Corporate Finance 1 (Finance 1 in short) 2008/2009 EXAM

Welcome to the final exam of Finance 1. You have 90 minutes, and there are 12 questions split
up into 3 problems. Please, read each question carefully. The exam takes the form of a multiple
choice questionnaire. You do not need to show your calculations. Simply put a circle on
this sheet around the answer you think is correct. Note that there is exactly one correct
answer for each question. There is no penalty for guessing.
The scale of grading associated with each question is given under each question on this
sheet.

Problem 1:
QUESTION 1 A B C D E
2 points

QUESTION 2 A B C D E
2 points

QUESTION 3 A B C
1 point

QUESTION 4 A B C D E
1 point

QUESTION 5 A B C D E
3 points

QUESTION 6 A B C D E
1 point

Problem 2:
QUESTION 1 A B C D E
3 points

QUESTION 2 A B C D E
2 points

QUESTION 3 A B C D E
3 points

Problem 3:
QUESTION 1 A B C D E
2 point

QUESTION 2 A B C D E
0,5 point

QUESTION 3 A B C D E
0,5 point

Nicolas Nalpas Finance 1 -2008- Final Exam Toulouse Business School

Problem 1:

You are just graduating from Toulouse Business School. Before getting your diploma, you
have found a very interesting entry position as a Socially Responsible Investment (SRI)
analyst at a renowned investment firm located in London (UK). Based on the recent political
debate, you are considering the decision between buying and renting your house. Given
that your lover will still work in Paris, you expect to stay in London over the next 5 years
to gain practical experience before going back to Paris. To make the two options
comparable, you will calculate their respective financial costs by the time of your move to
Paris (on year 5).

- Buying Option:
The purchase price of your townhouse in London is £350,000. You have to make a
20% down payment. The remaining part will be financed by an amortized residential
loan at a 6% annual interest rate over 15 years. The property taxes, condominium
fees and utilities are £200, £100 and £500 per month respectively. After 5 years, you
move to Paris. Due to the real-estate crisis, you expect to be able to sell your house for
only £400,000. But, you will have to face "closing costs" that include legal fees, land
transfer taxes, and other miscellaneous expenses that you don't pay if you are renting.
A simple rule of thumb is to assume 5% of the selling price on the home. You will
also reimburse the remaining principal amount of your loan.

- Renting Option:
The rental charge is estimated at £600 per week and utilities are the same as above
(£500 per month). Given that you can afford a 20% down payment of £350,000 it is
assumed that you can invest that money at a safe 4.5% annual interest rate over 5
years. After 5 years, you will move to Paris.

All monthly renting and billing (property taxes, condominium fees, utilities) expenses
are assumed to be done at the beginning of each period (week or month) whereas all
mortgage payments are supposed to be made at the end of each month.

In the following, all the proposed numbers have been rounded to the closest integer
value!

Question 1:
Regarding the buying option, what is the monthly mortgage payment on your 15-year loan?

A. £2,319
B. £2,339
C. £3,305
D. £3,344
E. £4,180

Nicolas Nalpas Finance 1 -2008- Final Exam Toulouse Business School

Question 2:
Regarding the buying option, given the safe annual interest rate of 4.5%, what is the value
on year 5 of the monthly expenses (property taxes, condominium fees and utilities) associated
with the property?

A. £52,600
B. £52,793
C. £53,593
D. £53,790
E. £54,164

Question 3:
Regarding both options, given the safe annual interest rate of 4.5%, what is the value on
year 5 of the down payment?

A. £87,233
B. £88,126
C. £88,521
D. £93,676
E. £99,739

Question 4:
Regarding the buying option, given the safe annual interest rate of 4.5%, what is the value
on year 5 of the monthly mortgage payments?

A. £153,778
B. £156,682
C. £157,142
D. £157,994
E. £158,212

Question 5:
Regarding the renting option, given the safe annual interest rate of 4.5%, what is the value
on year 5 of the expenses (rent together with utilities)?

A. £206,820
B. £207,920
C. £208,191
D. £208,875
E. £210,521

Nicolas Nalpas Finance 1 -2008- Final Exam Toulouse Business School

Question 6:
Given that on year 5, the remaining principal amount on the loan is £212,188, based on purely
financial arguments, would you rather

A. choose the buying option

B. choose the renting option
C. indifferent between the two options

Nicolas Nalpas Finance 1 -2008- Final Exam Toulouse Business School

Problem 2:

As a new person in the finance department of your corporation, your CFO has asked you to do
some preliminary analysis on a potential investment project. The project under consideration
is a replacement of a machine currently used in production. If the old machine is replaced,
the company will sell it for $200,000 (bought $450,000 two years ago). The machine they
may replace had a 6-year lifespan and has been depreciated on a simple straight-line basis.
Despite the fact that it will become completely outmoded at the end of its lifetime, the
corporation expects a $40,000 salvage value in 4 years from now.

The new machine has a 5-year lifespan and will be depreciated on a simple straight-line
basis. The new machine will require an investment outlay of $1,000,000. This amount
includes all installation costs. The new machine will be operated over the next 4 years. At
this point in time, the firm estimates that it will be able to sell it in 4 years from now for
$400,000. This new machine will not affect the existing sales of the company but it is
expected to reduce yearly operating costs before taxes and depreciation with respect to
those of the old machine by $500,000.

The level of Net Working Capital should be maintained at 20% of next year’s total
operating costs. These numbers have been obtained using a market analysis paid $15,000.

The firm estimates that the weighted average cost of capital for this project is worth 12%.
Its marginal tax rate for operating income is 40% and its capital gain/loss tax rate is
20%. The CFO has asked you to answer the questions that appear below to assist her in the
analysis of this potential investment.

Question 1:
What is the initial outlay required to finance this project?

A. $660,000
B. $680,000
C. $860,000
D. $880,000
E. $1,100,000

Question 2:
What is the yearly operating cash flow generated by this project?

A. ($625,000)
B. $350,000
C. $355,000
D. $362,500
E. $370,000

Nicolas Nalpas Finance 1 -2008- Final Exam Toulouse Business School

Question 3:
What is the cash flow associated with the termination of this project?

A. $196,000
B. $220,000
C. $228,000
D. $396,000
E. $460,000

Nicolas Nalpas Finance 1 -2008- Final Exam Toulouse Business School

Problem 3:

A corporation is contemplating a potential investment project with the following stream of

cash-flows:

Years CFs
0 (200 000) $
1 100 000 $
2 100 000 $
3 100 000 $

The cost of capital is worth 10%.

In the following, when applicable, the proposed numbers have been rounded to the
closest integer value!

Question 1:
What is the Discounted Payback Period of this project?

A. 2 years and 1 month

B. 2 years and 2 months
C. 2 years and 3 months
D. 2 years and 4 months
E. 2 years and 6 months

Question 2:
What is the Net Present Value of this project?

A. ($2,512)
B. $15,973
C. $48,685
D. $51,531
E. $78,473

Question 3:
What is the Internal Rate of Return of this project?

A. -5,987%
B. 7,298%
C. 10,000%
D. 23,375%
E. 29,723%

Nicolas Nalpas Finance 1 -2008- Final Exam Toulouse Business School