WILFRID LAURIER UNIVERSITY

WATERLOO, ONTARIO
Session: Final Exam Name:
Course No.: BU283
Title: Financial Management I I.D. #
Professor(s): Lennox & McNally
Number of pages: 24 Section:
Length of examination: 2.5 hours
Examination aids allowed: Laptop, Calculator, Dictionary (if foreign student)

The doors of the examination room will be opened approximately 10 minutes before the start of the examination. Candidates will be
permitted to enter the examination room quietly up to one half hour after the scheduled start of the exam. Candidates arriving late
will not be allowed any extra time.
Candidates must not begin the examination or attempt to read the examination questions until instructed to do so.
**THE UNIVERSITY IS NOT RESPONSIBLE FOR THE LOSS OF VALUABLES BROUGHT INTO THE EXAM LOCATIONS OR
CLASSROOMS WHERE EXAMS ARE BEING WRITTEN.
Candidates once having entered, may not leave the exam room before completing and submitting the exam unless accompanied
by a Proctor. Candidates are not permitted to submit their examination and leave the examination room until 1 hour after the
examination has begun, and in no case before their attendance has been taken. In no case may a candidate leave the room
temporarily, for any reason, until 30 minutes after the start of the examination. In order that remaining candidates are not
disrupted, candidates must remain seated and may not leave the examination room during the last 15 minutes of the examination
session.
At the close of the examination period, candidates must stop writing immediately. The Presiding Officer may seize the papers of
candidates who fail to observe this requirement, and a penalty may be imposed at the discretion of the instructor. Candidates must
submit all their work, according to the instructions of the Presiding Officer, including all materials and a copy of the examination
paper with their name and student ID number written on it. Unused examination booklets may not be taken from the examination
room.
A candidate who leaves before the examination is over must hand in all completed and attempted work, notes made during the
exam, and a copy of the examination paper with their name and student ID number on it.
Talk or any form of communication between candidates is absolutely forbidden. No information of any kind is to be written on
the question paper or on scrap paper for the purpose of assisting other candidates. Responses to questions must not be done in an
exaggerated way or in a manner that will involve transmission of information to others.
Candidates must remain seated during the examination period. A candidate needing to speak to the proctor (e.g. to ask for
additional supplies or to request permission to leave the examination room for any reason) should so indicate by raising his or her
hand.
Questions concerning possible errors, ambiguities or omissions in the examination paper must be directed to the proctor who will
investigate them through the proper channels. The proctor is not permitted to answer questions other than those concerning the
examination paper.
Candidates must not use or attempt to use any improper source of information. No candidates for an examination may bring
into the examination room any books, notes or other material containing information pertaining to the examination unless the
examiner has given instructions that such material will be allowed and this instruction is specified on the examination paper. Any
item brought into the examination room is subject to inspection.
No briefcases, backpacks or other bags and carriers may be brought to the desk site where the candidate is writing the
examination. These bags should be left outside the examination room. If books, notes etc. cannot be left outside the examination
room, they must be put at the front of the examination room in a place designated by the proctor before a candidate takes a seat.
Candidates are advised not to bring valuables to the examination room.
No electronic or communication devices will be allowed in the examination room, including cell phones, smartphones, pagers,
etc. Cell phones will be taken away if found and an Irregularity notice will be filed with the Integrity Office. Calculators are not
allowed unless specified by the instructor and indicated on the examination paper. Only non-programmable calculators without
lids, authorized by the instructor, will be allowed. It is the candidate's responsibility to ascertain whether the use of calculators is
permitted, and, if it is, whether any restrictions are imposed on the types of calculators that may be brought to the examination.
No pencil cases are allowed on the desks.
Translation dictionaries (e.g. English-French) or other dictionaries, (thesaurus, definitions, technical) are not allowed unless
specified by the instructor and indicated on the examination paper. Electronic dictionaries are never allowed.
Except for bottled water (with label removed), no food or drink is allowed in the examination room. Candidates with health
problems that warrant relaxation of this regulation should provide medical documentation to the presiding officer prior to the
beginning of the examination. Such students should restrict themselves to those items and packaging that will least distract other
examinees.
Candidates are expected to write their examinations in an honest and straightforward manner. Where there are reasonable grounds
for believing a violation of exam protocol has occurred, the candidate will be subject to the disciplinary procedures and
sanctions according to the University Calendar.
Only currently registered students will be permitted to write the final exam.Examinations conducted at Wilfrid Laurier University will
be bound by WLU regulations, regardless of where the candidate is registered. Approved by Senate ( Oct 27/2003) Updated January 2014
 ADDITIONAL INSTRUCTIONS
BEFORE THE EXAM
1. Complete the personal identification portion of the multiple choice answer card.
Shade in the boxes below your student number on BOTH sides of the Scantron card.
2. Your student number should be left-aligned in the field.
3. Make sure that you shade ‘A’ under “Test Form”.
DURING THE EXAM
4. Count the pages to be certain that there are no missing pages.
5. No questions will be answered by the proctors or the Instructors during the exam,
except in the case of missing pages.
6. If, for any reason, you think that the correct answer is missing from the multiple
choices, then select the best available answer-- that is, the multiple choice which has
the closest value to the correct answer.
7. Students are NOT allowed to communicate with anyone during the exam or exam
collection period.
8. You must sign the identification sheet before leaving.
9. Open book. You may use prepared excel templates, browse the e-text or the web.
10. Stop writing immediately upon being told that the exam is over. Students who
continue writing may be subject to a penalty.
AFTER THE EXAM
11. Students may NOT leave the exam hall in the last 15 minutes.
12. Only the Scantron card MUST be handed in. Only the Scantron responses will be
graded.
13. Students may keep their copy of the exam paper.
14. Please remain seated quietly during the exam collection period.

