Name SID GSI Professor Matteo Benetton UGBA103 Introduction to Finance Spring 2022 Midterm Exam Spring 2022 Important Print your name and student ID on each page Write solutions legibly inside The exam consists of 3 questions If you cannot answer one part of a question you can still get full marks for the remaining parts This is a 1 5 hour exam This is an individual exam not a group assignment Solve the problems on your own without consulting anyone This exam is being administered under the University s rules for academic con duct and the Code of Academic Integrity applies 1 Question 1 15 points As a result of recent events gas prices are increasing and the US government is considering a government program to incentivize households to buy electric cars Under the government program buyers of electric cars would be able to get nancing at an APR of 1 on 5 year loans with monthly payments and monthly compounding You are considering two options 1 An electric car which costs 45 000 and is eligible for the government program 2 A regular gas fueled car which costs 32 000 but is not eligible for the government program In both cases you need full nancing i e you make no downpayment and you expect to drive the car for 5 years assume for simplicity the resale value would be zero at that point US banks o er car loans with an APR of 4 on 5 year loans with monthly payments and monthly compound ing and an origination fee transaction fee of 1000 The origination fee is paid immediately and car loans have xed monthly payments You can invest at an APR of 4 with monthly compounding a 4 points What would be your mortgage payment with each car Electric car monthly payment annuity formula solving for cash payment cid 20 cid 20 M Pe 45 000 1 1 12 1 1 1 1 12 5 12 M Pr 32 000 1 4 12 1 1 1 4 12 5 12 cid 21 769 22 cid 21 589 33 Regular car monthly payment annuity formula solving for cash payment 2 b 4 points What would be in present value terms the total cost of buying the electric car What would be in present value terms the total cost of buying the regular car Total cost of buying electric car annuity formula Coste 769 22 4 12 1 1 1 4 12 5 12 41 767 86 Total cost of buying regular car annuity formula Costr 589 33 4 12 1 1 1 4 12 5 12 1000 33 000 00 cid 21 cid 21 cid 20 cid 20 c 7 points You expect operating cost with the regular car to be higher by 175 in the rst month and to growth at 0 1 per month Assume operating costs occur at the end of each month Accounting for loans and operating costs which car is a better deal from a nancial perspective How much cheaper it is Present value of extra cost with regular car growing annuity formula cid 20 cid 21 ExtraCostr 175 4 12 0 10 1 1 0 10 1 4 12 5 12 9 778 40 Electric car is cheaper by 41 767 86 33 000 00 9 778 40 1 010 54 About 1000 cheaper 3 Question 2 10 points You observe the following yield for zero coupon bonds US Treasury bonds BBB rated corporate bonds y2 y1 3 3 5 4 3 4 5 y4 y3 y10 6 a 3 points What would be the price today t 0 of a Treasury bond with face value of 1000 3 year maturity and a coupon rate of 4 with annual coupon payments Cash ow PV 0 1 40 2 40 3 1040 38 83 40 1 3 37 34 40 1 3 5 2 916 60 1040 1 4 3 3 Price P0 38 83 37 34 916 60 992 78 b 3 points Suppose you plan to invest for only one year What annual return will you earn on the 4 year zero coupon bond if its yield one year from now is 5 No need for duration analysis Price today P0 100 1 4 5 4 83 86 Price in one year P1 100 1 5 3 86 38 One period annual return P1 P0 1 86 38 83 86 1 3 01 4 c 4 points A friend of yours plans to invest for 10 years She invests in a 10 year BBB rated zero coupon bond Suppose that if a bond defaults investors get only half of the principal promised and that there is a 15 chance that the bond defaults Assume a face value of 100 What is the yield to maturity of the bond What is the average expected return Expected payout 0 85 100 0 15 0 5 100 92 5 Price P0 92 5 1 6 10 51 65 Yield to maturity is 100 P0 N 1 100 1 51 65 1 10 1 6 83 Expected return is 6 you can verify it 92 5 51 65 1 10 1 6 00 5 Question 3 10 points You are the CFO of a public company in the wealth management industry During the recent pandemic there is a boom in investing and you want to expand your services to retail investors Last year you paid 300 000 to a consulting rm to help with an important decision about the future of your company Now beginning of t 0 you have to make a decision between two mutually exclusive possible projects with the following EBIT in M EBIT0 EBIT1 EBIT2 Implement robo advice Hire more human advisors 80 60 50 40 100 40 Assume tax rate is 20 and remember that a negative tax is equal to a tax credit The company is fully equity nanced the company has no debt and no cash The robo advice option has also 20M in capital expenditure in period 0 assume there are no di erences in net working capital or other aspects between the two alternatives The equity cost of capital is 10 for rm with similar risk pro les a 5 points Which project are you going to take if any Using the capital budgeting formula to get the free cash ow 0 1 2 FCF robo advice FCF human advice 84 80 1 20 20 48 60 1 20 40 50 1 20 32 40 1 20 80 100 1 20 32 40 1 20 NPV robo advice N P V0 84 40 1 10 80 1 10 2 18 NPV human advice N P V0 48 32 1 10 32 1 10 2 8 Take the robo advice project which has the highest NPV 6 b 2 points The CEO is worried that some projects may take too long to payback the original investment How would your answer to a change if the decision is based on a maximum payback period of one year How would you defend your approach relative to the one proposed by the CEO A couple of sentence are enough for the …