2021年兹维博迪金融学第二版试题库TB
兹维博迪金融学第二版试题库9TB
Chapter NineValuation of Common StocksThis chapter contains 47 multiple choice questions, 17 short problems, and 9 longer problems. Multiple Choice1.In a quote listing of stocks, the ________ is defined as the annualized dollar dividend dividedby the stock’s price, and is usually expressed as a percentage.(a)cash dividend(b)dividend payout(c)dividend coverage(d)dividend yieldAnswer: (d)2.According to the discounted-dividend model, the price of a share of stock is the ________value of all expected ________ dividends per share, discounted at the market capitalization rate.(a)present; current(b)present; future(c)future; future(d)future; currentAnswer: (b)3.The value of common stock is determined by which of the following expected cash flows?(a)dividends and interest payments(b)dividends and maturity value of stock(c)dividends and net cash flows from operations of the firm(d)interest payments and maturity valueAnswer: (c)4.The ________ is the expected rate of return that investors require in order to be willing toinvest in the stock.(a)market capitalization rate(b)risk-adjusted discount rate(c)cost of debt(d)a and bAnswer: (d)5.The ________ of dividends is the most basic assumption underlying the discounted dividendmodel.(a)industry average(b)non-constant growth(c)constant growth(d)variabilityAnswer: (c)6.BHM stock is expected to pay a dividend of $2.50 a year from now, and its dividends areexpected to grow by 6% per year thereafter. What is the price of a BHM share if the market capitalization rate is 7% per year?(a)$250.00(b)$192.31(c)$25.00(d)$19.23Answer: (c)7.IOU stock is expected to pay a dividend of $1.67 a year from now, and its dividends are notexpected to grow in the foreseeable future. If the market capitalization rate is 7%, what is the current price of a share of IOU stock?(a)$11.69(b)$23.86(c)$116.90(d)$238.60Answer: (b)8.GMATS stock is currently selling for $34.50 a share. The current dividend for this stock is$1.60 and dividends are expected to grow at a constant rate of 10% per year thereafter. What must be the market capitalization rate for a share of GMATS stock?(a)4.90%(b)5.36%(c)14.64%(d)15.10%Answer: (d)9.Avacor stock is expected to pay a dividend of $1.89 a year from now, and its dividends areexpected to grow at a constant rate of 5% per year thereafter. If the market capitalization rate is 14% per year, what is the current price of a share of Avacor stock?(a)$13.50(b)$18.90(c)$21.00(d)$37.80Answer: (c)10.GRITO stock is currently selling for $46.10 a share. If the company is expected to pay adividend of $5.60 a year from now and dividends are not expected to grow thereafter, what is the market capitalization rate for a share of GRITO stock?(a)7.56%(b)8.23%(c)10.50%(d)12.15%Answer: (d)11.In the DDM model, if D1 and k are held constant, what will happen to the price of a stock ifthe constant growth rate gets higher?(a)the price of the stock will be higher(b)the price of the stock will hold constant(c)the price of the stock will be lower(d)it cannot be determined from the information givenAnswer: (a)12.The relation between earnings and dividends in any period is ________.(a)Dividends = Earnings/Net New Investment(b)Dividends = Earnings x Net New Investment(c)Dividends = Earnings + Net New Investment(d)Dividends = Earnings – Net New InvestmentAnswer: (d)13.Consider a firm called Nowhere Corporation, whose earnings per share are $12. The firminvests an amount each year that is just sufficient to replace the production capacity that is wearing out, and so the new investment is zero. The firm pays out all its earnings asdividends. Calculate the price of a share of Nowhere Corporation stock, give that k = 14%.(a)$168.00(b)$166.67(c)$85.71(d)$82.40Answer: (c)14.Consider a firm called SureBet Corporation. SureBet reinvests 55% of its earnings each yearinto new investments that earn a rate of return of 17% per year. Currently, SureBetCorporation has earnings per share of $12 and pays out 45% or $5.40 as dividends. Calculate the growth rate of earnings and dividends.(a)7.65%(b)8.50%(c)9.35%(d)24.75%Answer: (c)15.What adds value to the current price of a share of stock is ________.(a)growth per se(b)tax advantages(c)investment opportunities that earn rates of return > k(d)all of the aboveAnswer: (c)16.In order to evaluate the stock of Beltran Inc., an analyst uses the constant growth discounteddividend model. Expected earnings of $12 per share is assumed, as are an earnings retention rate of 70% and an expected rate of return on future investments of 17% per year. If the market capitalization rate is 14% per year, calculate the price for a share of Beltran stock.(a)$171.43(b)$367.35(c)$400.00(d)$857.14Answer: (a)17.In order to evaluate the stock of The Rendell-Vine Corporation, an analyst uses the constantgrowth discounted dividend model. Expected earnings of $12 per share is assumed, as are an earnings retention rate of 70% and an expected rate of return on future investments of 17% per year. If the market capitalization rate is 14% per year, what is the implied net present value of future investments?(a)$314.29(b)$281.64(c)$171.43(d)$85.72Answer: (d)18.In order to evaluate the stock of Toys’R’Me, an analyst uses the constant growth discounteddividend model. Expected earnings of $14 per share is assumed, as are an earnings retention rate of 60% and an expected rate of return on future investments of 17% per year. If the market capitalization rate is 15% per year, what is the implied net present value of future investments?(a)$23.34(b)$70.00(c)$93.34(d)$116.67Answer: (a)19.Firms with consistently high P/E multiples are interpreted to have either relatively ________market capitalization rates or relatively ________ present value of value-added investments.