1 CASE QUESTIONS BOOKLET –VERSION A Finance 550 Lee Pinkowitz MIDTERM EXAM October 22nd, 2013 Please read the following instructions carefully: (i)Put all your solutions and work on the ANSWER SHEETS, NOTon these pages. You can use these pages for scratch work, but nothing written here will be graded.(ii)Make sure you have the answer sheets for VERSION A. (iii)Read the questions completely and carefully. Make sure you understand what is being asked before launching into calculations. It is possible that you are given more information than needed. (iv)For dollar figures, you can round to the nearest cent. For rates, carry computations out 4 places (i.e. 0.0123 =1.23%) (v)Check that there are 8 pages and 4 sections in your CASE QUESTIONS booklet (vi)You may have at your desk a pen, pencil, a pocket calculator and ONE side of a formula sheet. There is to be NO sharing of calculators or case questions. You may not use laptops or PDAs for the test. You cannot use your calculator manual. (vii)Allocate your time wisely. Use the number of points assigned to each question as your guide. (viii)GOOD LUCK

2 SECTION I: YOU CAN’T HANDLE THE TRUTH!!! OR MAYBE YOU CAN Questions 1-2 (20 points total) True or False, Explain: (20 points total –10 points each question) Use the following information to determine whether the statements are true or false. If the statement is false provide a BRIEF explanation as to why it is false (BRIEF means AT MOST a few sentences). For a statement to be true, it must always be true. Thus, if the statement is true, there is no need for further explanation. Show work if necessary. 1.Every one of the statements A-D below is TRUE (to be clear: if you answer false, explain which statements are NOT true and briefly WHY. To answer true, all the statements below must be true)A.For any given stream of positive cash flows, future value will increase as interest rates increase. B.For a fixed interest rate and a given stream of positive cash flows, when the frequency of compounding per year increases, present value decreases. C.Assuming you invest $100 at 12% EAR, you will have roughly $769 in 18 years. D.If two streams of positive cash flows have the same payment, number of payments, the same positive discount rate, and both start at the same time, the present value of an annuity due is greater than the present value of an ordinary annuity. 2. If the beta of asset A is 0.80, the beta of asset B is 1.20, and you form an equal-weighted portfolio of A, B, the risk-free security, and the market portfolio, the beta of the combined portfolio must be 0.67. SECTION II: THE FIRST RULE OF FIN CLUB IS YOU DON’T ADD ACROSS TIME!Questions 3-6 (45 points total) Tyler Durden was President and CEO of The Paper Street Soap Company which produced and sold high quality soaps to luxury department stores. Tyler had been losing sleep recently as he thought about the future for himself and his company. There was a possibility of expanding his operation to other cities as well as branching out into other activities.