173A – Midterm – February 21, 2007 – Total Time ca 105 minutes to complete. Exam will be over at 7:30. Please save your answer file as “YourName”. Keep saving through the exam.
Nearly all answers cut and pasted from student answers – unless too long
Part I: Short answer questions (weight 20%) – 15 minutes
1. Explain briefly actions managers can take to maximize shareholder wealth?
2. Briefly (!) describe 4 ways to motivate managers to act in the interest of shareholders rather than their own interest (minimize agency conflict)
3.What are the key elements of the Sarbanes-Oxley legislation?
4. What are the key assumptions of the CAPM (your answers should state the minimum necessary to make the point)
{This one I assumed you would have to look up}
(a)	All investors think in terms of a single holding period	
(b)	All investors have identical expectations	
(c)	Investors can borrow or lend unlimited amounts at the risk-free rate	
(d)	All assets are perfect divisible	
(e)	There are no taxes and no transaction costs	
(f)	All investors are price takers meaning that investors' buying and selling do not influence stock price	
5. How do we value financial assets?
Present Value of Future Cash Flows (discounted cash flow analysis)
6. If the Fed tightens up (increases interest rates), what will happen to bond prices and why?
Interest rates go up, bond prices go down as the required rate (yield on similar risk investments) goes up
7. Name 4 items that impact a bond’s valuation.

8. What are the 3 flaws in the Gordon constant growth model for use in determining stock price?
a) assumption of dividends
b) assumption of constant growth
c) assumption of required rate of return higher than assumed constant growth
9. Define an option, call option, put option, exercise value, strike price
10. Ratios vary from industry to industry. What differences might you find between a grocery chain and steel company?

Part II: Short calculations (weight 20%) – 10 minutes
1.The market and stock J have the following probability distributions
Probability			Market Return			Stock J Return
30%				15%				20%
40%				9%				5%	
100%		13.500%		

2.Stock R has a beta of 1.5, Stock S has beta of .75, the expected rate of return on an average stock (“market”)  is 13% and the risk free rate is 7%. By how much does the required rate of return of the riskier stock exceed the required rate of the less risky one?
3.A newly issued10 year 12 % semiannual coupon bond with a par value of $1000 may be called in 4 years at a call price of  $1060. The bond sells for $1100. What is its YTM? Current Yield? Capital gain or loss yield? Yield to call?
4. Aegeis company stock currently sells for $20. It’s last dividend was $2.00. IF the dividend is expected to be flat and the required rate of return was 15% is the stock correctly valued. If the dividend grew at constant rate of 10%, what would the value be then?

Part III: Company analysis (Weight 60%)  80 minutes (The amount of text makes this look longer than it is)
1.	5%  First click on the latest “10K” and see the full outline. Then please download the EXCEL version of the latest 10K (Annual Filing) for the companies listed on the attached colored sheet. The first one is the main company to analyze and the second will be the comparison.
a) go on company website
b) locate “about us” or “about the company”
c) go to Investor Relations
d) go to SEC Filings
e) Select “Annual Filings” in the search box
f) Select the Excel version and download on your USB or hard drive
YAHOO Financials are not complete so please do NOT use them (lose points).
2.	5% Find the tabs for full income statement (IS), common size income statement, and balance sheet (BS), statement of cash flows, and statement of retained earnings. These should be toward the middle of the tabs. Pay attention to what else is available as you may find it helpful (MD&A spells out company’s interpretation of their performance….etc.) Copy (this is how you get the credit) the information into your Excel Exam Answer File under separate “sheets” (you can insert “new worksheets” as needed by using the Insert/New Worksheet menu items) either by selecting all (click the top left corner) Ctrl C and pasting using Ctrl V into your answer Workbook  (If you know how to copy sheets directly do so, it is harder to explain here)
3.	5% Before you do any numbers, describe in your own words how this kind of company does business and how that influences the line items in the IS and BS line items and ratios.(don’t be wordy or waste time and energy – this is a very simple business!)
4.	15% Please describe the top level what happened to the company’s performance from 2005 to 2006 (2004 to 2005 if those are latest) and compare to the performance of the second company. Be sure to
a) calculate the ratios using year end figures (no averages), explain what they measure, and create an easy to read table of both the year to year comparison (make sure years go from left to right!) and the other company comparison 
b) Explain what the numbers show, quoting your calculated numbers in your answer
5.	15% Now “peel the onion”, and calculate at least 2 ratios in the areas of liquidity and asset management that may help explain the top level analysis further. IF the company performance did not change, calculate at least 2 ratios anyway to see if there is any “offsetting” of one ratio by another (one was worse the other better)
6.	15% Calculate the EVA (show every step of calculation) for the main company for two years and discuss your suggestions for increasing/improving EVA based on your ratio analysis above and/or the overall financials. Assume a WACC of 15%. If you improve EVA using your suggestions, what else are you improving (which financials, which ratios).