You may take up as much

MGMT 648: Applied Finance
Crotty, Fall 2018
Final Exam
GENERAL INSTRUCTIONS
You may take up as much time as you would like to work this exam. Please download the Excel template
from Canvas. You should upload your final by 8:59 am on Tuesday, August 28th. The exam is open note
and open book. You may not consult your classmates for any reason.
The exam has three spreadsheet-based questions. Please assume that I will print your exam and grade the
print-out. Make sure your spreadsheet is well documented and easy to follow so that I can give you as much
credit as possible. For instance, displaying formulas with FORMULATEXT is very helpful. If you only
want me to see a specific part of your worksheet, select the part you want me to see and set that as the print
area, using the ‘Print Area’ command in the Page Layout tab in Excel.
Please make sure your ID# is on the first page of the exam (top right), along with your mailbox. After you
complete the exam, upload your excel sheet to Canvas. Your exam file must be labeled with your student
ID as XXXXXXXX.xls (i.e., please replace the X’s with your student ID number.)
Remember, if you want partial credit, you need to show me detailed steps. Also, please save your work
regularly.
Good Luck!
Q1 (35 points):
Consider two mutual funds with the following attributes:

Expected Return	Standard Deviation
Fund 1	15%	27%
Fund 2	8%	12%

The correlation between the funds’ returns is 0.30. The risk-free rate is 3%.
a. (10 points) Compute the expected return and standard deviation of a portfolio that holds
70% in Fund 1 and 30% in Fund 2.
b. (10 points) What is the optimal portfolio of the two funds?
c. (5 points) Please explain in a concise sentence or two how you solved part (b).
d. (10 points) You would like your overall portfolio to have an expected return of 16%. If
you can also invest in the risk-free asset (either long or short), what are the portfolio
weights of the best portfolio you can hold? Please specify the weights in the risk-free
rate, fund 1, and fund 2.
Q2 (35 points)
You are interning in the planning group of a company that is currently forecasting its future
investments in fixed assets, that is, its capital expenditures. The firm will not use debt or equity
to finance its future investments. That is, there are no plans to issue/repurchase stock or
issue/retire debt. Moreover, dividends will be kept constant at its current level (in dollar terms).
The firm would like cash balances to be 2% of sales in order to manage operations. Any extra
cash generated by the business will be invested into fixed assets.
Due to the recent tax reforms, the company now pays a 21% tax rate, but the firm’s management
wants forecasts of the levels of potential capex that are possible if tax rates rise again in the
coming year. The firm has estimated that each dollar of capital expenditures as a fraction of the
beginning of period gross fixed assets generates an additional 0.5% of sales growth in the
following year. So, if the firm’s capital expenditures from time 0 to time 1 is $1,270 (which is
10% of the time 0 gross fixed assets), then the sales growth from time 1 to time 2 will be 5%.
Management believes sales will grow by 10% in the first year.
Build out a pro-forma of the firm reflecting these assumptions and those noted in the soft-copy
template available on Canvas under Assignments/Final.
1. (25 points) Complete the five-year forecasted pro-forma financial statement for the firm
assuming the tax rate stays at 21% and the firm invests extra cash in fixed assets. Please use net
fixed assets as the plug in the model. What is the average level of capital expenditure over the
five-year period that the firm can manage if tax rates stay the same?
2. (10 points) The firm’s management wants forecasts of the levels of potential capex that are
possible if tax rates go up in the coming year. Specifically, create a data table that shows the
amount of average capital expenditures over the five-year period as a function of the tax rate.
Consider tax rates of 21% to 35% in increments of 1%. At approximately what rate does the
firm need taxes to stay below if the firm wants to invest at least $4,500 (on average over the next
5 years)?
Q3 (30 points) You are an analyst at an asset management fund. The fund currently has five
bonds in its portfolio with the attributes shown below.
The fund’s founder believes that it is most likely that bond yields stay the same, but that it is
possible (but very unlikely) that the yields for all of the bonds could drop as much as 200 basis
points or rise by as much as 200 basis points. Your colleague has been working on a Monte
Carlo analysis of the price risk faced by these potential interest rate moves. Their simulation
model and output are on the following page. The simulated data can be found in the Q3 Data tab
of the spreadsheet. Unfortunately, they only sent you a screenshot of the model and the data, so
you cannot tell which bond they were analyzing (since they named the input cells and all the
bonds are currently trading at par).

1	2	3	4	5
Annual Coupon Rate (CR)	10%	5%	6%	12%	8%
Yield to Maturity (Annualized) (YTM)	10%	5%	6%	12%	8%
Number of Payments / Year (NOP)	1	2	1	2	1
Number of Periods to Maturity (T)	8	10	6	8	8
Face Value (M)	100	100	100	100	100

Please use the simulated data, the simulation output, and the bond concepts discussed in class to
answer the following questions.
a. (10 points) If the founder’s forecast of the future distribution of interest rates is correct,
what is the expected gain/loss (in percentage terms) on the bond being analyzed?
b. (10 points) Run the following regression using the simulated data and interpret the
estimate of the slope coefficient b.

The post You may take up as much appeared first on My Assignment Tutor.