One year ago, you purchased 1,200 shares of Berry, Mayell, and Wheeler (BMW) stock for $21.20 per share. You have received dividend payments equal to $0.60 per share. Today, you sold all of your shares for $22.20 per share. What is your total return (dollar and percent) on this investment? (4 points) [pic]

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Castella, Norwood, and Ngoc (CNN) stock had returns of 8%, -2%, 4%, and 16% over the past four years. What are the mean and standard deviation of this stock for the past four years? (6 points) [pic]

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The long term inflation rate average was 3.2% and you invested in long term corporate bonds over the same period which earned 6.1%. What was the average risk premium you earned? (3 points)[pic] Use the following information to answer questions 11 and 12. You purchased one of Fan, Igli, Sherrill, Harper, Evans, and Rashid (FISHER) Corp’s 8% coupon bonds one year ago for $1,028.50. These bonds make annual payments and mature six years for now. Suppose you decide to sell your bond today, when the required return on the bond is 7%. The inflation rate was 4.8% over the past year. What would be your total (i.e., nominal) rate of return on the investment? (7 points) To find the return on the coupon bond, you first need to find the price today. The bond now has six years to maturity, so the price today is: [pic] You received the coupon payments on the bond, so the nominal return was: [pic] What would be your real rate of return on the investment? (4 points) And using the Fisher equation to find the real return, we get [pic] Return and Risk: Statistics and CAPM (various points each) If the covariance of Caroline and Oberkrom (CO) Inc. stock with Van, Aleksandra, and Richter (VAR) Co. stock is0.0065, then what is the covariance of VAR Co. stock with CO Inc. stock? (3 points) Answer: -0.0065 Suppose the risk-free rate is 6.3% and the market risk premium is 8.5%. The market portfolio has a variance of 0.0498. Blagg, Elizabeth, Tendler, and April (BETA)...

... * Hedge funds have traditionally been unregulated.
* derivatives can be used either to reduce risks or to speculate.
* a larger bid-ask spread means the dealer will realize a higher profit.
* Compensating managers with stock options can help reduce conflicts of interest between stockholders and managers, but if the options are all exercisable on a specific date in the near future, this can motivate managers to deceive stockholders.
* A stock is considered overvalued if its intrinsic value is smaller than its market value.
* The income statement shows us the firm’s financial situation over a period of time.
* Last year, Blanda Brothers had positive cash flow from operation; however, cash on its balance sheet decreased.which explain this? Answ:The company purchased a lot of new fixed assets.
* Company A and Company B have the same total assets, Return on Assets (ROA), and profit margin. However, Company A has higher debt ratio and interest expense than Company B. Which of the following statements is most correct? Company A has a higher ROE than Company B.
* Double taxation refers to the fact that corporate income is subject to an income tax, and then stockholders are subject to a further personal tax on dividends received.
Ace Industries has $2.0 million in current assets and $0.75 million in current liabilities. Ace decides to raise funds as additional notes payable and use them to increase inventory. How...

...CH10 The government debt totaled 27% of total credit market debt although this number has risen since that time.Mortgages comprised 28%, Corporate and Foreign Bonds 22% and Municipal Bonds 5% of total credit market debt in the third quarter of 2008. The issuing company may choose to call the bond and require the bondholder to turn in the bond in exchange for receiving the bond's call price. A callable bond gives the issuing company the right to call in the bond by paying the bondholder the call price. Bulldog bonds are issued in Great Britain by non-British borrowers and are denominated in British pounds. Foreign bonds that are denominated in the currency of the country in which it is sold are given descriptive names such as Yankee bonds sold in the U.S. by non-U.S. borrowers and Bulldog bonds sold in Great Britain. When income from specified assets is used to service the bond it is called an asset-backed bond. Asset backed bonds are backed by the income from specified assets. The investor's best choice is A rated debt. BB is speculative which is not what the investor desires and given the investor's forecast AA and AAA rated bonds are not necessary and would result in a lower promised yield than an A rated bond. The TIE ratio = EBIT / Int. Exp. = $66/$6 = 11; Current Ratio = Cur. Assets / Cur. Liabilities = $79 / $52 = 1.52; Debt/Equity = $65 / ($79 + $72 - $65) = $0.76. The bond meets the AAA criteria for theTIE since it is above 10 but fails to meet the criteria for...

