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```					Key to Exam I; F4360; Fall, 2004 Short answer questions/problems Note: if you write more than a couple of sentences on a short-answer question, you are likely writing too much. 1. Using the attached information, calculate General Motors’ PE Ratio for 2003.

EPS 

3,822,000,000  6.80 561,997,725 53.40 PE   7.85 6.80

2. Assume you are interested in whether General Motors has excessive debt. If you could only calculate one ratio, which would you calculate? Times Interest Earned 3. Assume you are calculating General Motors’ EVA for 2003 using the Harnischfeger approach. What would you use for Operating Cash when you calculate capital? 20,320 4. Calculate the NOPAT you would use in calculating General Motors’ Basic EVA for 2003. NOPAT = 3822 + 9464 = 13,286 5. Assume you read an article that states that EVA is a poor measure of performance because it doesn’t allow for differences in risk between firms. Briefly respond to this statement (a sentence or two should be sufficient). Riskier firms will have a higher cost of capital and as a result a lower EVA other things equal. Note (not needed for answer): for riskier firms, equity betas will be higher. In addition, the debt rating will be lower which will cause the rate on debt to be higher. Both lead to a higher cost of capital. The higher cost of capital will lead to a higher capital charge and thus a lower EVA. 6. Assume that two years ago your parents made the first of 22 monthly deposits into a savings account. After the initial deposit, your parents increased the deposits by 2% each. Beginning three months from today, you will be able to make the first of 10 annual withdrawals of \$400 each from this account to help pay for Christmas trips. List the sequence of steps (including what you are solving for in the final step) that you would need to undertake to solve for the first deposit your parents made into this account. (Note: no calculations necessary…just list the steps). Possible sequence of steps to solve problem: Note: PVLS = present value of lump (single) sum, FVLS = future value of lump sum, PVA = present value of annuity, FVA = future value of annuity, PVGA = present value of growing annuity, FVGA = future value of growing annuity. In last step, what solving for is in parentheses. PVA, FVLS, FVGA (payment) PVA, PVLS, PVGA (payment) FVA, PVLS, PVGA (payment) FVA, PVLS, FVGA (payment)

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Key to Exam I; F4360; Fall, 2004 7. For a given annual percentage rate, what happens to the effective annual interest rate as the number of compounding periods per year increases? Increases. 8. Assume that IBM’s reward to risk ratio is below that of other assets. Describe the process that will drive the reward to risk ratio for IBM to equal that of other assets. Everyone will sell IBM driving the price down. As price falls, the expected return rises and the reward to risk ratio rises. Note: Question 10 is an extension of question 9. Draw your answers to questions 9 and 10 on the same graph. 9. Assume you are considering investing in General Electric and Microsoft. Assume that expected return and standard deviation of returns is higher on Microsoft than on General Electric. Sketch a reasonable feasible set and label a portfolio consisting of 80% Microsoft and 20% General Electric. Description of graph: Microsoft is above and to right of General Electric. Feasible set is a line that curves to the left between the two assets. Portfolio is closer to Microsoft than General Electric. 10. Assume you decide to add Kellogg to your portfolio of General Electric and Microsoft. Kellogg has a lower expected return and standard deviation of returns than either General Electric or Microsoft. On the same graph you drew for 9, sketch a feasible set using the 3 stocks. Label the point that is the best possible combination of the 3 assets that allows you to have the same expected return that you had in question 9. Are you better off or worse off at this new point? Why? Description of graph: Kellogg is below and to left of other two. Feasible set is an area that extends to the left of the three points and extends further to left than the curve in question 9. Your new investment will have the same expected return but will have a lower risk (a point to the left on a line). As a result you are better off. Problems/Essays 1. You have just deposited \$100,000 into a savings account that pays an interest rate of 6% per year compounded continuously. Eight months from today, you plan to make the first of a series of quarterly withdrawals that grow by 1% each. You plan to make your final withdrawal five years and two months from today. How large can you make your first withdrawal?
r 1  e.06  1  .06184

