Question 1. Suppose the market can be described by the following three sources of systematic risk with associated risk premiums.
Factor
Risk Premium
Industrial production (I) 7%
Interest rates ( R) 3
Consumer confidence ( C) 5
The return on a particular stock is generated according to the following equation:
R = 10% + 1.5 I + 0.6 R + .70 C + e
Find the equilibrium rate of return on this stock using the APT. The T-bill rate is 5%. Is the stock over- or under-priced? Explain.
Question 2. The Pfifer Corporation published the following financial data:
Operating Margin 10%
Asset Turnover 4
Financial Leverage Ratio 1.2
Effective Income Tax Rate 30%
Sales $100,000,000
Assuming the company has no debt, what is Pfifer’s return on equity?
Question 3. Sam Tsantes has analyzed two stocks, Acme Airlines and Ajax Travel Associates. His analysis concludes that Acme has a 30% chance of producing a return of 10% and a 70% chance of producing a return of 15%. At the same time, Ajax has a 30% chance of losing 25% and a 70% chance of producing a return of 50%. If Sam invests $80,000 in Acme shares and $20,000 in Ajax shares. What is the expected return on the portfolio?
Question 4. A portfolio manager buys a 30-year, zero-coupon Treasury security for a price of $400.03. The bond is held for 10 years and then sold. Interest rates have declined. The sale price is:
a. $400.03
b. $1000.00
c. Less than $400.03
d. More than $400.03
Question 5. An analyst values a newly issued, 15-year, 9 percent annual coupon bond at par as of April 1, 2000. On April 1, 2008, the market prices the bond to yield 8.3 percent. What is the price of the bond on April 1, 2008?
Question 6. Which security has a higher effective annual interest rate ( a or b)?
a. A 6-month T-bill selling at $96,525 with par value of $100,000.
b. A coupon bond selling at par paying a 10% coupon semiannually. Show all calculations to receive any credit.
Question 7. Bonds of XYZ Corp. with a par value of $1,000 sell for $950, mature in 8 years, and have a 9% annual coupon rate paid semiannually.
Calculate the:
a. Current yield
b. Yield to maturity to the nearest whole percent.
c. Realized compound yield for an investor with a 2-year holding period and a reinvestment rate of 7% over the period. At the end of two years the 9% coupon bonds with 6 years remaining will sell to yield 9%.
Question 8. Delilah, Inc. currently pays a $2.25 common stock dividend, with dividends expected to grow at a 4% rate over the long-term. Assuming a risk free rate of 4.25%, an expected return on the market of 10%, and a stock beta of 0.70, what should be the price of Delilah’s stock?
Question 9. Asset A has an expected return of 7% and a standard deviation of 15%; asset B has an expected return of 10% and a standard deviation of 20%. If the covariance (COV) of the two assets is 0.006, what is the standard deviation of the portfolio with a 50/50 allocation?
Question 10. The S&P has a standard deviation of 18%. If stock ABC has a standard deviation of 15% and a correlation coefficient of 0.6 with the S&P, what is ABC’s beta relative to the S&P?
Question 11. ABC Corp. plans to issue $100 par preferred stock with a 9% dividend. The stock is selling on the market for $95.00, and ABC must pay flotation costs of 5% of the market price. What is the cost of the preferred stock?
Question 12. XYZ Company’s current EPS is $5.25. It was $4.90 a year ago. The company pays out 35% of its earnings as dividends, and the stock sells for $35.
a. Calculate the past growth rate in earnings.
b. Calculate the next expected dividend. Assume that the past growth rate will continue.
Question 13. A portfolio contains $40,000 in bonds and $60,000 in stocks. The expected return on bonds is 7% with standard deviation of 1%. The expected return on the stocks is 12% with standard deviation of 8%. Assuming that the bonds and stocks are uncorrelated, determine the standard deviation of the above bond and stock portfolio.