...Accrued Interest = x Nominal Return = Real Return = – 1 Real rate of return Compounding = rnominal-inflation rate
Current yield = The invoice price is the reported price plus accrued interest The ask price is 101.125 percent of par, so the invoice price is: $1,011.25 + (1/2 $50) = $1,036.25
Effective annual rate on a three-month T-bill: Optimal capital allocation: Y= E(rp)- Rf / A(std)^2portfilio
– 1 = (1.02412)4 – 1 = 0.1000 = 10%
Effective annual interest rate on coupon bond paying 5% semiannually:
(1 + 0.05)2 – 1 = 0.1025 = 10.25%
The effective annual yield on the semiannual coupon bonds is (1.04)2 -1 = 8.16%. after tax yield = (taxable yield)*(1-tax rate)
Holding period return =
Price of a Zero-Coupon Bond =
Bond Equivalent YTM = Semi-annual YTM 2
The bond is selling at par value. Its yield to maturity equals the coupon rate, 10%. If the first-year coupon is reinvested at an interest rate of r percent, then total proceeds at the end of the second year will be: [100 (1 + r) + 1100]. Therefore, realized compound yield to maturity will be a function of r as given in the following table:
r
Total proceeds
Realized YTM = = 1
8%
$1,208
– 1 = 0.0991 = 9.91%
10%
$1,210
– 1 = 0.1000 = 10.00%
12%
$1,212
– 1 = 0.1009 = 10.09%
HPR =
Time-weighted average returns are based on year-by-year rates of return. Portfolio= (1-y)(risk free) + (y)(equity index)
Year
Return = [(Capital gains + Dividend)/Price]
2010-2011
(110 –...

...1. There is a 20% probability that a particular stock will earn an 18% return and an 80% probability that it will earn 13%. What is the risk premium on this stock if the risk-free rate is 3.5%? E(R) = (.20 × .18) + (.80 × .13) = .036 + .104 = .14 = 14.00%. Risk premium = 14.00% − 3.5% = 10.50%
2. Fruity Soft Drinks just announced that their quarterly earnings will be $0.20 less than the prior quarter. This announcement will cause their stock price to. e. increase, decrease, or remain constant
3. You have a portfolio which is comprised of 60% of stock A and 40% of stock B. What is the expected rate of return on this portfolio?
Portfolio return in Boom state = (.60 × .20) + (.40 × .14) = .12 + .056 = .176
Portfolio return in Normal state = (.60 × .12) + (.40 × .08) = .072 + .032 = .104
E(RPort) = (.30 × .176) + (.70 × .104) = .0528 + .0728 = .1256 = 12.56 percent
4. A security which plots above the security market line represents the best investment opportunity, all else equal.
5. The reward-to-risk ratio is 7.7% and the risk-free rate is 4.2%. What is the expected return on a risky asset if the beta of that asset is 0.89?
6. To reduce risk as much as possible, you should combine assets which have strongly negative correlation coefficients.
7. A stock has a beta of 1.4 and an expected return of 16%. The risk-free rate is 4.5%. What is the market risk premium? .16 = .045 + 1.4(MRP); MRP = .08214 = 8.21 percent
8. Which of the following measures should be used to...

...FORMULA SHEET – for student reference only
Perpetuity:
The value of a perpetuity of $RM1 per year is:
Equivalent Annual Cost:
If an asset has a life of ‘t’ years, the equivalent annual cost is:
Annuity:
The value of an annuity of $RM1 per period for t years (t-year annuity factor) is:
Measures of Risk:
Variance of returns = σ2
= expected value of
Standard deviation of returns, σ =
Covariance between returns of stocks 1 & 2 = σ1,2 = expected value of
Correlation between returns of stocks 1 & 2:
Beta of stock i = βi =
The variance of returns on a portfolio with proportion xi invested in stock i is:
A Growing Perpetuity (Gordon model):
If the first period’s cash flow is $RM1 at year 1 and if cash flows thereafter grow at a constant rate of ‘g’ in perpetuity:
A Growing Annuity:
The formula for an annuity discounted at an annual rate (i) and where cash flows are growing at an annual rate (g) is as follows:
An = 1- {(1+g)n/(1+i)n} x (1+g)
( i-g )
Continuous Compounding/Discounting:
If ‘r’ is the continuously compounded rate of interest, the present value of $RM1 received in year ‘t’ is:
Capital Asset Pricing Model (CAPM):
The expected risk premium on a risky investment is:
r – rƒ = β(rm – rƒ)
Bond Duration and Volatility:
Duration of T-period bond =
Volatility (modified duration) = Duration/(1+y)
Weighted Average Cost...

