ARAB OPEN UNIVERSITY
FACULTY OF BUSINESS STUDIES
(MBA) BB831 Corporate Finance
TUTOR MARKED ASSESSMENT – SPRING 2018-19
Question 1: (15 points)
You run a computer hardware firm. You have just won a contract to supply computers to one of the biggest companies in your country (company SAN) with full maintenance for five full years. This opportunity will require an investment of $9.78 million today and $5 million in five years. SAN will pay you $22.5 million in year five. Suppose that the market interest rate is 11%.
a. Calculate the NPV of this opportunity? Would you take the contract? Why or why not? (5 points)
b. How can your firm turn this NPV into cash today? assume an 11% market interest rate. (5 points)
c. Critically discuss the advantages and disadvantages of using the NPV. (5 points)
Question 2: (10 points)
John is saving for retirement. He decides that he will need to save $1 million by the time he is 65. Today is his 23rd birthday, and he decides, starting today and continuing on every birthday up to and including his 65th birthday, that he will put the same amount into a savings account. Assume the market interest rate is 5%.
a) Calculate the amount that John must set aside each year to make sure that he will have $1 million in the account on his 65th birthday? (5 points)
b) Fama (1960) identified three distinct levels at which a market might actually be efficient. Critically discuss the strong form and support your answer with relevant examples. (5 points)
Question 3: (25 points)
ABC is a firm whose only assets are $100,000 in cash and three investments that it will undertake. The investments are risk free and have the following cash flows:
ABC plans to invest any unused cash today at the risk-free interest rate of 9.2%. In one year, all cash will be paid to stakeholders and the company will close.
a. Calculate the NPV of each investment? Which investments should ABC undertake and how much cash should it retain? (5 points)
b. Calculate the total value of ABC’s assets (investments and cash) today? (5 points)
c. What cash flows will the shareholders in ABC receive? Based on these cash flows, what is the value of ABC today? (5 points)
d. Suppose ABC pays any unused cash to shareholders today, rather than investing it. What are the cash flows to the shareholders in this case? What is the value of ABC now? (5 points)
e. Evaluate the relationship in your answers to parts (b), (c), and (d). (5 points)
Question 4: (10 points)
John has offered to give Jane $150, starting next year, and after that growing at 4% for the next 20 years. Jane would like to calculate the value of this offer by calculating how much money she would need to deposit in the local bank so that the account will generate the same cash flows as he is offering her. Your local bank will guarantee an 8.5% annual interest rate so long as you have money in the account.
a. Using an Excel spreadsheet, calculate how much money will Jane need to deposit into the account today? (5 points)
b. Using an Excel spreadsheet, show explicitly that Jane can deposit this amount of money into the account, and every year withdraw what John has promised, leaving the account with nothing after the last withdrawal. (5 points)
QUESTION 5: (40 points)
Read the article “IMF approves $2.9bn credit line for Morocco”
found at: https://www.middleeastmonitor.com/20181219-imf-approves-2-9bn-credit-line-for-morocco/
After reading the article critically discuss the role of the IMF in supporting local economies. Support your answer using relevant literature and critically discuss whether the IMF support has always been positive to local economies. (40 Marks) [1000-1500 words]