Sections, Questions and Marks

# Questions Marks
Instructions 10 1
Section 2 F/S, Ratio & WCM 12 12
Section 3 Miscellaneous 33 33
TOTAL 55 46
 Spring/Summer 2017 BU283 Final Exam 3

1. Exam Instructions
(10 Questions worth 0.1 marks each.)

1 Which letter should you shade under “Test Form” on your Scantron
card?
A) A

2 Can students use a laptop computer during the exam?

A) Yes

3 How long is the exam?

A) 2.5 hours

4 How many minutes do you have per mark?

A) 2.50
B) *3.25
C) 3.50
D) 4.00

5 Can students communicate verbally or electronically (i.e., on Facebook)

during the exam or exam collection period?
A) No

6 True or False? The Scantron cards are the only item that will be marked
and will be collected by the proctor at the end of the exam.
A) True

7 True or False? I should complete the Scantron card using a pencil.

A) True

8 True or False? If I am confused about an ambiguous exam question, then

A) Make an assumption and discuss the question with the Professor
after the exam

9 If the correct answer appears to be missing from the multiple choices

then I should:
A) Select the best available answer.

10 Can students continue to write after the end of the exam? (For example,
to complete the Scantron card.)
A) No. Students who continue writing will have their incomplete
Scantron cards collected by the Proctor and will be marked on the
basis of the incomplete card.
 Spring/Summer 2017 BU283 Final Exam 4

2. F/S Forecasting, Ratio Analysis & Working Capital

1 mark each. If you think that the correct answer is missing from the multiple choices, then
select the best available answer.

Selected Financial Information

Cadbury
(£ millions)
Year 7 Year 8
PP&E 1,904 1,761
Depreciation 196
CAPEX 53

11 Cadbury plc is a global confectionary company. Cadbury is forecasting

its financial statements for Year 9. Selected financial information for
Years 7 and 8 is provided in the table. In Year 9 Cadbury is planning to
invest £300 million in CAPEX. The average depreciation rate is 10%.
What is the forecasted depreciation expense in Year 9?
A) £176
B) *£206
C) £286
D) £300
E) £322

Selected Financial Information

Cadbury
(£ millions)
Year 7 Year 8
Short Term
£ 2,562 £ 1,189
Debt
Long Term
2,551 1,973
Debt
Interest 153
Expense

12 Cadbury plc is a global confectionary company. Cadbury is forecasting

its financial statements for Year 9. Selected financial information for
Years 7 and 8 is provided in the table. What is the interest expense for
Year 9? (Assume that Cadbury’s average cost of debt is 3%.)
A) £36
B) £59
C) £63
D) *£95
E) £110
 Spring/Summer 2017 BU283 Final Exam 5