r

   1.06184
1 4

14

 1  .015113

V5  100,0001.061845 12  102,531.51
19 C    1.01   1   102,531.51      C  5730.46  .015113 .01   1.015113   

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Key to Exam I; F4360; Fall, 2004 2. Based on the following returns (August to August), what is your estimate of the beta for Pepsico? Pepsico: 2004: 14%, 2003: 13%, 2002: -15%, 2001: 12% S&P 500: 2004: 11%, 2003: 9%, 2002: -19%, 2001: -25%.
14  13  15  12 6 4 11  9  19  25 rS & P   6 4 rP 
2  S &P 

(11  6)2  (9  6)2  ( 19  6)2  ( 25  6)2  348 3 (14  6)(11  6)  (13  6)(9  6)  ( 15  6)( 19  6)  (12  6)( 25  6)  P,S & P   133.33 3 133.33   0.383 348

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Month-end stock prices for General Motors Source: WRDS DATE 200001 200002 200003 200004 200005 200006 200007 200008 200009 200010 200011 200012 200101 200102 200103 200104 200105 200106 200107 200108 200109 200110 200111 200112 200201 200202 200203 200204 200205 200206 200207 200208 200209 200210 200211 200212 200301 200302 200303 200304 200305 200306 200307 200308 200309 200310 200311 200312 COMPANY NAME TICKER GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM GM PRICE 80.5625 76.0625 82.8125 93.6250 70.6250 58.0625 56.9375 72.1875 65.0000 62.1250 49.5000 50.9375 53.7000 53.3200 51.8500 54.8100 56.9000 64.3500 63.6000 54.7500 42.9000 41.3200 49.7000 48.6000 51.1400 52.9800 60.4500 64.1500 62.1500 53.4500 46.5500 47.8600 38.9000 33.2500 39.7000 36.8600 36.3300 33.7700 33.6200 36.0500 35.3300 36.0000 37.4300 41.1000 40.9300 42.6700 42.7800 53.4000

GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP GENERAL MOTORS CORP

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, (dollars in millions except per share amounts) 2003 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Total net sales and revenues (Notes 1 and 24) Cost of sales and other expenses (Note 5) Selling, general, and administrative expenses Interest expense (Note 16) Total costs and expenses Income from continuing operations before income taxes, equity income and minority interests Income tax expense (Note 11) Equity income (loss) and minority interests Income from continuing operations Loss from discontinued operations (Note 2) Gain on sale of discontinued operations Net income Dividends on preference stocks Earnings attributable to common stocks (Note 20) \$185,524 ------152,071 21,008 9,464 ------182,543 ------2,981 731 612 ----2,862 (219) 1,179 ----3,822 ----\$3,822 ===== \$177,324 ------146,793 20,690 7,503 ------174,986 ------2,338 644 281 ----1,975 (239) ----1,736 (46) ----\$1,690 ===== \$169,051 ------138,847 19,433 8,317 ------166,597 ------2,454 1,094 (138) ----1,222 (621) ----601 (99) ----\$502 === 2002 2001

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, ASSETS (dollars in millions) 2003 Cash and cash equivalents (Note 1) Other marketable securities (Note 6) Total cash and marketable securities Finance receivables - net (Note 8) Loans held for sale Accounts and notes receivable (less allowances) Inventories (less allowances) (Note 9) Assets of discontinued operations Deferred income taxes (Note 11) Net equipment on operating leases (less accumulated depreciation) (Note 10) Equity in net assets of nonconsolidated affiliates Property - net (Note 12) Intangible assets - net (Notes 1 and 13) Other assets (Note 14) Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable (principally trade) Notes and loans payable (Note 16) Liabilities of discontinued operations Postretirement benefits other than pensions (Note 17) Pensions (Note 17) Deferred income taxes (Notes 11 and 15) Accrued expenses and other liabilities (Note 15) Total liabilities Minority interests Stockholders' equity (Note 19) \$1-2/3 par value common stock (outstanding, 561,997,725 and 560,447,797 shares) Class H common stock (outstanding, 958,284,272 shares in 2002) Capital surplus (principally additional paid-in capital) Retained earnings Subtotal Accumulated foreign currency translation adjustments Net unrealized gains (losses) on derivatives Net unrealized gains on securities Minimum pension liability adjustment Accumulated other comprehensive loss Total stockholders' equity Total liabilities and stockholders' equity \$32,554 22,215 -----54,769 173,137 19,609 20,532 10,960 27,190 34,383 6,032 38,211 4,760 58,924 ------\$448,507 ======= \$25,422 271,756 36,292 8,024 7,508 73,930 ------422,932 307 937 15,185 12,752 -----28,874 (1,815) 51 618 (2,460) ----(3,606) ----25,268 ------\$448,507 =======

