how an answer was calculated, no credit will be given for that answer. If a question calls for a text answer, such as a few sentences or a short paragraph, create a text box on the spreadsheet and enter your text in the box. In Word, be sure to show clearly how you arrived at your answers by entering the calculations as text. If your instructor cannot determine how an answer was calculated, no credit will be given for that answer.

• Be sure to complete the exam by the deadline posted for it. Late submissions without good reason will be assessed a penalty.

• Be sure to put your name on the spreadsheet or in the Word document.

• You must complete the exam by yourself, without assistance from anyone else. Copying and pasting from another person’s spreadsheet or Word document or from the Internet is not allowed. Also, you must not give assistance to anyone else. That means you may not send your files, or parts of your files to anyone else and you may not receive files, or parts of files from anyone else.

• Ask your instructor if you have any questions.

Exam problems begin on the next page. There are seven questions worth a total of 40 points.

-----------------------------

Question 1: (Financial Statement Analysis) 10 points

Consider the following sets of financial statements and answer the questions that follow:

BALANCE SHEET, as of year-end2012INCOME STATEMENT2012

ASSETS Net sales$512,305

Cash and marketable securities$45,183Cost of goods sold326,327

Accounts receivable41,398 Gross profit$185,978

Inventory31,367Admin and selling exp$29,930

Total Current assets$117,948Depreciation14,875

Plant & equipment, gross$148,746Miscellaneous expenses5,822

Accumulated depreciation(21,880) Total operating exp$50,626

Net fixed assets$126,866 EBIT$135,352

Total assets$244,814Interest on ST loans$3,795

LIABILITIES AND EQUITIESInterest on LT loans2,319

Short-term bank loans$54,216Interest on mortgage303

Accounts payable35,591 Total interest$6,417

Accruals23,252 Before-tax earnings$128,935

Total Current liabilities$113,059Taxes38,680

Long-term bank loans$21,082Net income$90,254

Mortgage3,788

Total Long-term debt$24,870Dividends paid$0

Total liabilities$137,929

Common stock (7 million shares)$44,538Addition to retained earnings$90,254

Retained earnings62,347

Total equity$106,885EPS (7,000,000 shares)$12.89

Total liabilities and Equity$244,814

BALANCE SHEET, as of year-end2012INCOME STATEMENT2012

ASSETS Net sales$512,305

Cash and marketable securities$105,183Cost of goods sold398,844

Accounts receivable21,398 Gross profit$113,461

Inventory81,367Admin and selling exp$29,930

Total Current assets$207,948Depreciation5,875

Plant & equipment, gross$58,746Miscellaneous expenses5,822

Accumulated depreciation(21,880) Total operating exp$41,626

Net fixed assets$36,866 EBIT$71,835

Total assets$244,814Interest on ST loans$1,205

LIABILITIES AND EQUITIESInterest on LT loans2,319

Short-term bank loans$17,216Interest on mortgage303

Accounts payable10,591 Total interest$3,827

Accruals8,252 Before-tax earnings$68,008

Total Current liabilities$36,059Taxes20,402

Long-term bank loans$21,082Net income$47,605

Mortgage3,788

Total Long-term debt$24,870Dividends paid$0

Total liabilities$60,929

Common stock (7 million shares)$121,538Additions to retained earnings$47,605

Retained earnings62,347

Total equity$183,885EPS (7,000,000 shares)$6.80

Total liabilities and equity$244,814

FINANCIAL STATEMENTS, Pat's Company

FINANCIAL STATEMENTS, Mary's Company

a. To which firm would you prefer to lend money? Why? (Justify your answer with at least two ratios).

b. In which firm would you prefer to invest? Why? (Justify your answers with at least two ratios).

Question 2: (Time Value of Money – Monthly Loan Payments) 5 points

Best Buy has a flat-screen HDTV on sale for $995. If you could borrow that amount from First National Bank of St Louis at 4% for 1 year, what would be your monthly loan payments?

Question 3: (Time Value of Money – Present Value) 4 points

You would like to have $1,000,000 accumulated by the time you turn 65, which will be 30 years from now. How much would you have to put away each year to reach your goal, assuming you're starting from zero now and you earn 5% annual interest on your investment?

Question 4: (Risk & Return) 4 points

You hold a portfolio of stocks consisting of the following:

Stock Beta Current Value

Caterpillar 1.0 $20,000

CitiCorp 0.6 $23,000

Wendy’s 0.7 $18,000

Raytheon 1.1 $19,000

Total: $80,000

a. What is the beta of the portfolio?

b. You have decided to sell Raytheon for $16,000 and to use the proceeds to buy $16,000 of LuluLemon stock with a beta of 1.5. After the transaction is complete, what will be the new beta of the portfolio? (Disregard any commissions on the buy and sell transactions.)

Question 5: (Risk & Return) 3 points

a. Define the Capital Asset Pricing Model.

b. Explain what a stock's "beta" is.

c. If the risk-free rate is 1% and the expected rate of return on the stock market is 6%, what is the required rate of return per the CAPM for a stock that has a beta of 1.1?

Question 6: (Bond valuation) 8 points

a. Dick's Company's bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 5%. The bonds have a yield to maturity (YTM) of 8%. Given these conditions, what should be the current price of these bonds?

b. Jerry's Company's bonds have 6 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 6%. The bonds have a current market price of $800. Given these conditions, what should be the yield to maturity (YTM) of these bonds?

Question 7: (Stock Valuation) 6 Points

a. Define the Efficient Markets Hypothesis.

b. Financial theorists generally define three forms of market efficiency: the weak-form, the semi-strong-form, and the strong-form. Explain these three forms.

------------------------------

End of exam