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FIN 630 MIDTERM EXAM (Spring)-Questions and Answers

INTRODUCTION This exam is open book and is to be your individual work ONLY. You are not allowed to consult with anyone in answering the questions. Before starting your work, please sign the statement below. If you have questions about the exam, please post them in the Midterm Test Conference. That way, I can deal with all students as fairly as possible, especially those who might have the same question. I also reserve the right to delete posts or comments that provide solutions or answers to problems.   You must show all your work for full credit; showing your work will also ease getting partial credit. I have shown the weights of each problem. Remember that quite often providing just a number is not enough, you have to give your recommendation or explanation.   Each problem is located in a separate spreadsheet tab, which includes the text of the problem in the textbox and a suggested template. These templates are for your convenience only; you don’t have to use them. If you decide to use them, then it is your responsibility to include all required information from the problems in the templates. If there is a discrepancy between numbers in the text box and numbers in the template, please use the numbers from the textbox. Feel free to add additional cells, rows and even separate tabs, if you need them.   Please put your name on your exam and in the title of your files as well (last name and first initial, e.g., Doe_J_Fin630_Midterm). I will download all files first and I don’t want tens of files named “FIN630.” Even if you decide not to use the templates, please consolidate all your Excel work in one workbook with multiple spreadsheets. It will help me if you name the spreadsheets “Problem 1,” “Problem 2” etc. to identify the questions/problems. If you need more than one spreadsheet per question, please name them accordingly.   The exam is due by 11:59 pm, March 16. Late Policy specified in the Syllabus will be followed for any exam submitted after the due date.   Please submit the completed exam under Midterm Exam in the Assignment Folder. PROBLEM 1 Hilton Worldwide Holdings (HLT) went public in 2013. This exercise asks you to forecast the company's free cash flow and discuss risks the company is facing. You may use and modify if necessary the template below or you may create your own template. a) download 2011-2013 historical financial data for Hilton, using one of the sources listed in Course Content (you may enter numbers in the template below or create your own). I suggest using the SEC Edgar website ( b) Based on historical financial data calculate ratios that to be used later in pro-forma financial statements (revenue growth, gross margin etc., see chapter 6 for details); c) Using historical data from a) and ratios from b) create pro-forma statements (see chapter 6 for details); d) Estimate free cash flows FCF for 2014-2017 (see chapters 2 and 6 for details); e) What are risks the company is facing? Discuss, how its tornado diagram would look like (see chapter 3 for details). You don't have to build the diagram itself, unless you want to earn bonus points (5 points maximum); PROBLEM 2 Californian start-up LDM considers installing on campus of a well known university in Maryland a messaging system, which will compete with various SMS applications and social networks. The management anticipates that new system will have the first year revenues of $400,000 with subsequent annual growth of 5%. Operating costs are 30% of revenues. The project requires $1,000,000 investment in equipment, which will have a five year anticipated life and will be depreciated using MACRS depreciation method toward a zero book value (MACRS depreciation rates are given below). However, the company will be able to sell the equipment on the after-market at the end of year 5 for 20% of its original cost. The company requires a 12% rate of return from its investment and faces a 38% tax rate (overall the company is profitable). In addition to capital investment, the project requires an outlay of net working capital equal to 10% of revenues in the coming year. I.e., at time 0 (beginning of year 1) net working capital requirement is $25,000 and will grow in subsequent years. All NWC will be recovered after the project's end. a) Calculate the NPV and IRR for the project. Should the company undertake the project? (see chapter 2 for details) b) The manager raised some concerns about costs, first year revenues and revenue growth projections. Considering one factor at a time, at what level of operating costs, initial revenues, and revenues growth the project will break-even (NPV=0)? (see chapter 3 for details) c) Looking at percentage difference between the predicted level and critical (break-even) level of each of the three factors, which of them is the most critical? (see chapter 3 for details) PROBLEM 3 LEO Inc. has the balance sheet as shown below.   Recently the yield on bonds similar to the ones that company has had increased to 4.25%, so that the market value of the bonds is now about $715 million The rate on company' short-term notes is equal the market's rate on these notes, which is 3%. What are the company's total invested capital and capital structure weights? What is the company's cost of equity according to CAPM, if the U.S. T-bond yield is 2.00 %, the long-term market risk premium is 4.5% and the company's levered beta is 1.2? What is the company's WACC?

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