Selected Financial Information

Scrumptious Inc.
(£ millions)
Year 1 Year 2
Property, Plant &
£1,904
Equip.
Depreciation 212 196
CAPEX 45 53

13 Scrumptious Confections plc is a United Kingdom confectionary

company. Scrumptious Inc. is forecasting its financial statements for
Year 2. Selected financial information for Years 1 and 2 is provided in the
table. In Year 2 Scrumptious is planning to invest £53 million in CAPEX
and forecasted depreciation is £196 million. What is Property, Plant and
Equipment (Net) in Year 2?
A) £831
B) £861
C) £1,411
D) £1,441
E) *£1,761
 Spring/Summer 2017 BU283 Final Exam 6

Selected Financial Information

Cadbury plc
Year 4
(£ millions)
Year 4 Forecast
Revenue £ 4,022 £5,802
Net Income £393 £528

TOTAL ASSETS 8,895 10,275

LIABILITIES AND STOCKHOLDERS' EQUITY
Short Term Debt 1,189 1,189
Accounts payable 1,551
Total Current Liabilities 2,740
Long Term Debt 1,973
Other Liabilities 648 648
Total Liabilities 5,361
Shareholders' Equity
Common Stock 1,036 1,036
Retained Earnings 2,498
Total Shareholders' Equity 3,534
Total Liabilities & Shareholders' Equity 8,895

14 Cadbury plc is a global confectionary company. Cadbury is forecasting

its financial statements for Year 5. Selected financial information for Year
4 is provided in the table. What is the long term debt, the plug variable,
amount for the forecasted year? To forecast accounts payable use the
percentage of sales method based on Year 4 figures. Assume that no
dividends are paid in Year 5.
A) £1,259
B) £1,397
C) £1,530
D) £2,027
E) *£2,138
 Spring/Summer 2017 BU283 Final Exam 7

Selected Financial Information for Apple Inc.

2013 2011
Sales 170,910 108,249
Cost of Goods Sold 106,606 64,431
R&D 4,475 2,429
SG&A 10,830 7,599
Net Income 37,037 25,922
Inventory 1,764 776
Accounts Receivable 24,094 13,731
Fixed Assets 16,597 7,777
Total Assets 207,000 116,371
Accounts Payable 36,223 23,879
Owner's Equity 123,549 76,615

Use the financial information in the table above to complete the following
table of ratios and then answer the four questions that follow.

Selected Ratios for Apple Inc.

2013 2011
ROE 0.34
1+D/E* 1.68
ROA 0.22
TAT 0.83
PM 0.24

Days Inventory 4
Days Receivables 51
Operating Cycle
Days Payables 124 135
Cash cycle

Gross Margin 0.40

R&D/Sales 0.03
SG&A/Sales 0.07

Sales/Net Fixed 13.9

*In Du Pont system, D = Total Liabilities
 Spring/Summer 2017 BU283 Final Exam 8

15 What is the trend (from 2011 to 2013) in profitability to the owners?

A) Increasing
B) *Decreasing
C) No Change

16 What variable(s) are driving the trend in owners’ profitability?

I. Leverage (1+D/E)
II. Net Profit Margin
III. Total Asset Turnover
A. I only
B. II only
C. III only
D. I and II
E. *II and III

17 Which assets are being managed worse over time?

A) Inventory
B) Accounts Receivable
C) Net Fixed Assets
D) *All of the Above

18 Which explanation best explains the change in gross margin from 2011
to 2013?
A) SG&A expenses have increased
B) R&D expenses have increased
C) *In Sept. 2012, after the launch of the iPhone5, Apple dropped the
price of the iPhone4 to maintain its market lead in the U.S.
D) Apple sold more laptop computers in 2012, and laptops have
higher margins than smartphones and tablets.
 Spring/Summer 2017 BU283 Final Exam 9

Selected Financial Data (in millions $)

Hudson's Bay WalMart
FYE Feb 1, 2014 FYE Jan 31, 2014
Revenues 5,223.40 476,294.00
Cost of Revenues (Sales) 3,216.80 358,069.00
Inventory 2,048.00 44,858.00
Accounts Receivable 137.00 6,677.00
Total Current Assets 2,310.00 61,185.00
Accounts Payable 585.00 57,174.00
Total Current Liabilities 2,012.00 69,345.00
Long-term Liabilities 3,891.00 59,151.00
Owner’s Equity 2,043.00 76,255.00

Use the financial information in the table above to complete the following
table of ratios and then answer the four questions that follow.

