Session 1
XXXXXXXXXXPHILIPP SCHNABL
NYU STERN DEPARTMENT OF FINANCE
44 WEST FOURTH STREET SUITE 9-190
NEW YORK, NY 10012
XXXXXXXXXX
Corporate Finance
Professor Philipp Schnabl
Take-Home Quiz
Last Name: ____________________________ First Name: _________________
Stern Honor Code : “I pledge my honor that I have not violated the Stern Honor Code in the
completion of this examination.”
Signature: __________________________________________________
Please work alone on this exam. There is no time limit.
Please submit your finished exam (scan, photo, or word document) via email to
XXXXXXXXXX and XXXXXXXXXX.
The deadline for submitting the exam is Thursday, March 3rd, 2022 at 11:59pm EST.
There is partial credit awarded for inco
ect or partially incomplete answers if some
of the work is co
ect. To receive partial credit, you must show your work. Mentioning
extra things that are wrong can hurt your partial credit.
The exam is open book. You can use your lectures notes, problem sets, and any other
notes. No computers or anything with a wireless connection.
Please round to two decimals after the comma. There won’t be any deductions for
ounding e
ors as long as I can clearly identify them as those.
You can use a financial calculator or Excel, but it won’t be necessary. If you are using
a financial calculator or Excel, I want to see exactly how you derive the solution, i.e.,
I want to see all steps that lead to the solution. Hence your answer should look
exactly like one coming from someone who does not have a financial calculator or
Excel. If you cannot make transparent how you derive your solution, you won’t get full
points.
mailto: XXXXXXXXXX
mailto: XXXXXXXXXX
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Question 1: Present Value (15 points)
You have just invested $5,000,000 into an account that will earn a 10% annual interest rate.
You have a rich aunt who promises to give you $5,000,000 in five years (at t=5). You want to
etire in 10 years (at t=10). Assuming that you have no other earnings or income over the
next 10 years, how money will you have when you retire (at t=10)?
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Question 2: Cash Flows (30 points)
You are considering setting up a new restaurant. The restaurant would be open for four
years (from t=0 to t=4). You have come up with the following information:
The locale for the restaurant will cost $500,000 today (t=0) and will be fully depreciated
in a straight line over 5 years according to IRS rules. You can sell the locale for $200,000
after 4 years.
The main cost will be the chef’s salary. Her salary will be $400,000 annually (starting at
t=1).
The revenues of the restaurant are expected to be $1,500,000 per year (starting at t=1)
and other costs (not including depreciation or the chef’s salary) are expected to be
$200,000 annually (starting at t=1).
All cash flows occur at the end of the year.
The opportunity cost of your time is zero.
The tax rate is 35%. Prepare a cash flow table for the restaurant.
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Question 3: Internal Rate of Return (25 points)
Your firm is scheduled to spend $500,000 on one-time repairs at t=0. Due to cash flow
problems, your firm is considering forgoing these repairs. If you do, you expect you will need
to spend $700,000 at t=1 on new equipment (i.e., you save $500,000 at t=0 but you need to
spend $700,000 at t=1). Compute the IRR for this problem. For what range of cost of capital
is forgoing repairs at t=0 a good decision?
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Question 4: Real Options (30 points)
Your friend is a movie producer and is considering investing in a movie today. The movie
would cost $75 million to produce today and could either be a hit or a flop. If the movie is a
hit, your friend will receive $30 million per year for four years starting next year, and if it is a
flop she will receive only $10 million per year for four years starting next year. The movie
will be a hit or a flop with equal probability.
Also suppose that your friend can invest in a sequel next year. The sequel costs the same to
produce as the original movie ($75 million to be paid one year from now). If the original
movie was a hit, then your friend believes that there is a 90% chance that the sequel will
also be a hit and generate $30 million per year for four years starting two years from today,
versus a 10% chance that the sequel will be a flop and produce $10 million per year for four
years starting two years from today. If the original movie was not a hit, though, then the
sequel will generate no revenue.
Your friend’s opportunity cost of capital is 5% annually. What is the value, to your friend, of
the option to produce the sequel?