Instructions:

Be concise and specifically address the question that is asked. Don't ramble. Write clearly!!!!!!!! If I can't read it, it's WRONG. Points as marked. Do all work on this test booklet.

1. Explain the purpose of the financial markets. That is, what do financial markets do that individual savers, investors, and borrowers cannot do for themselves. Be concise and specific. Use a graph that helps to illustrate the impact of the capital market on savers, investors, and borrowers in a one-period world. [10]

2. The ABD Corporation, a wholesale distributing company, has the following income/expense information for the current quarter:

Sales (Revenue) was $1,875,000. Quarterly tax payments totaled $450,000, operating expenses were $625,000, depreciation charges were $350,000, interest pay- ments were $200,000, common stock dividends were $35,000, and capital outlays for new equipment were $450,000 ($350,000 was con- sidered essential and the rest was discretionary).

A. Construct an income statement for the company. [5]

B. Determine the operating cash flow and free cash flow for the company. [10]

3. Consider a loan that has the following characteristics:

Amount borrowed = $1,200,000
Interest Rate = 8.6% stated annual rate
Term = 10 Years
Monthly Payment = $13,753.31

A. What is the total dollar amount of interest you will pay over the life of the loan? [10]

B. For the 60th monthly payment, supply the following information: [5]


Interest portion of the payment: _________________________

Principal portion of the payment: ________________________

Balance immediately following the payment: ________________


C. Suppose you make an extra payment of $1,000 with each required monthly payment. How much money, in actual dollars, would you save using this payment scenario versus the original loan scenario?[5]

D. Refer back to the original loan conditions. Which payment (give the sequence number of the payment -- 1 for the first payment, 2 for the second payment, etc.) will be the first to have more than half of the payment amount go to reducing the balance versus covering interest? [10]

E. Refer back to the original loan conditions. Suppose the bank offers a special promotional deal to its valued commercial customers. The deal is that every 12th payment is reduced by $1,000. Compare the effective annual rate on this promotional loan to the effective annual rate on the original loan. Be precise and show your work. [10]

1. Beginning 18 years from now and continuing for 4 years -- withdraw $15,000 per year to help cover your child's college expenses. Then, for two additional years, withdraw $25,000 per year to help cover her graduate school expenses.



2. 20 years from now, you want to withdraw $175,000 (cash) to purchase a vacation retirement home and associated necessities (bass boat, swimming pool, etc.)



3. 30 years from now, you plan to retire. You will sell your home for an estimated $200,000 and move into your vacation home. (Ignore tax implications). You will owe nothing on your mortgage at that time.



4. When you die (hopefully at a ripe old age) you would like to leave an endowment for the Ole Miss School of Business that will generate a scholarship of $50,400 per year forever, beginning one year after your death.



5. From the time you retire until the time you die, you want to be able to withdraw $45,000 per year from your account at the end of every year. Assume that you will very conveniently die on the last day of a year (as measured by your withdrawals). You will not need a withdrawal when you die. That is, you will have used up the previous year's withdrawal on the day you die and no annual withdrawal will be taken.

5. Congratulations! You have just won the $10,000,000 lottery! However, you will not receive the money in one lump. Instead, the Lottery Commission will pay you $2,000,000 now and $2,000,000 every other year for four additional payments. That is, you will receive $2,000,000 now, $2,000,000 two years from now, $2,000,000 four years from now, $2,000,000 six years from now, and $2,000,000 eight years from now. If your annual opportunity rate for cash is 8.0%, how much is this prize really worth to you today? [5]

6. Assume that today is 1/1/1996. You plan to make equal monthly deposits of $500 into an account that pays 10.8% per year with quarterly compounding. You will make one deposit today and one at monthly intervals over the next four years with 48 total deposits. On 1/1/2000 how much money will be in the account? (Assume that there are exactly three months in a quarter and all months are of equal length.) [5]

7. Assume that today is 1/1/1996. You plan to make equal monthly deposits of $500 into an account that pays 10.8% per year with daily compounding. You will make one deposit today and one at monthly intervals over the next four years with 48 total deposits. On 1/1/2000 how much money will be in the account? (Assume that all months have 30 days and that a year has 360 days.) [5]

Short Answer:

1. What is meant by an efficient capital market? What factors are necessary to insure that it will function efficiently?[5]

2. Explain why the total assets figure on the balance sheet in an annual report is not necessarily an accurate representation of the true value of the company? [5]

3. Explain the difference between a firm-commitment and a best-efforts underwriting. [5]

4. Why might the stock price drop on the announcement of a seasoned new equity issue? [5]

5. What is the difference between a positive and a negative covenant. Give an example of each. [5]

6. How do deep-discount bonds, zero coupon bonds, and income bonds differ from typical debentures? [5]

7. What are the differences between preferred stock and debt? Which investors are the primary holders of preferred stock? Why? [5]

Answers:

Problem 2:

     Income Statement:
	
	  Sales				1,875,000
	- Operating Expenses		 (625,000)
	- Depreciation			 (350,000)
					-----------
	  Operating Income		   900,000
	- Interest Expense		 (200,000)
					-----------
	  Taxable Income		  700,000
	- Tax				 (450,000)
					-----------
	  Net Income			  250,000
	- Dividend			  (35,000)
					-----------
	  Retained Earnings		  215,000


     Operating Cash Flow:

	  Operating Income		  900,000
	+ Depreciation			  350,000
	- Tax on Operating Income	 (450,000)
					-----------
	  Operating Cash Flow		  800,000

     
     Free Cash Flow:

	  Operating Cash Flow		  800,000
	- Required Capital Outlay	 (350,000)
	- Interest Expense		 (200,000)
					-----------
	  Free Cash Flow		  250,000

Problem 3:

	A.	$675,397.71

	B.	$5899.77		7,853.54		815,369.94

	C.	$69,198.69	

	D.	42

	E.    7.758%

Problem 4: $3,827.3

Problem 5: $7,525,614.37

Problem 6: $30,059.72

Problem 7: $30,152.84

Return to Table of Contents