Comercio y Finanzas Internacionales Bilingüe

Finanzas Corporativas
B 2018 Midterm Exam

Name: _____________________________________

Section one. True (T) or False (F) (2 points)

a) As an investor, I want my money back as soon as possible. ( F )
b) It is assumed that the administrator acts on behalf of the investor. ( T )
c) The higher the inflation, the higher the real interest rate required by the investor. ( T )
d) An example of a financial asset are preferred stocks. ( T ).
e) To a company that issued bonds in 2015 with a maturity of 5 years, it is convenient that in 2017 the yield
on the maturity of said bonds is lower than at the time of issuance. ( F )
f) All stocks in an equivalent-risk class are priced to offer the same expected rate of return. ( T )
g) A bond’s maturity tells you the date of its final payment. ( T )
h) According to Modigliani and Miller’s Proposition I, investment and financing decisions can be
separated. ( T )

Section two. Select the correct statement (1 point)

Which of the following statements always apply to Corporations?
a) Unlimited liability.
b) Limited life.
c) Ownership can be transferred without affecting operations.
d) Managers can be fired with no effects on ownership.
e) Shares must be widely traded.

Section three. Development of the argument (1 point)

a) Define (five lines maximum) Agency Problem. (0.5 points)
Agency problem usually refers to a conflict of interest between a company's management and the
company's stockholders. The manager, acting as the agent for the shareholders, or principals, is supposed
to make decisions that will maximize shareholder wealth even though it is in the manager’s best interest
to maximize his own wealth.

b) Explain the difference between the investor and the owner (the founder) of a corporation. (0.5 points)
The main difference is that the owner also is committed with the corporate principles and includes a
special feeling for his business. The investors not necessary agree with those principles.

Section four. Capital Market (2 points)

The figure below shows how financial markets works:

Operating expenses, dividends Dividends

Capital Capital, Commissions

You must explain:
a) What represents the continuous line and the doted line? (0,5 points)
Doted line represents the capital movement from investors to companies demanding funds and
continuous line are dividends, operating expenses and commissions (paid to brokerage firms).

b) What role do you think the goverment plays in the capital market? (0,5 points)
Goverments play the regulator role. There are several procedures, laws and conditions under the capital
market works efficiently for all the members.

Section four. Exercises (include Excel formulas) (4 points)

1) Suppose you invested $ 16500 at the end of 2008 in good roots (terrain). At the end of 2018 this land is
valued in $ 50000. Estimate:
a. Nominal rate of return. (one point)
b. Real rate of return, considering inflation rate in this last decade (see table below): (one point)

2) Caterpillar Inc. is considering issuing bonds to get capital for its quarterly budget plan. The amount of
capital needed is two million dollars. The corporate bond characteristics are the following: face value $
750, five years maturity, 3 % coupon rate compounded quarterly, and 11 % yield to maturity.
a. Estimate bond issue price. (0.5 points)

b. Determine what type of bond is this. (0.5 points)

c. Determine how many bonds Caterpillar needs to issue to complete the amount of money in order
to cover the financial plan. (0.5 points)

d. Assume you invest in this corporate bond. If you hold the bond until year four, and annual yield
to maturity is then 8 %, determine your final rate of return of this investment 0.5 points.