2002 \$20,320 16,825 -----37,145 134,643 15,720 16,337 9,737 18,653 39,767 31,026 5,097 35,956 10,796 14,176 ------\$369,053 ======= \$21,138 200,168 7,956 38,152 22,679 6,523 65,344 ------361,960 279 936 96 21,583 10,031 -----32,646 (2,784) (205) 372 (23,215) -----(25,832) -----6,814 ------\$369,053 =======

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For The Years Ended December 31, 2003 2002 2001 ---------(dollars in millions) \$2,862 \$1,975 \$1,222

Cash flows from operating activities Income from continuing operations Adjustments to reconcile income from continuing operations to net cash provided by operating activities Depreciation and amortization expenses Mortgage servicing rights amortization Provision for financing losses Other postretirement employee benefit (OPEB) expense OPEB payments VEBA (contributions)/ withdrawls Pension expense Pension contributions Retiree lump sum and vehicle voucher expense, net of payments Net change in mortgage loans Net change in mortgage securities Change in other investments and miscellaneous assets Change in other operating assets and liabilities (Note 1) Other Net cash provided by operating activities Cash flows from investing activities Expenditures for property Investments in marketable securities acquisitions Investments in marketable securities liquidations Net change in mortgage servicing rights Increase in finance receivables Proceeds from sale of finance receivables Proceeds from sale of business units Operating leases - acquisitions Operating leases - liquidations Investments in companies, net of cash acquired (Note 1) Other Net cash used in investing activities

13,978 1,602 1,608 4,599 (3,536) (3,000) 3,412 (18,168) 923 456 236 1,741 792 95 ----\$7,600 ----(7,330) (28,660) 24,253 (2,557) (149,419) 107,505 4,148 (11,761) 9,952 (201) (1,422) -----(55,492) ------

11,865 3,871 2,028 4,108 (3,334) (1,000) 1,780 (5,156) (254) (4,715) (656) 1,335 4,477 (842) -----\$15,482 -----(6,871) (39,386) 35,688 (1,711) (143,024) 117,276 (16,624) 13,994 (870) 1,004 ------(40,524) -------

11,764 948 1,472 3,720 (3,120) 1,300 540 (317) (136) (4,615) (777) 180 (234) 233 -----\$12,180 -----(7,832) (38,248) 37,560 (2,075) (107,566) 95,949 (12,938) 11,892 (1,283) 126 ------(24,415) -------

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Cash flows from financing activities Net increase (decrease) in loans payable 235 Long-term debt - borrowings 97,391 Long-term debt - repayments (38,963) Repurchases of common and preference stocks Proceeds from issuing common stocks Proceeds from sales of treasury stocks 60 Cash dividends paid to stockholders (1,121) Other 1,320 -----Net cash provided by financing activities 58,922 -----Net cash provided by discontinued operations Effect of exchange rate changes on cash and cash equivalents Net increase in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year 275 929 -----12,234 20,320 -----\$32,554 ======

770 51,411 (24,365) (97) 62 19 (1,121) 333 -----27,012 -----495 -----2,465 17,855 -----\$20,320 ======

(21,740) 62,956 (19,789) (264) 100 418 (1,105) 924 -----21,500 -----(96) -----9,169 8,686 -----\$17,855 ======

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