MGT 3078 FINANCIAL MANAGEMENT & INVESMENTS SPRING 2010 EXAM 1

Student: ____________________________________________________ ID: ______________________

Answer the following questions to the best of your ability. Many of the questions are purposefully open ended. The intention is to cause you to THINK about a topic. You will be graded on the quality of your response, not your ability to regurgitate information from the book. You may use any outside resource you choose (including classmates) to formulate your response. However, your final answer must be your own. Do not cut and paste from the Internet and do not duplicate a classmates response. If two students turn in duplicate responses to a short answer/essay question, neither will get credit for the question. A hard copy of the exam must be put in my hands before March 1, 2010 at 8:05 AM, our normal class time. Be warned. Your printer will fail, your automobile will have severe problems, or an unforeseen personal crisis will materialize that morning. Please plan your work accordingly.

Ethics Challenge: I have abided by the Georgia Tech honor code in the preparation and execution of this exam. The answers provided are my own thoughts and my own words. Signature:____________________________________________________________________________

1.

RISK FREE RATES: What are the current risk free rates? Explain why the 1 year risk free rate is different than a 10 year risk free rate. Explain how you would actually acquire the security to earn the risk free rate. http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml TIME VALUE OF MONEY: You want to retire in 25 years. retire? You decide. a. What annual amount do you think you will need to

2.

Given that amount, assume that you will live for 50 more years after your retire. How much money will you need in your investments account in order to withdraw your desired annual amount for 50 years? Assume you can earn 12% on your money. The calculation is called the present value of an ordinary annuity. Assume you invested in a Roth IRA, so your annual withdrawals are tax free. What if you assume that you will need annual 3% inflation adjustments to the amount you chose? How much money will you need in your investments account to meet your annual goal (plus 3% more every year) if you can earn 12% on your money? The calculation is called the present value of a growing annuity. Assume you invested in a Roth IRA, so your annual withdrawals are tax free. How much do you need to contribute to your Roth IRA every month (starting next month) to accumulate the amount you calculated in part a? You can earn an average of 12% on your investments. This calculation is called the future value of an ordinary annuity. How much do you need to contribute to your Roth IRA every month (starting next month) to accumulate the amount you calculated in part a? Assume you can contribute .25% more every month. You can earn an average of 12% on your investments. This calculation is called the future value of a growing annuity.

b.

c.

d.

3.

TIME VALUE OF MONEY: Eight years ago, you purchased a home and took a 30 year mortgage from Bank of America (BOA) for $275,000. The interest rate was 12% APR. a. What is your monthly (principle and interest) payment? Your actual payment would include principle, interest, taxes, and insurance, but we are just concerned with principle and interest here - the PMT on your calculator, the C in the annuity formula. What is your current balance? How much interest have you paid BOA over the last 8 years? Wachovia is offering 15 year mortgage rates of 4.75% APR. There is a 2% fee for appraisal, taxes, legal, etc. For example, it cost $2000 in fees to borrow $100,000. You do not have the money for the fees, but Wachovia is willing to roll those fees into your new loan when you refinance your current mortgage. What is the amount of the new mortgage at Wachovia? This is the BOA balance plus 2% Wachovia fees. What is your new (principle and interest) payment? How much total interest will you pay Wachovia if you pay off the loan over 180 months (15 years)? How much interest would you have paid BOA if you had kept their mortgage and paid it according to schedule? (22 more years)

b. c. d.

e. f. g.

4.

RISK & RETURN: Pick a stock. Calculate the monthly returns for the past 5 years. Use a spreadsheet. a. b. c. What is the standard deviation of returns (riskiness) for this stock? What is the coefficient of variation for this stock? Calculate the beta of this stock using monthly returns and the monthly returns of a market index like the S&P or the DJIA.. You will also need the monthly risk free rates for that same time period. How close is your beta to the beta published on finance.yahoo.com? Hint: Set up two columns on your spreadsheet for R-Rf and Rm-Rf. Run a least squares regression on the two columns to calculate beta.

5. FINANCIAL STATEMENT ANALYSIS: Pick a company and find or calculate the ratios listed in Table 8-7 of
your textbook. Calculate and interpret the current ratio, quick ratio, inventory turnover, total asset turnover, debt ratio, time interest earned ratio, gross profit margin, operating profit margin, net profit margin, earnings per share, ROA, ROE, P/E, and M/B. If you cannot find the exact numbers, make some assumptions. Many of the numbers for KO can be found here: http://finance.yahoo.com/q/ks?s=KO, http://finance.yahoo.com/q/is?s=KO&annual, http://finance.yahoo.com/q/bs? s=KO&annual. Do not use KO. 6. DECISION MAKING: Calculate the NPV, MIRR, IRR, payback period, and profitability index for the attached project scenario. You will also need to calculate WACC so that you will have a rate to use in your calculations. This project is acceptable only if you can earn WACC + 12%. Make some assumptions about sales or cost projections and calculate a best case and a worst case scenario. Play with the year 1 input values and see how much you can change the inputs and still have a profitable project. Make a recommendation about the feasibility of the project.