15.425  Corporate Finance

Final Exam

To: 15.425 Class
From: Paul Asquith
Re: Final Exam

I have posted the top 3 exams to Stellar. I can say confidently that almost everyone in the class knows first year corporate finance, the difference in grades represents how well you knew it. As a whole, the class did quite well on the final, and I gave the maximum number of A’s that Sloan allows. The maximum grade in the room was a 98, the minimum was a 51, and the mean was 77. I also gave no C’s. A exams did the valuation correctly and got most of the points on the financing section. The TA’s and I spent about 20-25 hours grading and every exam on the margin (which in this case was between an A- and B+) was looked at twice, once by a TA and once by me.
Some comments on the class’s exam performance as you read the posted exams:

1. The exam required two valuations, one without the improvements and one with. Not surprisingly, the NPV was negative without the improvements and positive with. Some people did the complete valuation twice, some merely did the valuation without the improvements and then added the incremental value of the improvements. Both will give the same answer if done correctly. The cash flows were generally correct. Terminal value was an important part of the valuation and I was somewhat disappointed to find that despite my repeated warnings, 14 people only did one terminal value instead of two. The most commonly missed point on the valuation was that once you determined the Vf , since you are assuming the debt, you only want to pay Vf – Ve.

2. In the cost of capital section, the most common mistake was in choosing the proper twin firm. Since the beta reflects both financial and product market risk, you want to pick a twin that has the closest product market risk. About 12% of the class chose their twin primarily based on size rather than industry.

3. The financing section was the hardest part of the exam and was the main differentiator between A’s and B’s. The total funding needs were greater than any of the financing options, and therefore more than one form of financing had to be chosen. In addition, since the financing needs covered a three year period, the firm’s sustainable growth over that three years could/would reduce the amount of outside financing needed. The requirement to keep an A rating meant that the equity option had to remain in play. The choice between the bank debt and the bonds focused on the discussion between fixed versus floating rates, and long versus short. There was not a single right answer to the trade off, but some discussion of the issues earned points. Recognizing the covenants and the current used portion of the bank credit line also earned points.

4. The strategic issues involved primarily the economic fit, the state of the wood chip market, the future choice of mini-mills, among other issues.
To conclude, I stated the true purpose of a final exam was to “encourage you to review the material and learn it as a whole, and to differentiate the A students from the B students”. I think the exam did both. I also mentioned many times that my purpose was for you to understand the theory and how to use the tools of corporate finance. The exam demonstrates that you do. I wish you well in the future.

Announced on 08 January 2018  2:11  p.m. by Alison Wurtz

Questions for Matthew Zames

Class,

As discussed in class, Matthew Zames will be a guest speaker on Wednesday. In preparation for this, please submit your brief synopsis and 2 or 3 questions via the following link.

https://goo.gl/forms/teHD4go4P4Sq4tx82

The assignment description can be found below.

Matthew Zames will be a guest speaker. Matt is the former COO of JP Morgan Chase. Prior to that, he was the Chief Investment Officer at JPM, as well as Head of Sales and Trading. Matt previously worked at Goldman Sachs, First Boston, and Long Term Capital Management.

Your assignment is to do some background reading on the following financial events: the meltdown of LTCM, the acquisition of Bear Sterns by JPM during the financial crisis, and the London Whale incident, all in which Matt played a prominent role. He will answer student questions regarding the finance industry; history of, problems with, careers in, future of, etc.

Turn in a brief synopsis of the above and 2 or 3 questions you wish to ask Matt.

Thank you,

Brendan Mahon and Taylor Higgins

Announced on 30 October 2017  12:29  p.m. by Brendan Emmanuel Mahon