Name:_______________________________
Financial Management (BUSI 640) Professor Faulkender

Midterm Exam: Fall 2012

1) The exam is open book and open notes. You may use Excel and a calculator.

2) Point totals for each question are specified in parentheses. There are 220 total points.

3) Circle your numerical answers. This makes it easier for me to find them. Show all calculations and the inputs of all values solved for using your calculator or Excel. This allows me to determine how your numbers were arrived at. If you get stuck on the math, tell me what the correct answer should be based on your intuition. Incorrect numerical answers based on the correct logic will receive partial credit.

4) Your answer should be
(10)

b. One of Rick’s colleagues, Ben, is looking at the same vehicle. However, he lives in New Jersey where he owns a home and will use the equity in his house to finance the purchase. Ben will pay all $92,000 using his home equity line of credit and pay it off over the next seven years making constant monthly payments. The line of credit also carries a 4.8% annual rate but because the loan is considered a mortgage for tax purposes, the interest payments are tax deductible (Ben’s taxable income in a calendar year is lower by the amount paid in mortgage interest that year). If Ben’s marginal tax rate (federal and state) is 32%, what is his effective monthly payment on the vehicle? By “effective”, I am looking for the constant out-of-pocket monthly payment net of the reduction in taxes from the mortgage interest deduction. (15)

c. Rick and Ben’s managing partner, Eric, makes significantly more money than they do and is expected to have a marginal tax rate of 48.6% over the next five years (39.6% federal plus 9% state). If Eric were to purchase the vehicle, paying a $20,000 down payment out of his money market account and financing the rest through his 4.8% interest rate home equity line of credit over 5 years, what is his effective monthly payment? What is your estimate of the present value of the tax subsidy Eric receives for buying this vehicle