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Finance

I. INSTRUCTIONS
A. Your grade is based on your conviction, correctness, elaboration and elucidation of your answers.
B. Show your work. Un-shown work will receive no points.
C. Each of the questions is worth 7 points. The exception is the long problem, which is worth 30 points.

II. TEST
A.ESSAYS( 8 pages)
1. Because there is inflation of 4%, the central bank intervenes and decreases the money stock by 7%. Interest rates rise by 1%, or 100 basis

points. Eventually, the intervention lowers the GDP and the interest rates as well as inflation. The GDP, in fact, decreases by 1.5%, the

inflation rate becomes 1%, and the interest rates drop by 1.7%, or they fall from the initial level by70 basis points (.7 %.) Divide the

analysis into two areas. First, address the initial effect on the bond and the stock market. Second, discuss both, after the effects have worked

themselves out as I have indicated above.
2. Expound on an expansion in GDP and the effects on the stock market and bond market in two different cases. First, the economic growth does

not induce inflation. Second, the economic expansion causes substantial increase in inflation. Specifically, the GDP rises by 2.5% and the

inflation rises by 5.5%.
3. How do we forecast GDP? Explain the different components of it and the determinants of those components.
4. What tools have we got to foretell the values of the portions of the GDP?
5. Analyze the defense industry versus the digital mobile device industry in terms of
a) Structure
Ascertain that you include population, income, regulation and technology.
b) Competition
c) Business cycle
6. We have two individuals whom we have to advise about investments. The one is a twenty three year old who has gotten a job in investment

banking and is receiving 150 k annually. The other is an eighty year old woman, Ms. Brown, who has $10 million in assets, as well as owns her

house mortgage free. The expenses to sustain herself is 30k for her house costs and 45 k for all other costs. She has 2 children, and she wants

to pass as many of her assets to them. Assume their return objectives and their risk profiles and recommend the appropriate investments for

them.
7.a) Talk about two concepts to tell us about prospects of the firm.
b) Talk on the drawbacks of using ROE as a performance measure.
8. Define risk. Elaborate on the different cases of bheta. Explicate the 3 factors which affect it.

B. PROBLEMS (6 pages)
1. Cummings has EAT, depreciation expense, capital expenses, debt and debt principal payments of $9m, $2.8m, $1.3m, $40m and $1.5m

respectively. Between the first and the second years, it has current assets of $11m and $13.4m and current debts of $5m and $6.1m respectively.

Its unlevered bheta, D/E and t are 3, 40/60 and .4 respectively. The t bond rate is 2% and the risk premium is 8% and its sales are $90m.

Cummings plows about 30% of its profits back into its business. Derive the value of Cummings, if the growth rate continues perpetually.
2. We know the following about Mansur. Total assets are $1000m, E is $700m, cash is $100m and the # of shares is 1m. We estimate that the

market value of equity is 2 times the book value of it. Finally, a fire sale of the firm would bring 70% of the value to the co. Compute the

book value, liquidation value, replacement value and enterprise value per share of Mansur.
3-See document ABEX Chemicals Inc. “Attached”
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