Selected Ratios Hudson’s Bay and Wal-Mart

Hudson’s Bay Wal-Mar
(HBC) (WMT)
NWC/Total Capital* 0.05

Average Collection Period 5.1

Average Inventory Period 232.4

Average Payable period 58.3

Operating Cycle

Cash Cycle

Total Capital = Long-term Liabilities + Owner’s Equity

 Spring/Summer 2017 BU283 Final Exam 10

NWC
19 The reason Wal-Mart’s ratio is negative is:
Total Capital
I. Walmart uses very little long-term capital to finance its short –term
assets
II. Walmart has a very efficient inventory management system
III. Walmart is slow in paying its suppliers

A) I only
B) II only
C) III only
D) I and II
E) *II and III

20 What is the main reason for Hudson’s Bay Cash Cycle being significantly
different than Wal-Marts?
A) *Hudson’s Bay Days Inventory is approximately 187 days longer
than Wal-Marts.
B) Hudson’s Bay Days Payables is 1.05 times greater than Wal-Marts
C) Hundson’s Bay Operating Cycle is shorter than Wal-Marts
D) Hundson’s Bay Revenue is 1% of Wal-Marts Revenue

21 What level would Hudson’s Bay inventory be if it had a Days Inventory

the same as Wal-Mart?
A) Hudson’s Bay Inventory would be $227.9
B) Hudson’s Bay Inventory would be $277.9
C) *Hudson’s Bay Inventory would be $402.8
D) Hudson’s Bay Inventory would be $492

22 We would characterize Walmart’s approach to working capital

management as _________________ and Hudson’s Bay’s as
_________________.
A) Aggressive, Aggressive
B) Conservative, Conservative
C) *Aggressive, Conservative
D) Conservative, Aggressive
 Spring/Summer 2017 BU283 Final Exam 11

3. Miscellaneous Questions
1 mark each. If you think that the correct answer is missing from the multiple choices, then
select the best available answer.

23 You borrow $700,000 with repayment structured as an amortized loan.

You will make annual (end-of-year) payments over the next 20 years. The
interest rate on the loan is 5%. How much is each loan payment?
A) $35,000
B) $49,253
C) $51,507
D) $53,813
E) *$56,170

24 You plan to retire at age 65. You plan to make 20 withdrawals of

$100,000 from your savings account every year starting on your 65th
birthday. You expect to pass away some time after your 84th birthday.
You think that you can earn 3% on your savings in retirement. Today is
your 26th birthday. You wish to make equal annual deposits into your
savings account on your birthdays (starting today) and continuing until
(and including) your 65th birthday. How much must you deposit each
year if you earn 5% on your investments?
A) *$12,685.29
B) $9,023.99
C) $13,143.63
D) $12,213.20
E) $12,315.81

25 You are about to buy a $550,000 house. You have $50,000 of cash and
you need a mortgage for $500,000. Your banker presents you with two
choices: 1) a 25 year amortization period at 4% with monthly payments
of $2,630.10; or 2) a 40 year amortization period at 4% with monthly
payments of $2,079.46. How much more interest do you pay over the life
of the 40 year mortgage compared to over the life of the standard 25 year
mortgage?
A) $174,036
B) *$209,112
C) $229,264
D) $250,000
E) $479,264
 Spring/Summer 2017 BU283 Final Exam 12

