FIN 401 Lecture 12: Fin401_MT_F11_V1_Solution.doc

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tealhippopotamus990

26 Sep 2014

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Mid-term exam - alan kaplan version a - solution. Aids allowed: closed book except for an 8"1/2 by 11" note sheet. Answer all multiple choice questions on the scan sheet. All multiple choice questions are worth 1 mark each. Take it: a, b, please fill in the blank. The use of personal borrowing to change the overall amount of financial leverage to which the individual is exposed is called ____________: financial risk, homemade dividends, business risk, homemade leverage e) Indirect bankruptcy costs: please fill in the blank. The theory that the value of the firm is independent of its capital structure is called ___________: m&m proposition i, the static theory of capital structure, m&m proposition ii, m&m proposition iii, the dynamic theory of capital structure. Xyz corporation has no debt outstanding and a total market value of ,000. Earnings before interest and taxes, ebit, are projected to be ,000 if economic conditions are normal.

Related Questions

The following market value (mark-to-market) balance sheet information is available for Duguay State Bank (amounts in $ thousands and duration in years):

Book Value Market Value

Assets Amount Amount Duration

T-bills $ 180 $ 180 0.50

Loans* 5,000 ______ _____

Total Assets 5,180 ______

Liabilities

Deposits 4,184 4,184 1.00

Total Liabilities 4,184 4,184

Equity 996 _______

Total Lia and NW 5,180 _______

*Since this is a simple bank, it has only one type of loan. The loan has a $5,000 book value (current outstanding principal), amortized loan with annual payments, an interest rate of 6 percent, and 20-years to maturity. Similar loans today would have an interest rate of 7 percent which is the market yield.

Using Excel, determine the market value and duration of the loan and fill in the blanks in the balance sheet above. Please include a copy of your Excel Spreadsheet with your completed exam. What is the average duration of all the assets?

Weighted Average Duration Assets:

b. What is the average duration of all the liabilities?

Weighted Average Duration Liabilities:

c. What is the leverage-adjusted duration gap? What is the interest rate risk exposure?

DG = DA - kDL =

d. What is the forecasted impact on the market value of equity caused by a relative upward shift in the entire yield curve of 1.5 percent [i.e., Dr/(1+r) = 0.0150]?

The market value of the equity will change by the following:

MVE = -DG * (A) * r/(1 + r) =

e. What variables are available to the financial institution to immunize the balance sheet? Taking one variable at a time, how much would each variable need to change to get DGAP equal to 0?

To immunize the institution for interest rate risk, the Leverage Adjusted DG needs to be zero:

DG = D_A âkD_L = 0

The choice is to make the duration of assets equal to:

D_A =

or the duration of liabilities equal to:

D_L =

Or some combination thereof.

The following market value (mark-to-market) balance sheet information is available for Delasho State Bank (amounts in $ thousands and duration in years):