Financial Analysis
Advanced undergraduate course
SUNY- Geneseo
5/9/1985
3 hours final exam
Each question worth 10 points

1- What is the purpose of capital budgeting? How do the discounted cash flow methods fulfill this goal? Why do non-discounted cash flow methods do not? Does risk enter into consideration in these non-discounted cash flow methods? When and how? (Give formulae and definitions where necessary.)

2- In the excerpt from the New York Times (below), what is the purpose of Rochester Gas and Electric offering? Why should and/or shouldn't Rochester Gas and Electric use this form of financing? What is (are) the alternative(s)? What is the effect of financial leverage? What criteria determines how much debt is acceptable for a firm? Assess these criteria in the case of Rochester Gas and Electric.

" Rochester Gas and Electric Corp. has filed for an offering of $50 million of 30-year first mortgage bonds through underwriters led by First Boston Corp." New York Times 5/1/1985.

3- Explain why trade credit is sometimes referred to as spontaneous financing. What is the cost of trade credit? What is the opportunity cost of not taking cash discounts? Calculate such cost for terms 3 15 Net 45. What is anticipation?

4- How does a company evaluate the credit worthiness of a client? Where is the information obtained? What criteria are used? When and if the determination is based on a single ratio, which should it be? Explain the reason for your choice and show that this ratio is intended to show is indeed useful. How does a company monitor and enforce its credit policy?

5- Give definition(s), formula(e) and meaning(s) of the various forms of return on investment. Explain the purpose of ratio analysis as you conducted it in case assignments. Identify the sources of information for that purpose. Show how more incisive analysis can be conducted using the DuPont breakdown, normalized statements and growth-index statements. In the above explanations, indicate in which case the analysis is conducted for internal managerial purposes and when it is that of an outside investor.

6- Define the concept of value. Relate this definition to a derivation of the value of share of stock. Is your formula including future capital gains? How? Is it including risk of the stock? How? Is it including level of earnings? How? It this stock value equal or even close to the price at which the stock trades in the stock market? What would be necessary for the stock value to equal to that price?

7- Explain the concept of risk. When and why the standard deviation is appropriate for measuring risk? When and why is BETA used? What is the difference between the two concepts? How is BETA calculated in practice? How is it used in investment decisions, and how is it used in capital budgeting? Give examples of BETA values and corresponding risk levels.

8- Explain the process of financial planning. Show how it fits in the on-going decision-making process of a firm. Identify the benefits.

9- If new bonds of similar rating as DuPont earn 12% in May 1985, is a DuPont bond maturing in 2004, with coupon of $84.50, a good buy at $745? Is the 14% DuPont bond maturing in 1991 a good buy at $1,080? Show all calculations. Why is one bond above par and the other below? What general law of time value of money causes this?

10- In what circumstance would a bond NOT be a desirable instrument to place excess cash, but a Eurodollar CD would be? Briefly discuss the major differences between capital and money markets? List and explain the different types of money market instruments which would be acceptable for placement of excess cash. Also explain the desirable features of depth and breadth of market for these instruments. Explain the mechanism of repurchase agreement and the benefits to the firm that uses it.