26 You are trying to choose between investing in the Index mutual fund
(that mimics the S&P500) or buying units of an exchange-traded-fund
(ETF) that invests directly in the S&P500. Both investments give you
exposure to the same basket of stocks, but the difference is in the way
fees are assessed. The mutual fund subtracts an annual fee of 1%. The
S&P500 is expected to grow at a rate of 9% (0.75% per month) in the
future, so the return on the Index mutual fund will be 8% (0.6667% per
month). You are 30 years old today. You plan to save $300 per month at
the end of each month until your 60th birthday. So, you expect to
accumulate $447,107.83 by investing in the mutual fund. Alternatively,
you could invest in the ETF. With the ETF there is no annual fee. You
will earn the same return as the S&P500, but you pay a brokerage
commission each time that you trade. (The trading commission for TD
Direct Investing is $10 per trade.) How big does the trading commission
($fee) have to be on the ETF in order for the future value of the two
strategies to be equal? (Assume monthly periodicity. Ignore any
commission on selling at age 60.).
A) $10.00
B) $15.78
C) $25.78
D) $35.78
E) *$55.78

27 George Soros wants to pick a Canadian stock for his International

Diversified Hedge Fund. The fund has holdings in every country with a
stock market. With reference to the data in the following table, which
stock is best for his portfolio and why?
Stock A Stock B Risk-free Asset
E(r) 8% 12% 5%
Std Deviation 12% 22%
Beta 1 2

A) Stock B because it has a higher return;

B) Stock A because it has more return per unit of standard deviation;
C) Stock B because it has more excess return per unit standard
deviation;
D) *Stock B because it has more excess return per unit systematic
risk;
E) Stock A because it has a lower Beta.
 Spring/Summer 2017 BU283 Final Exam 13

28 Douglas Dynamics is an industrial machinery company based in

Milwaukee, Wisconsin, that makes snowplow blades, large snowplows
and salt spreaders. In its MD&A, management list the following risks
that can affect the financial performance of the company. Which is
relevant to you if you own a large portfolio?
I. Low snowfall.
II. Rising steel prices.
III. The lose of a large customer.
IV. A change in road de-icing technology.
A) All
B) I only
C) I and II only
D) I, II and IV only
E) *None

29 You sell some of your IBM common stock (which tends to move up and
down with the economy as a whole) and replace it with the common
stock of Fort Knox Gold Mining, Inc. (whose shares tend to rise when the
economy falls, and vice versa). Your portfolio's beta should
_______________.
A) increase
B) *decrease
C) remain unchanged
D) either increase or decrease
E) definitely exceed the beta of the market when all is said and done

30 Which of the following describes a portfolio that plots below the security
market line?
A) The security is undervalued.
B) The security is providing a return that is greater than expected.
C) *The security's Treynor index is too low.
D) The security's beta is too low.
E) The security provides a return that exceeds the average return on
the market.
 Spring/Summer 2017 BU283 Final Exam 14

31 You construct an equally weighted, two asset portfolio between Johnston

Controls, a Canadian valve and regulator manufacturer, and Hutchison
Whampoa, a Hong Kong property company. The standard deviation of
Johnston’s shares is 35% and 55% on Hutchison Whampoa. The returns
on the two companies have no covariance (zero). What is the expected
standard deviation of the portfolio?
A) 10.6%
B) *32.6%
C) 45.0%
D) 57.3%
E) 67.1%

32 You have been asked to analyze two stocks, Stock A and Stock B. The
beta of stock A is 1.2, and the beta of stock B is 0.8. The expected return
on stock A is 13.5%, the expected return on stock B is 11.0% and the
risk-free rate is 7%. We also know that stock A is fairly priced. Which of
the following regarding Stock B must be true?
A) The expected return on stock A is too high.
B) Stock B is also fairly priced.
C) *The price of stock B is too high.
D) The expected return on stock B is too high.

33 The risk-free rate is 5%, the beta of stock A is 1.2, and the expected
return on stock A is 12.2%. What is the expected return on the market
portfolio?
A) 9%
B) 10%
C) *11%
D) 12%
E) 13%

34 Fishing supply company, Outside Tackle, has its returns graphed against
the market returns for a 5 year period. The line that has the best fit for
the data has the formula y = .1254 + 1.265x. What information can we
derive from this?
A) the beta of Outside Tackle is .1254
B) the systematic risk of Outside Tackle is less than average for the
market
C) *the beta for Outside Tackle is 1.265
D) Outside Tackle has posted better returns than the market for this
time period
 Spring/Summer 2017 BU283 Final Exam 15

