Essay Exam for Corporate Finance

Essay Exam for Corporate Finance

Exam 2 consists of two essay questions. Fully answer each question in a maximum of 1/2 page or 250 words. A rubric is provided to guide your response on each

question. You will have a total of 120 minutes to complete this exam.
Before you open the Exam 1 page and begin timing, it is suggested that you open a blank document in Word.
By answering your questions in Word, you will be able to use the Spell Check and word count features.
Before the 120 minutes elapse, copy your response from the Word document to Exam template.
In each essay, reflect your individual work and effort

CMBA FIN 6446 – Spring 2017 Exam 2: March 2 – 3  Chapters 10, 11, 18, 19, 22 (pg. 668 – 670), 21 (pg. 630 – 656), Chapter 25
Topics:  How firms achieve sustainable differentiation / Deep Economic Moat
• Production Process: o Economies of scale o Capital requirements o Access to key inputs and raw materials o Superior systems, design and technology (product quality)

o Master of efficient distribution, low-cost operator o Superior customer service  • Boundaries and Distribution o Brand status o Network externality o Franchises and

product exclusivity o Store ubiquity  • Government Actions o Patten protection o Government franchise / preference o Legal barriers: license, zoning laws  Monopoly

(Chapter 10)
• Monopoly market rules o One firm controls the market o Unique product, no substitutes o Very high entry barriers / very deep Economic Moat  • How monopolist maximize

profits in the short run
• Relationship between demand curve (where each point on the demand curve represents average revenue, P = AR) and the MR curve.  Monopolistic Competition & Oligopoly

(Chapter 11)
• Monopolistic competition market rules o Many firms o Easy entry / exit o Product differentiation (small economic moat)
CMBA – FIN 6446 Exam 2 Prep for Week 8               Prof. M Lasaga
2
• Product differentiation: how companies differentiate their products (little moat)
• Can firms make a profit in the long-run under monopolistic competition?
• Oligopoly market rules o Small number of producers o High barriers to entry and exit / deep Economic Moat o Standard or differentiated product  • Because few firms

dominate the market, this market structure leads to interdependence of actions taken by each oligopolist.
• Game theory is an approach that can be used by firms in an oligopoly to find their optimal outcome: o Basic model of game theory: two companies, two strategies each,

one time simultaneous decision. Each seeks to maximize payoffs. o Dominant strategy o Prisoners’ dilemma o Nash equilibrium o Solve for the Nash equilibrium using the

“*” marker in the payoff matrix  o Pre-emptive strategy (if we change the game rules to allow one player to strike first) o Other strategies: tit-for-tat, leader –

follower, etc.
Chapter 18
• Basic Macro-Economic Accounting
• Measure of total output: Gross Domestic Product (GDP)
• Two faces of GDP:  o Market Value of total expenditures, at market prices, by final end-users: what is produced is purchased by different end-users, and what is not

sold goes into inventory, or if more is sold than produced, it reduces inventory.  What is not included in the value of production: intermediate inputs, goods already

produced, goods and services not traded in the market, and ownership claims on assets such as equities.    Basic GDP equation: GDP = C + I + G + X – M  • Imports (M)

are subtracted because they are not produced in the country but those imports are already included in the measures of C, I, and G.
CMBA – FIN 6446 Exam 2 Prep for Week 8               Prof. M Lasaga
3
• Three categories of Investment: i) business fixed investment; ii) residential construction; and iii) change in inventories  o GDP as a measure of total output of

goods and services based on the Income approach: the value of production of final goods and services (as opposed to intermediate goods used in production) is also

equal to the value of income distributed to the factors of production
• Four types of unemployment that comprise the overall unemployment rate: o Frictional unemployment o Seasonal unemployment o Cyclical unemployment (see selected pages

from Ch. 22 on business cycles) o Structural unemployment o If the current rate is 10% (for example), then that rate could be broken up into the four components based

on statistical analysis.
Chapter 19 Prices and inflation
• Consumer Price Index (CPI) measures the overall price level based on a basket of consumer goods and services o Construction of the CPI  o Base period = 100 o

Changing the base period in the price index  • Using price indexes to convert nominal to real values
• The Fisher Model for interest rates: o Two ways to express the equation (approximation & and the correct method based on compounding or rates):  Nominal interest

rate = real interest rate + expected inflation   (1 + i) = (1 + r) * (1 + expected inflation)  o If expected inflation increases nominal interest rates will increase.

This gives rise to interest rate risk for borrowers as well as lenders.
Chapter 21 (Pg. 630 – 656)  Economic Growth
• Long-term economic growth measured by the growth in the volume of output of goods and services, or real GDP:
CMBA – FIN 6446 Exam 2 Prep for Week 8               Prof. M Lasaga
4
%∆GDP = %∆productivity + %∆hours worked + %∆EPR + %∆population 1. Productivity 2. Hours worked 3. Employment – population ratio 4. Population growth
• Long-term growth of GDP per capita or growth of standard of living:  %∆GDP/cap =  %∆productivity + %∆hours worked + %∆EPR
• Economic policies to support long-term GDP growth: • Policies to increase EPR
• Policies to increase productivity
• Other factors that influence the decision to enter or expand in a country market: o Human capital and quality of life (i.e. life expectancy)  o Ease of doing

business (World Bank: Doing-Business Indicators)
Chapter 22 (pg. 669 – 672;  pg. 676 – 677;  and pg. 681 – 683)
• Business Cycles: periods of expansion followed by contraction
• Causes of business cycles
• Expansions and contractions affect the cyclical component of the unemployment rate (see Ch. 18)  Chapter 25  Money Supply
• Definition of money supply  • The Federal Reserve System and the balance sheet of the Fed • Balance sheet of commercial banks • The payments system in the U.S.  How

the Fed Manages the Money Supply
• Instruments for controlling the money supply o Reserve requirements o Discount window o Open market operations
CMBA – FIN 6446 Exam 2 Prep for Week 8               Prof. M Lasaga
5
• The use of open market operations to change the money supply and the associated money multiplier process
Format of Exam 2  The exam will consist of essay questions in the same format as Exam 1. You will have two hours to complete two essay questions.
For each of the two essay questions, you will be instructed to answer one out of two possible questions.
The questions will test your ability to reason and apply the economic concepts learned during the four weeks to specific business situations. The types of questions

are similar to those posed for the weekly group discussion memos.  NO PROCTORU YOU CAN TAKE THE EXAM AT ANY TIME DURING THE AVAILABILITY PERIOD.  Suggested Problems:

(Suggested problems are indicative of how to apply concepts learned in class lectures and discussions and thus should be helpful in preparing for the test. For deeper

understanding of the concepts review other even-numbered problems)  Chapter 10: Problems 2 and 8  Chapter 11: Problem 4 and 12  Chapter 18: Problems 2, 6 and 12

Chapter 19: Problems 2, 6, 10 and 14  Chapter 21: Problem 8   Chapter 25: Problems 2, 8, and 10

find the cost of your paper