Business Finance I midterm
Evaluate the following statement: Managers should not focus on the current stock value because
doing so will lead to an overemphasis on short-term profits at the expense of long-term profits.
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Question 2 (Time Value of Money) (20%)
In 2013 Bill Gates was worth about $28 billion after he reduced his stake in Microsoft from 21% to
around 14% E\ PRYLQJ ELOOLRQV LQWR KLV FKDULWDEOH IRXQGDWLRQ. LHW¶V VHH ZKDW BLOO GDWHV FDQ GR ZLWK
his money in the following problems.
a. I¶OO Wake MaQhaWWaQ? MDQKDWWDQ¶V QDWLYH WULEH VROG MDQKDWWDQ IVODQG WR PHWHU MLQXLW IRU $24 LQ
1626. Now, 387 years ODWHU LQ 2013, BLOO GDWHV ZDQWV WR EX\ WKH LVODQG IURP WKH ³FXUUHQW
QDWLYHV.´ HRZ PXFK ZRXOG BLOO KDYH WR SD\ IRU MDQKDWWDQ LI WKH ³FXUUHQW QDWLYHV´ ZDQW D 6%
annual return on the original $24 purchase price? Could he afford it? (5 points)
b. How much would BLOO KDYH WR SD\ IRU MDQKDWWDQ LI WKH ³FXUUHQW QDWLYHV´ ZDQW D 6% UHWXUQ
compounded monthly on the original $24purchase price? (5 points)
c. Microsoft Seattle? Bill Gates decides to pass on Manhattan and instead plans to buy the city
of Seattle, Washington, for $60 billion in 10 years. How much would Mr. Gates have to invest
today at 10 percent compounded annually in order to purchase Seattle in 10 years? (5 points)
d. Now assume Bill Gates wants to invest only about half his net worth today, $14 billion, in
order to buy Seattle for $60 billion in 10 years. What annual rate of return would he have to
earn in order to complete his purchase in 10 years? (5 points)
Question 3 (Time Value of Money) (20%)
Yang Ming Marine Transport Corporation is considering the purchase of a new bulk carrier for $8
million. The forecasted revenues are $5 million a year and operating costs are $4 million. A major
refit costing $2 million will be required after both the fifth and tenth years. After 15 years, the ship is
expected to be sold for scrap at $1.5 million.
a. What is the NPV if the opportunity cost of capital is 8%? (10 points)
b. Should the company accept the purchase of the carrier? (10 points)
