MBA 645 Exam 1

Spring 2, 2024                                             Name_________________________________

Instructions:

1. When answering the questions, the work that you submit for grading must be your work. Any plagiarism will result in a grade of zero for the exam. If you have questions, please consult with the instructor.
2. The evaluation of the work, especially the qualitative questions depends on the organization of the material and the depth of the answers.
3. PLEASE SHOW COMPUTATIONS FOR QUANITATIVE PROBLEMS, NO COMPUTATIONS; NO CREDIT.
4. Read each problem carefully and answer completely.
5. Please write your name at the top of the submitted document.
6. Please answer the questions in the context of our class discussions.
7. Please submit exam in one document to Canvas.

(20 pts)   1.      In the context of our class discussion, explain the overall objective of a financial manager. Explain how the objective relates to market value added (MVA), economic value added (EVA), and free cash flow. No computations are necessary.

(20 pts)   2.      Your stockbroker has called to tell you about two stocks: Netflix, Inc. (NFLX) and Meta Platforms, Inc. (META). She tells you that NFLX is selling for $400.00 per share and that she expects the price in one year to be $460.00. META is selling for $310.00 per share and she expects the price in one year to be $360.00. The expected return on NFLX has a standard deviation of 25 percent, while the expected return on META has a standard deviation of 15 percent. The market risk premium for the S & P 500 has averaged 7.0 percent. The beta for NFLX is 1.26 and the beta for META is 1.21. The 10-year Treasury bond rate is currently 5.00%. Neither NFLX nor META pays a cash dividend.

Required:

1. Determine the probability for each stock that you would earn a positive return.
2. Determine the probability for each stock that you would earn less than your required rate of return.

c)  Explain why you would or would not buy either or both of the two stocks.

(15 pts)   3.      Lowry Corp.’s preferred stock is selling for $80 per share in the market. This preferred stock has a par value of $50 and a dividend rate of 12 percent.

                         Required:

1. What is the current yield on the stock?
2. If an investor has a required rate of return of 18 percent, what is the value of the stock for that investor?
3. Should the investor acquire the stock? Explain.
4. Explain why preferred stock is referred to as a hybrid security.

(25 pts)  4.       On March 1, 2014, Robinson Corp. sold a $700 million bond issue to finance the purchase of a new distribution facility.  These bonds were issued in $1,000 denominations with a maturity date of March 1, 2034. The bonds have a coupon rate of 8.00% with interest paid semiannually. 

Required:

1. Determine the value today March 1, 2024 of one of these bonds to an investor who requires a 12 percent return on these bonds. Why is the value today different from the par value?
2. Assume that the bonds are selling for $925.00. Determine the current yield and the yield-to-maturity. Explain what these terms mean.
3. Explain what layers or textures of risk play a role in the determination of the required rate of return on Robinson’s bonds.

 (20 pts) 5.       Suppose that Airbnb, Inc. (ABNB) is selling for $115.00. Analysts believe that the growth rate for ABNB will be 30% per year for the next two years, 20% per year for the following three years, and thereafter the growth rate will be 8% indefinitely. ABNB’s most recent cash dividend per share was $3.00. The dividend will grow by the same rate as the company. Stockholders require a return of 20 percent on ABNB’s common stock. 

Required:

1. Based on the above assumptions, determine the price of ABNB’s common stock.
2. Explain whether an investor should buy the stock.