SRM 5211 – Finance & Economics Exam
Name: _________________________
Instructions: Please write your answers in the space provided below each question. When applicable, please show your work. If using Excel, please show the syntax that you entered into the cell to generate your response.
Save your work often and submit your finished exam to Canvas by 7:30pm in Microsoft Word or PDF format.
Questions 1-3 are worth 10 points. Questions 4-17 are worth 5 points.
1. (10 points) Lululemon (LULU) currently trades for approximately $240 per share and there are slightly more than 123M shares outstanding for a total market capitalization of about $30B. Nike is interested in making an offer to buy the company. Phil Knight is not sure what kind of offer might entice LULU’s management team and Board of Directors to sell.
a. What valuation method would you recommend to him? Why?
b. Phil says to you: “Why can’t we just offer $30,000,000,000?”
You reply: “It’s not that simple, Phil.”
Provide him with a list of the two (2) most important adjustments you should make to this basic valuation. Based on these adjustments, provide him with your recommendation for a fair offer price. Carefully justify your recommendation.
2. (10 points) An investor is considering whether or not to purchase a partnership share in a minor league baseball team in an independent league. There are four possible outcomes for the average first-year profits based on the team’s success:
1. Team wins championship: $85,000 at p = 0.15
2. Team is a contender, but does not win championship: $40,000 at p = 0.20
3. Team finishes around 0.500, but is not a contender: $10,000 at p = 0.35
4. Team finishes last, or next to last: –$30,000 at p = 0.30
a. Calculate the expected value of the investment.
b. Calculate the standard deviation of the outcome of the investment.
c. Provide a brief explanation of what the answers to Part a and Part b mean.
3. (10 points) You’ve just started your own business and while your online sales are doing well, you think there’s a great opportunity to make even more money if you open up your own store. However, to open up your own store, you need at least $80,000 to get started. While you can’t afford that now, you think that in four (4) years, it’s a very reasonable goal.
a. How much would you have to invest today at 6% interest to have $80,000 to open the store in four (4) years?
b. Instead of investing a lump sum today, suppose you prefer to invest a fixed amount each month to obtain the $80,000 in four (4) years. How much would you have to invest each month at the same 6% interest rate?
- Company X price-to-earnings ratio of 21.
- What does that mean?
- How could I know if that was a “good” ratio or not?
- There are five basic forms of financing an enterprise. Describe three of them and give an example within sport for each.
6. The Sports Investment Fund has a total investment of $3 million in the following portfolio:
Asset
Investment ($)
Beta
A 500,000 0.82
B 1,200,000 1.37
C 400,000 0.92
D 900,000 0.21
Total 3,000,000
The market’s expected rate of return is 8%, and the risk-free rate is 3%. What is the required rate of return? Briefly explain how you would interpret this result.
7. You work as a GM for a basketball team. You sign a player for a 7-year, $140M contract. The league collective bargaining agreement allows you to have no year of the contract worth less than half of the highest year. Your team wants you to try to make this contract as “cheap” for them as possible. Suggest a possible contract structure, and thoroughly explain your reasoning behind your decisions.
8. You are considering buying stock in either Nike or Adidas. Both companies are doing extremely well in terms of their ability to generate profits. So rather than consider their profitability, you are trying to decide which stock is the better value at its current price. Identify and describe two financial indicators that can help you make this determination.
9. You are the new manager of Philly Phitness, a new local health club. You have been asked to create a budget for the upcoming year. Which budgeting approach will you use? Why do you believe that this approach is preferred over the other approaches presented in class?
10. What is the difference between a budget and a financial statement? How are these documents utilized differently by financial managers? Give an example of how these documents may be used together in assessing an organization’s overall financial performance.
11. We discussed a number of different methods of valuing an asset. Identify and describe three of them in the context of valuing a new fitness center. If you were buying a fitness center, which method would you prefer and why?
12. Explain why Einstein called compound interest “the most powerful force in the universe”
13. Explain the difference between an income statement and a cash flow statement. Why are they both important when examining the financial state of an organization?
14. A balance sheet is often expressed in the form of an equation. What is the equation? Define each of the three parts of the balance sheet and explain why the two sides must equal one another.
15. Provide a brief definition of opportunity costs. Besides the decision to sign free agents and the decision to build a new stadium, provide an example within the sports industry where opportunity costs should be considered.
16. Provide a brief definition of depreciation. Why is depreciation such an important concept in the context of owning a professional sports franchise?
17. You are a financial manager for a bank and the Philadelphia Eagles have called and asked for a sizable loan. Explain what factors you would consider in setting the interest rate for this loan. Would this rate be higher or lower than a similar loan for the Philadelphia Phillies? Why?