Corporate Finance

NORWEGIAN SCHOOL OF ECONOMICS

Examination fall semester 2014

Code:   FIE402N        

Title:   Corporate Finance / Foretakets Finansiering

Date:    25 November        Time:   09:00-13:00

The course instructor will not visit the examination room, but may be contacted by an examination attendant at 59 291 or mob. 970 19 567

• The students may respond in Norwegian or English.

Materials permitted for use during the examination:

Materials permitted:  YES, cf list below: X

Electronic calculator:  YES: X

In accordance with the rules specified in ”Utfyllende bestemmelser til Forskrift om eksamen ved Norges Handelshøyskole (fulltidsstudiene)”

List of materials permitted:

One dictionary

FIE  402  CORPORATE  FINANCE   FALL 2014

All four problem sets on the next seven pages should be answered. The last sheet contains a collection of formulas, some of which may be useful during the exam.

The stated time limits may be helpful in allocating your time among the questions — they are also the weights for the total grade. Short and precise answers are favored.

PROBLEM 1. Multiple Choice (Q1 through Q14)   (max 90 min)

Suppose the risk-free rate is 4% and the market portfolio has an expected return of 10% and a volatility of 10%. Merck & Co stock has a volatility of 20% and a correlation with the market of 0.5

Q1: What is Merck’s beta with respect to the market?

1. 0.5
2. 1
3. 1.5
4. None of the above.

Q2: Under the CAPM assumptions, what is the expected return?

1. 10%
2. 14%
3. 13%
4. 7%

The risk-free rate and the expected return on the market portfolio is as above.

Pfizer has a stock price of $20 per share, with 10 million shares outstanding. It also has $100 million in outstanding debt, due in one year, with a yield on the debt of 6%.  Pfizer’s equity beta is 1.5. You can assume the debt has a zero beta and that there is no taxes.        

Q3: What is the unlevered beta?

1. 0.5
2. 1
3. 1.5
4. None of the above

Q5: Pfizer’s Loss given default (LGD) is estimated to 50%. What is the expected probability of default implied by the cost of debt (6%)?