35 At the beginning of last year you constructed a value-weighted portfolio

out of two stocks, A and B. Over the year A experienced a positive return
and B experienced a negative return. You want to continue holding a
value-weighted portfolio with the same two stocks for the coming year. To
do this you must:
A) Rebalance the portfolio by selling some A and using the proceeds
to buying more B
B) Rebalance the portfolio by selling some B and using the proceeds
to buying more A
C) *Do nothing
D) Need more information

36 A friend brags that she expects to earn a return of 10.25% on her

portfolio with a beta of 0.825. Can you match her performance with
Stock X (12% return and a beta of 1.1) and the risk free asset that earns
a 5% return? With what portfolio weights?
A) *Yes, 0.75 Stock X and 0.25 Risk Free Asset
B) No
C) Yes, 0.25 Stock X and 0.75 Risk Free Asset
D) Yes, 0.5 Stock X and 0.5 Risk Free Asset
 Spring/Summer 2017 BU283 Final Exam 16

Apple Inc.

Stock: AAPL: NASDAQ

Stock Price: 477.05
Volume: 5,453,332
Contract Expiry: November

Calls Puts
Premium Vol Op Int Strike Premium Vol Op Int
410 0.700 10 4,840
420 0.800 55 4,042
430 1.200 83 6,205
38.600 45 3,741 440 1.950 40 4,814
30.100 150 5,632 450 3.100 267 6,983
22.100 187 5,010 460 5.100 150 4,598
15.500 2,356 9,365 470 8.100 613 7,498
10.300 986 10,128 480 12.700 371 3,375
6.500 482 9,327 490 19.700 56 2,064
0.450 176 5,136 500

37 Refer to the table of Apple stock option prices. Which of the following
options are “in-the-money”?
I. The $440 Call.
II. The $490 Call.
III. The $410 Put.
IV. The $490 Put.

A) I and III
B) *I and IV
C) II and IV
D) II and III
E) *I and IV
 Spring/Summer 2017 BU283 Final Exam 17

38 Refer to the table of Apple stock option prices. What is the intrinsic value
of the $490 Call?
A) *$0
B) $6.45
C) $6.50
D) -$12.95
E) $12.95

39 Refer to the table of Apple stock option prices. What is the time premium
of the $480 Put?
A) $0
B) $2.95
C) $7.35
D) *$9.75
E) $12.70

40 The image, below, is a profit diagram for a

A) Long Call
B) Short Call
C) Long Put
D) *Short Put
E) None of the above

41 Consider a put option on Research at Rest (RAR) with a December

expiration date and a strike of $11. The option currently trades for a
premium of $1.30. RAR shares are trading today for $10.25. If RAR goes
bankrupt before mid-December, then what is the profit to the put owner?
A) $8.95
B) *$9.70
C) $10.25
D) $12.30
 Spring/Summer 2017 BU283 Final Exam 18

42 Yesterday you took a short position in one December wheat futures

contract. The closing futures price (yesterday) was $7 per bushel. There
are 5,000bu in the contract. You deposited your initial margin of $3,240
yesterday. (The maintenance margin is $2,400.) Today the wheat futures
market closed with a price of $6.75. What is the closing balance in your
margin account?
A) $1,250
B) $2,400
C) $3,240
D) $3,990
E) *$4,490

43 Two days ago you took a short position in one December wheat futures
contract. The closing futures price (two days ago) was $7 per bushel.
There are 5,000bu in the contract. You deposited your initial margin of
$3,240 two days ago. (The maintenance margin is $2,400.) Yesterday,
wheat futures closed at $6.75 per bushel. Today the wheat futures
market closed with a price of $7.25. What is the closing balance in your
margin account today?
A) $1,250
B) $1,990
C) $2,400
D) *$3,240
E) $4,490

The following question is based on the information provided in the table below:

CBOT Corn Futures Settlement Prices (C)

as of March 20, 2006 17:00 CST
Expiration Opening High Low Settle Change
06May 219'6 221'6 217'0 218'2 -3'2
06Jul 230'4 232'4 227'6 228'6 -3'4
06Sep 240'4 241'4 237'2 238'2 -3'2
06Dec 252'4 253'2 249'2 250'4 -2'6
Price Unit: Cents and quarter-cents/bu (5,000 bu)

