Midterm, May 2025
The solutions are here.
Questions 8-11
The first weakness appeared primarily in Questions 8-11.
Obviously, you will need to go over this again. It is important that you understand how debt and equity are structured and paid off, and how this flows through to the risk.
The differences in risk flow through to the reward in the real-world, where investors are not risk-neutral. This gives rise to the WACC, the Weighted Average Cost of Capital. Every firm uses this.
I did a problem like Qs 8-11 right before the exam on the board, too. (There was also one on the practice midterm in syllabus.space.) The only difference was that we had 5 years instead of 1 year here, requiring grossing up the expected return on all investments over 5 years first. Because this was open notes, and you had just taken the notes from the board, I had hoped for better comprehension. No worries — we’ll get there.
I don’t care how you did on the exam. (Some people are just not good exam-takers, either.) I do care that you understand what we are doing, and that you go back and try to understand why you missed what you missed. It is essential to a basic grasp of finance that you understand the conceptual basis of risk and reward in debt and equity. It makes no sense to look at more complex cases involving capital structures if you don’t understand these basics.
Understanding this concept is also doable. It’s not rocket science, although it does require a finance way of thinking. You can get there. Let us know if you are stuck, where you are stuck. We are here to help.
Question 19
This was a straightforward application of the CAPM formula. In fairness, we did not review this in class. You only did this on your own. You will have to do this, too, because this is the most common real-world way to get a starting estimate for a hurdle rate.
General Observation
Please make sure that you understand what you got wrong and why you got it wrong. You need to be able to answer all these questions if they were to appear again on the final.
It definitely hurts your performance that you don’t regularly have to do and hand in homeworks. I understand that your time constraints make this difficult, but it doesn’t get us around the fact that this is a top EMBA program and not a secretarial school. You have to understand all the concepts we are covering here in our finance course. I wish we had the time to do more cases and cover more material, but we only have 10 weeks in total.
There will be a followup optional finance course for those of you who want to see the concepts in case application format.
Incidentally, you are not alone in struggling. I just talked to David Wessels. His class and he are struggling with the same problem of condensing the basic MBA finance course into only 10 weeks, while you have accounting (and earlier ethics) in the same quarter. It’s just a difficult subject.
Grading
The mean was 70, with a standard deviation of 25. The range was from about 20 to 123. This is how the distribution of scores on an exam should look like: a good spread around a mean. If this was the only exam, and I had to assign grades based on it, I would probably do
| Score | Grade |
|---|---|
| 18-20 | B- |
| 20-40 | B |
| 40-65 | B+ |
| 65-80 | A- |
| 80-100 | A |
| 100- | A+ |
This reflects a bonus due to the tough time and course schedule that you are suffering through this quarter. In a standard MBA finance course, I would have changed the scale by 5 points (e.g., an A- would have been from 70-85.)
Of course, the course is not yet over, and you still have chances to improve your score.
Final
The preference was 3-to-1 in favor of having the exam on the last day of class in May rather than in June. Therefore, we will hold the final in class on the last day of class in May. The format and timing will be similar to what the midterm was.
Moreover, the entire weekend format will be similar, too. I will be reviewing what we have done on Friday as well as some selected questions sent to me by Caitlin. Feel free to ask me anything before the final. We will have the midterm on Saturday.