...Assignment 1
NPV: = -PF + FV /(1+r)
PV = FV/(1+r) or
PV = C1/1-r + C2/(1-r)2 + .. + CT/(1-r)T
Rate of return: R=(Vf-Vi)/Vf
Rate r compounded m times a year:
FV = C(1+r/m)mt
10% semiannually = 10.25% annually, Hence 10.25 is said to be the Effective Annual Yield (EAY)
1+EAY = (1+r/m)mt
Assignment 2
Perpetuity
The value of D received each year, forever: PV = D/r
Annuity
The value of D received each year for T years:
PV = (D/r)*[1 – 1/(1+r)T]
Growing Perpetuity
PV = D/(R-g)
R: the cost of capital, interest rate
G:growth
Growing Annuity
PV = (D/(r-g))*[1 – (1+g)T/(1+r)T]
Dividend & Stock Price
|------------|------------|-----------
P0 P1/D1 Pt/Dt
Rate of Return of Stock
r = (D1 + P1)/P0 - 1
Given annual growth rate g1, g2, then g3 remained constant forever:
Di = Di-1*(1+r)
P2 = D3 /(R-g)
P0 = D1 /(1+r)+ (D2+P2)/(1+r)2
Variation: quarterly basis
Di = Di-1*(1+r)4
P2 = D3 /(R-g/4)
Variation2: Change of Growth
Find the R before Change:
P0 = D1 /(R+g)
Use it to find future P
P1 = D2 /(R+gnew)
Bond
Repayment = total bond*(face value + last payment price)
Efficient Market
-Stock prices fully reflect available information
-Competition among investors eliminates abnormal profit
Foundation of ME
Rationality: adjust their estimate of stock prices in a rational way
Independent deviation from rationality: # optimist = perssimistic
Arbitrage: 0 investment, no risk, but + reward
Different Type of Efficiency
Weak: Prices reflects all...

...Fin 3322
Cost of Capital Homework
1. Suppose Garageband.com has a 28% cost of equity capital and a 10% cost of debt capital. The firm’s debt-to-equity ratio is 1.5. Garageband is interested in investing in a telecomm project that will cost $1,000,000 and will provide $600,000 annually for the next 4 years. Given the project is an extension of their current operations, what is the net present value of the this project if the corporate tax rate is 35.
D/E = 1.5, D/V = 1.5/2.5, E/V = 1/2.5, re = 28%, rd = 10%
WACC = (1.5/2.5)*0.10*(1-0.35) + (1/2.5) *0.28 = 15.1%
FV = 0, PMT = 600,000, n =4, r = 15.1% → PV = 1,709,527.73
NPV = 1,709,527.73-1,000,000.00 = 709,527.73
Take the project
2. Suppose the market value of a firm’s equity is worth $100m and the market value of its debt is worth $50m. Also, assume equity beta and debt beta to be 1.2 and 0.3 respectively. Return on debt is 6%. If the market risk premium is 10% and the risk free rate is 3%, calculate:
a) Expected return on equity
0.03 + 1.2(0.10) = 15%
b) WACC using the return on equity from above and the return on debt.
(100/150)*0.15 + (50/150)*0.06 = 12%
c) Asset beta using the equity beta and debt beta.
(100/150)*1.2 + (50/150)*0.3 = 0.9
Suppose the firm discussed above decides to alter its capital structure by repurchasing $20m in equity. It repurchases the $20m in equity by raising $20m in debt. Assume that the debt beta increases to 0.5
d) What is the market value of...