Midterm Exam for Finance 6400

4. Section II should be labeled Capital Market Efficiency. In Section II discuss capital market efficiency. What is the efficient market hypothesis? What are the forms of capital market efficiency? What are the implications of capital market efficiency for the financial management of a public firm? Discuss three Wall Street Journal articles about your firm in the context of capital market efficiency. Clearly label and title the articles and their associated dates. (In the appendix, provide a link to the three articles you select) Look on Yahoo Finance or any other data base (Bloomberg) and identify the stock price response to this news item. What was the price immediately before the news release and what was the price immediately afterwards? Why do you think this price response occurred or did not occur? Be sure to number this question #4.

5. Section III should be labeled Empirical Evidence on the Efficient Market Hypothesis.

In your own words, repeat the general evidence concerning capital market efficiency discussed in the text. This section requires you to also discuss three empirical articles from SSRN concerning capital market efficiency and corporate finance. You should not discuss the methodology in these articles. What is being tested or examined in each of these articles? What does the empirical evidence say? How do the authors interpret the empirical evidence? What do they conclude? If these results are correct, what implication does each have for the management of your public firm?

You must connect these three articles to the theory of corporate finance that we have discussed so far in the course. Note: no two students can select the same articles. Deductions will result for any choice of same articles from SSRN. Be sure to number this question #5.

6. Section IV should be labeled Free Cash Flow. Section IV requires you to use pre-pandemic years to calculate your firm’s Free Cash Flow for two pre-pandemic years using figure 2-5 in your text. Appendix I should contain financial statement information that allows me to verify your two years of FCF calculation. Be sure to label the components of the calculation for my ease in checking. Explain the difference between the cash flow statement and the firm’s free cash flow. What are the potential uses of free cash flow? Why is free cash flow important? Be sure to number this question #6.

7. Hint: This in a Time Value of Money problem. In Section V You must use Value Line and the most recent one-page pdf Value Line report for your firm. Include the one-page Value Line pdf report in your appendix. Show the 10-year growth rate calculation for your firm’s free cash flow per share. Show the 10-year growth rate for your firm’s Dividends Declared per share. For both, this is one calculation that compares 2012 data to 2022 data.

Now use the last 6 years and calculate five individual growth rates of free cash flow per share (2017-2018, 2018-2019, 2019-2020, 2020-2021, 2021-2022) and five individual growth rates of dividends declared per share. Clearly show your results. {Hint: the FV in year 2 = PV in year 1 times (1+ growth rate)} Is your firm’s free cash flow growing? Is this growth rate constant? What do you believe your firm is doing with its FCF? What is the firm’s dividend pay-out ratio? Is it growing in tandem with your firm’s FCF growth rate?

Be sure to label this question #7.

8. Section VI should be labeled the Cash Conversion Cycle. This section requires you to calculate, demonstrate the calculation, and comment on your firm’s cash conversion cycle during a pre-pandemic period. ( See Section 16-3 of your text). How could the cash conversion cycle be improved? Do you think this is realistic? Why is the cash conversion cycle important? Be sure to label this question #8.

9. Section VII requires you to present three years of data like Table 3-1 in your text. (Use the Library Research Guide. No credit is given for manual calculation of ratios) Be sure to include the NAIC industry comparison ratios for each ratio. It is permissible to use several different data bases to find all the ratios you need if necessary. Choose one ratio in each of the five categories and comment on it both over time and in comparison, to the industry average. The actual ratio tables can be provided in the appendix if necessary to limit your total page count . Be sure to number this question #9.

10. Section VIII requires you to calculate the DuPont Equation for your firm for two years. Comment on and explain the DuPont equation and analyze the ratios as a complete system of financial information about your firm. Choose one of your firm’s ratios that seems less than ideal and discuss how the firm could potentially improve this ratio. Be sure to number this question #10.

11. Section IX should be labeled Corporate Bond Yield. This section requires you to use FINRA’s market data center to calculate your bond’s trading price. Be sure to include the necessary information in the appendix for this calculation so that I can verify it. Demonstrate the bond’s price calculation and explain the calculation with a numerical example using your firm’s FINRA data. Be sure to include weekly accrued interest. Use your financial calculator to calculate your bond’s Yield to Maturity using the price you calculated from FINRA. Interpret it. Demonstrate how you use your calculator to calculate the corporate bond’s yield to maturity. Definitionally, what is ‘yield to maturity?’ Is your bond selling at a premium or discount? Why? Be sure to number this question #11.

12. Section X should be labeled Yield Comparison. Plot your bond’s one yield on the current Treasury Yield curve. Copy the picture of this Treasury Yield Curve from any Research Guide database on any date between 10-11-2022 and 10-24-2022. Place this copy in this section. Be sure to match your one bond’s YTM and the Treasury Yield curve at the appropriate time to maturity. (For example, a corporate bond with 10 years remaining to maturity should be plotted at the 10-year point on the Treasury Yield curve. You will have a dot on the Treasury Graph for your corporate bond yield)

Explain the shape of the Treasury yield curve ( see Section 5-13 of your text) and what this tells you about the market’s estimate of expected inflation? Discuss Equation 5-6 from your text for a Treasury Bond and for ONE corporate bond for your firm. What is the spread between the corporate bond yield and the Treasury yield? What causes this?

Discuss your bond’s rating. Discuss reinvestment rate risk. Discuss interest rate risk.

Be sure to number this question #12.

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