Question 1:
a- Wildcat Company stock is trading for $80 per share. The stock is expected to have a year end dividend of $4 per share (D1=$4) which is expected to grow at some constant rate g through tome. The stock 's required rate of return is 14%. If you are an analyst who believes in efficient markets, Evaluate your forecast of g?
b- You are considering an investment in the Tiger Corporation. The stock is expected to pay a dividend of $ 2 at the end of the year (D1= S 2). The stock has a beta coefficient of 9. The risk free rate is 5.6%, and the market risk premium is 6%. The stock's dividend is expected to grow at some constant rate g. The stock sells for $25 per share. considering the market is in equilibrium, what does the market believe the stock price will be in three years?
Question 2:
The Gator Company has an outstanding bond issue that will mature to its $1000 par value in ten years. The bond has a coupon interest rate of 12 percent and pays interest annually.
a- Evaluate the value of the bond if the required return is (1) 12%, (2) 14%, and (3) 10%, with 10 years to maturity.
b- Evaluate the value of the bond if the required return is (1) 12%, (2) 14%, and (3) 10%, with 3 years to maturity.
c- plots your finding in (a) and (b) on a diagram with time to maturity on the (x-axis) and the market value of the bond on the (y-axis).
Question 3:
An investment is being considered by the Tiger Corp. The subsequent probability distribution of expected returns for this asset has been developed.
Tiger Corporation
Probability Return
1 .10 .40
2 .20 .10
3 .40 .00
4 .20 -.05
5 .10 -.10
a- Determine the expected value of return.
b- Determine the standard deviation. What is the standard deviation and what does it mean?
c- Determine the coefficient of variation? What is the CV? What does it mean?
Question 4:
Market interest rates can rise by two percent in the near future. Evaluate Maculays duration, Modified duration, and potential the change to price, of the $1000 Fernando-Cara Company bond that has 3 years to maturity, and a ten percent coupon. The present market rate of interest on bonds of similar risk is seven percent. You may consider the convexity factor(C) is 250.
Question 5:
1- Illustrate graphically, and describe clearly the two types of risks in a portfolio, which is the relevent and why?
2- Illustrate graphically, and clearly describe the Security Market Line(SML), and the risk premiums of (i) a market portfolio with a return 10 percent , and (ii) a security with a beta coefficient of 1.5 and an expected return of 15 percent. Consider the risk-free ate is 5 percent.
3- Illustrate graphically and clearly describe the concept of ACMe Companys characteristic Line. What does the Characteristic Line show? Who originated it and Why?