A) What are the differences between the Security Market Line and the Capital Market Line? Show their formulas.
B) What are the assumptions of the Capital Asset Pricing Model (CAPM)?
C) What are the differences between the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT). Indicate at least 2 other factors affecting stock returns according to Arbitrage Pricing Theory models.
D) Your client has offered a 5-year, $1,000 par value bond with a 10 percent coupon. Interest on this bond is paid quarterly. 1) If your client is to earn a nominal rate of return of 12 percent, compounded quarterly, how much should he pay for the bond? 2) How much should he pay if it is a perpetual bond?
E) What are the differences of the following: required rate of return on a stock, expected rate of return on a stock, actual or realized rate of return on a stock.
F) What does market efficiency mean? Define the 3 forms/levels of market efficiency. Where would the current stock markets fall and why?
G) Is negative free cash flow always bad? Explain why or why not.
H) Describe Market Value Added (MVA) and Economic Value Added (EVA).
I) What is free cash flow? Explain the 3 determinants of free cash flow.
J) Define the determinants of nominal market interest rates.
K) What is the present value of a 5 year ordinary annuity with annual payments of $200, evaluated at a 15 percent interest rate?
L) What is the difference between interest rate risk and reinvestment rate risk?
M) What is the difference between stand-alone risk and market risk? How are they measured?
N) What is the Du Pont Equation? And why is it useful?