need exam completed asap
Session 1 PHILIPP SCHNABL NYU STERN DEPARTMENT OF FINANCE 44 WEST FOURTH STREET SUITE 9-190 NEW YORK, NY 10012 SCHNABL@STERN.NYU.EDU Corporate Finance Professor Philipp Schnabl Take-Home Quiz Last Name: ____________________________ First Name: _________________ Stern Honor Code : “I pledge my honor that I have not violated the Stern Honor Code in the completion of this examination.” Signature: __________________________________________________ Please work alone on this exam. There is no time limit. Please submit your finished exam (scan, photo, or word document) via email to schnabl@stern.nyu.edu and yy2249@stern.nyu.edu. The deadline for submitting the exam is Thursday, March 3rd, 2022 at 11:59pm EST. There is partial credit awarded for incorrect or partially incomplete answers if some of the work is correct. To receive partial credit, you must show your work. Mentioning extra things that are wrong can hurt your partial credit. The exam is open book. You can use your lectures notes, problem sets, and any other notes. No computers or anything with a wireless connection. Please round to two decimals after the comma. There won’t be any deductions for rounding errors as long as I can clearly identify them as those. You can use a financial calculator or Excel, but it won’t be necessary. If you are using a financial calculator or Excel, I want to see exactly how you derive the solution, i.e., I want to see all steps that lead to the solution. Hence your answer should look exactly like one coming from someone who does not have a financial calculator or Excel. If you cannot make transparent how you derive your solution, you won’t get full points. mailto:schnabl@stern.nyu.edu mailto:yy2249@stern.nyu.edu Page 2 _________________________________________________________________________________________ Question 1: Present Value (15 points) You have just invested $5,000,000 into an account that will earn a 10% annual interest rate. You have a rich aunt who promises to give you $5,000,000 in five years (at t=5). You want to retire in 10 years (at t=10). Assuming that you have no other earnings or income over the next 10 years, how money will you have when you retire (at t=10)? Page 3 _________________________________________________________________________________________ Question 2: Cash Flows (30 points) You are considering setting up a new restaurant. The restaurant would be open for four years (from t=0 to t=4). You have come up with the following information: The locale for the restaurant will cost $500,000 today (t=0) and will be fully depreciated in a straight line over 5 years according to IRS rules. You can sell the locale for $200,000 after 4 years. The main cost will be the chef’s salary. Her salary will be $400,000 annually (starting at t=1). The revenues of the restaurant are expected to be $1,500,000 per year (starting at t=1) and other costs (not including depreciation or the chef’s salary) are expected to be $200,000 annually (starting at t=1). All cash flows occur at the end of the year. The opportunity cost of your time is zero. The tax rate is 35%. Prepare a cash flow table for the restaurant. Page 4 _________________________________________________________________________________________ Question 3: Internal Rate of Return (25 points) Your firm is scheduled to spend $500,000 on one-time repairs at t=0. Due to cash flow problems, your firm is considering forgoing these repairs. If you do, you expect you will need to spend $700,000 at t=1 on new equipment (i.e., you save $500,000 at t=0 but you need to spend $700,000 at t=1). Compute the IRR for this problem. For what range of cost of capital is forgoing repairs at t=0 a good decision? Page 5 _________________________________________________________________________________________ Question 4: Real Options (30 points) Your friend is a movie producer and is considering investing in a movie today. The movie would cost $75 million to produce today and could either be a hit or a flop. If the movie is a hit, your friend will receive $30 million per year for four years starting next year, and if it is a flop she will receive only $10 million per year for four years starting next year. The movie will be a hit or a flop with equal probability. Also suppose that your friend can invest in a sequel next year. The sequel costs the same to produce as the original movie ($75 million to be paid one year from now). If the original movie was a hit, then your friend believes that there is a 90% chance that the sequel will also be a hit and generate $30 million per year for four years starting two years from today, versus a 10% chance that the sequel will be a flop and produce $10 million per year for four years starting two years from today. If the original movie was not a hit, though, then the sequel will generate no revenue. Your friend’s opportunity cost of capital is 5% annually. What is the value, to your friend, of the option to produce the sequel?