44 If you sell the December06 contract at the opening and buy it at the
settlement price, then your total profit (loss) excluding transactions costs
is:
A) *(2.525 - 2.505) * 5,000
B) (2.524 - 2.504) * 5,000
C) (2.505 - 2.525) * 5,000
D) (2.504 - 2.524) * 5,000
 Spring/Summer 2017 BU283 Final Exam 19

45 To raise funds for software development for the gun registry, the Federal
Government of Canada has issued bonds on behalf of the Department of
Justice. The bonds, called “Gun Bonds”, have a face value of $1,000, two
years to maturity and a 6% coupon rate (annual coupons with the first
coupon due in one year). The bonds are priced at $1,018.86. What is the
yield to maturity on the Gun Bonds?
A) *5%
B) 6%
C) 7%
D) 8%

46 True or False. You own a 10-year coupon bond. Interest rate risk is not a
concern to you because you have every intention of holding the bond to
maturity.
A) *True
B) False

47 Based on the table of zero coupon bond prices, below, what is the shape
of the yield curve? Each bond has a face value of $100.

Zero Coupon
Bond Prices
Maturity Price
1 95.24
2 90.70
3 86.38
4 82.27
A) *Flat
B) Upward sloping
C) Downward sloping
D) Not enough information

48 Consider a two year coupon bond issued today with a face value of
$1,000 and a 6% coupon rate. Suppose that yields on zero coupon bonds
with terms one and two are 6% and 7% respectively. What is your best
estimate of the price of the bond next year after the first coupon?
A) *$981.40
B) $982.45
C) $985.25
D) $992.50
E) $962.25
 Spring/Summer 2017 BU283 Final Exam 20

49 Analysts expect the Huck Glove Co. to pay a dividend of $1 in one year.
Dividends are expected to grow at 4% in perpetuity thereafter.
Stockholders require a return of 9%. What is the fair price, today, for the
stock?
A) $19.80
B) *$20.00
C) $20.80
D) $21.00
E) $21.80

50 The steps for short-selling an asset are:

A) Buy high; wait; and then sell low.
B) *Borrow the asset; sell it; wait; buy the same asset; give that to the
lender.
C) Borrow some money; use that to buy the asset; wait; sell the asset;
repay the loan.
D) Sell an asset; wait; buy the asset back.
E) Sell an asset; lend the sale proceeds; wait; collect on the loan; buy
the asset.

51 In an efficient capital market ________________________.

A) *some stock prices are too high, some are too low but on average
they are fair
B) all stock prices are fair
C) buyers and sellers are matched at minimum cost
D) it is not possible to earn a positive return over the long-run
E) High frequency traders are prohibited

52 If a company’s P/E ratio is larger than its P/E constant then the shares
are ________________ and you should ___________.
A) Overvalued, Buy
B) *Overvalued, Sell
C) Undervalued, Buy
D) Undervalued, Sell
E) Fairly valued, Hold
 Spring/Summer 2017 BU283 Final Exam 21

53 Gout Shoes Inc pays dividends annually and has an active share
repurchase program. Gout makes all of its payouts at the end of each
year and its year-end was yesterday. Today, Gout’s share price is $34.33
and there are 100 million shares outstanding. Shareholders require a
return of 9% and analysts expect Gout’s payouts to grow in perpetuity at
an annual rate of 3%. What are next year’s total payouts?
A) $202 million
B) $203 million
C) $204 million
D) $205 million
E) *$206 million

54 If a company repurchases its own shares and pays the same price for
repurchased shares as prevailed before the repurchase, then the stock
price should __________, ceteris paribus.
A) Rise
B) Fall
C) *Stay the same

55 You bought a Share of Next Computers Inc. for $15. It immediately

declared and paid a dividend of $0.50. You sold it one year later for $16.
What is the return on your investment?
A) 6.67%
B) 10.00%
C) *10.34%
D) 10.50%
E) 15.00%
 Spring/Summer 2017 BU283 Final Exam 22

