1. Mr. Brown invested in gold U.S. coins ten years ago, paying $216.53 for one-ounce gold "double eagle" coins. He could sell these coins for $734 today. What was his annual rate of return for this investment?

2. Cecil Young is planning for her golden years. She will retire in 20 years, at which time she plans to begin withdrawing $60,000 annually. She is expected to live for 20 years following her retirement. Her financial advisor thinks she can earn 9% annually. How much does she need to invest each year to prepare for her financial needs after her retirement?

3. Justify the historic ranking of returns for the following three categories of investment, listed from highest to lowest return: common stocks, long-term Treasury bonds, and Treasury bills.

4. How much is an investor's tolerance for risk worth over a long horizon? Calculate the difference in accumulation in real terms for an investor who initially invests $25,000 and ignores it for 20 years in either a long-term Treasury bond portfolio or a portfolio of diversified common stocks. Assume the historic real returns of 2.1% annually for bonds and 9.3% for common stocks.

5. In your words, discuss the capital asset pricing model in general, including the method of determining expected returns.

6. Where will the following projects plot in relation to the security market line if the risk-free rate is 6% and the market risk premium is 9%? Which projects should be undertaken?

7. Preferred stock of financially strong firms sometimes sell at lower yields than the bonds of those firms. For weaker firms, the preferred stock has a higher yield. What might explain this pattern?

8. Why does the SEC deem it necessary to require the issuance of a prospectus prior to security issuance?

1 Baker University

MBA Managerial Finance,
March 11 through May 6, 2014
MBA Managerial Finance Final

9. XYZ Corporation has received a firm commitment from its underwriter to purchase 1 million shares of stock that will be marketed to the general public at $23 per share. The underwriter's spread is $1.90 per share and the issuing firm will pay an additional $1.65 million in legal and other fees. The issue was fully sold on the first day and the stock closed at $27.50 on that day. Calculate both the direct expense of issuance and the indirect (i.e., underpricing) expense. What percentage of the market value of the shares is represented by these costs?

10. Smith Foods Corp. has 650,000 shares outstanding. General Grocery, one of its subsidiaries, is disgusted with current management practices and is trying to get some of its own people elected to the board of directors. There are twelve directors, and General Grocery owns 60,000 shares.

a) Under cumulative voting, how many directors can General Grocery elect?

b) How many shares will General Grocery have to acquire in order to elect seven directors?

11. Fritz Corporation has 800,000 shares of preferred stock and 1,800,000 shares of common stock. The cumulative preferred stock has a stated dividend of $1.75 per share. Under normal conditions, Fritz pays out preferred dividends and 30% of remaining earnings to common stockholders, however, because of a severe recession, Fritz retained all earnings last year. This year, Fritz earned net income of $5 million. Calculate the dividend per share to be received by the common stockholders this year.

12. In your own words, how are the gains from mergers distributed between the shareholders of the acquired and acquiring firms?

13. In your own words, describe the basic differences between mergers, leveraged buyouts, management buyouts, divestitures, and spin-offs. Examples would help, also.

14. Assume PPP holds at a time when the exchange rate is €1.75/$ and a market basket of goods costs €500. How many dollars would you expect to spend on the goods? Germany is expecting 10% inflation while the United States is expecting 4% inflation. What would you predict to happen to exchange rates?

15. What is the international Fisher effect and how would you test it, knowing that 6% inflation is expected in the United States but only 3% is expected in Spain. The nominal U.S. interest rate is 9%.