Final Exam Formula Sheet

1 FVIFn,i  (1  i )n
PVIFn,i   (1  i )- n
(1  i) n

1⁄ 𝐹𝑉
𝑛
𝐹𝑉𝑛 𝑙𝑛 [𝑃𝑉𝑛 ]
𝑖=[ ] −1 𝑛= 0⁄
𝑃𝑉0 ln(1 + 𝑖)
1
PVIFA n,i 
i

1 - (1  i )- n  1
FVIFA n,i  (1  i )n  1
i
 
1

PVIFA - Due n,i  1 - (1  i )- n (1  i )
i
 1
FVIFA - Due n,i  (1  i )n  1 (1  i )
i
 
PV  FVe -in (1  k t ) t
ft  1
(1  k t -1)t -1
m 2
 i   i m
EIR   1    1 j  1  1
 m  2 
Bond Equivalent Yield 
FV - Price 365
 kn = kr +  + kr
Price Term

YTM = kr + INF + MRP + LRP + DRP C C  FV

Pbond  
(1  k 1 ) (1  k 2 ) 2

Pzero 
$FVn
(1  i n )n
Pbond  $C 
1
kd

1 - (1  kd )-n 
$FV

(1  kd )n

Pt  Pt 1 C t
Holding Period Return  
Pt 1 Pt 1

D D 
D 0 (1  g) t D 0 (1  g)
P
D
 P   1
t 1 (1  k) (1  k)
t t
k t 1 k-g k-g

D1 Pt  Pt 1 Dt
k g Holding Period Return  
P0 Pt 1 Pt 1
TP0 (1  g) TP1 Po Payout Ratio
P  
k-g k-g EPS1 k-g

Po Price n

BVPS Book value per share
σ Pr k
i1
i i  E(k)2
n
  
COV(k~1 , k~2 )  Σ Pri k 1i  E( k~1 ) k 2i  E( k~2 )
i1
ρ ij 
COV(k i , k j )
σi σ j
 Spring/Summer 2017 BU283 Final Exam 23

E(k p )  x 1  E(k 1 )  ...  x n  E(k n ) σ x 2 σ 2a  (1  x) 2 σ b2  2x(1  x)ρ a,b σ a σ b

n
E(k i )  k f  β i (E(k M )  k f )
E(k 1 )  Prik 1i
i1

E(k i ) - k f COV(k i , k M )
Ti = βi 
βi σ 2M
β p  x 1  β1  ...  x n  β n σ i2  β i2  σ M2  σ 2di .

NWC = Current Assets – Current Liabilities

Total Debt = Short-term Debt + Long-term Debt

Current Assets
Current ratio
Current Liabilitie s
Current assets - Inventory
Quick ratio
Current liabilitie s
Cost of goods sold
Inventory turnover
Inventory
Inventory Period (Days’ sales in Inventory
* 365
inventory) COGS
Sales
Receivables turnover
Accounts receivable
Average Collection Period (Days’ Accounts Receivable
* 365
sales in receivables) Sales
Accounts Payable
Payable Period (Days’ Payables) * 365
COGS
NWC
NWC to Total Capital
Total Assets - Current Liabs.
Sales
Fixed asset turnover
Net fixed assets
Sales
Total asset turnover
Total assets
Total Liabilities
Debt ratio
Total assets

Debt/equity ratio Total Liabilities/Total equity

Equity multiplier Total assets/Total equity

Spring/Summer 2017 BU283 Final Exam 24

EBIT
Times interest earned
Interest
Cash Flow Net Income  Depreciation
Cash Flow to Debt 
Total Debt Short - term  Long - term Debt
Long - term Tangible Assets
Asset Coverage (Collateral Ratio)
Short - term  Long - term Debt
Net income
Net Profit margin
Sales
Sales - Cost of Goods Sold
Gross Margin
Sales
Net income
Return on assets (ROA)
Total assets
Net income
Return on equity (ROE)
Total equity
Price per share
Price/earnings ratio
Earnings per share
Market value per share
Market-to-book ratio
Book value per share
Dividends
Dividend Payout
Net Income
Dividends per share
Dividend Yield
Market price per share
Earnings Before Interest, Taxes,
EBITDA
Depreciation and Amortization

ROE = ROA x [1 + D/E]

[1 + D/E] = Total Assets/Owner’s Equity
D = Total Assets – Owner’s Equity = Total Liabilities
ROA = Net Profit Margin x Total Asset Turnover

Nett = Nett-1 + CAPEXt - Deprt