(a)low; low(b)high; high(c)high; low(d)low; highAnswer: (d)20.In a “frictionless” financial environment, the shareholders wealth is ________ the dividendpolicy the firm adopts.(a)increased by(b)decreased by(c)not affected by(d)determined byAnswer: (c)21.In a ________ the company pays cash to buy shares of its stock in the stock market, therebyreducing the number of shares outstanding.(a)cash dividend(b)share repurchase(c)stock split(d)a and bAnswer: (b)22.Stock splits and stock dividends ________ the number of shares of stock outstanding.(a)decrease(b)do not alter(c)increase(d)a or bAnswer: (c)23.SureBet Corporation has total assets with a market value of $15 million: $3 million in cashand $12 million in other assets. The market value of its debt is $3 million; of its equity $12 million. There are 1,000,000 shares of SureBet common stock outstanding, each with a market price of $12. If SureBet distributes a cash dividend of $1.50 per share, the market value of its assets and of its equity ________ by ________.(a)increases; $1.5 million(b)increases; $10.5 million(c)decreases; $1.5 million(d)decreases; $10.5 millionAnswer: (c)24.SureBet Corporation has total assets with a market value of $15 million: $3 million in cashand $12 million in other assets. The market value of its debt is $3 million; of its equity $12 million. There are 1,000,000 shares of SureBet common stock outstanding, each with amarket price of $12. If SureBet repurchases shares worth $2.4 million, the resulting number of shares outstanding is ________ , with a price per share of ________.(a)200,000; $15(b)200,000; $12(c)800,000; $15(d)800,000; $12Answer: (d)25.“Frictions” that can cause a firm’s dividend policy to have an effect on the wealth ofshareholders include:(a)regulations(b)taxes(c)cost of external finance(d)all of the aboveAnswer: (d)26.Outside investors may interpret an increase in a corporation’s cash dividend as ________ sign.(a)a positive sign(b)a negative sign(c)an indifferent sign(d)b or cAnswer: (a)27.From the perspective of a shareholder with regard to personal taxation, it is always ________for the corporation to pay out cash by ________.(a)better; cash dividends(b)worse; cash dividends(c)worse; share repurchases(d)it varies according to the situationAnswer: (b)28.An increase in a corporation’s cash dividend is most likely to ________.(a)decrease the price of its stock(b)increase the price of its stock(c)have no impact on the price of its stock(d)decrease trading activity of its stockAnswer: (b)29.Raising cash by issuing new stock is ________ to the corporation than raising cash byforegoing the payments of dividends.(a)is less costly(b)is more costly(c)is no different(d)just as costlyAnswer: (b)30.Gough Fraser is considering purchasing the stock of ASIOA Companies, which he plans tohold indefinitely. ASIOA just paid an annual dividend of $2.50 and the price of the stock is $48 per share. The earnings and dividends of the company are expected to grow forever at a rate of 6 percent per year. What annual rate of return does Gough expect on his investment?(a)10.58%(b)11.21%(c)11.52%(d)12.46%Answer: (c)31.Beazley Inc. just paid a dividend of $3.00 per share. This dividend is expected to grow at asupernormal rate of 15 percent per year for the next two years. It is then expected to grow at a rate of 6 percent per year forever. The appropriate discount rate for Beazley’s stock is 17 percent. What is the price of the stock?(a)$17.64(b)$27.27(c)$33.78(d)$46.15Answer: (c)32.Beazley Corporation would like to raise $100,000,000 by issuing preferred stock. Thepreferred stock will have a par value of $1,000 per share and pay a dividend of $72 per year.If the required rate of return for this stock is 16 percent, how many shares of preferred stock must Beazley issue?(a)450(b)16,000(c)222,222(d)265,332Answer: (c)33.If you use the constant dividend growth model to value a stock, which of the following iscertain to cause you to increase your estimate of the current value of the stock?(a)Decreasing the required rate of return for the stock(b)Decreasing the estimate of the amount of next year’s dividend(c)Decreasing the expected dividend growth rate(d)All of the aboveAnswer: (a)34.The constant dividend growth model may be used to find the price of a stock in all of thefollowing situations except when:(a)g < k(b)k < g(c)g = 0(d)k≠ gAnswer: (b)35.CarsonCorp just paid an annual dividend of $3.00. Dividends are expected to grow at aconstant rate forever. The price of the stock is currently $63.00. The required rate of return for this stock is 15 percent. What is the expected grow th rate of CarsonCorp’s dividend?(a)5.00%(b)5.48%(c)6.33%(d)10.00%Answer: (a)36.The common stock of Century Inc. is expected to pay a dividend of $2.00 one year fromtoday. After that the dividend is expected to grow at a rate of 10 percent per year for two years and then at a rate of 5 percent per year forever. If the required rate of return for this stock is 15 percent what is the current price?(a)$12.00(b)$18.29(c)$21.69(d)$25.40Answer: (c)37.A firm’s common stock is trading at $80 per share. In the past the firm has paid a constantdividend of $6 per share. However, the company has just announced new investments that the market did not know about. The market expects that with these new investments, thedividends should grow at 4% per year forever. Assuming that the discount rate remains the same, what will be the price of the stock after the announcement?(a)$94.50(b)$156.00(c)$171.43(d)$178.29Answer: (d)38.If the model below is to give a reasonable valuation of a stock, which of the followingpossible situations must be excluded?P0 = D1/(r–g)(a)There is no growth.(b)The growth rate exceeds the required rate of return.(c)The required rate of return is exceptionally high.(d)Growth is constant.Answer: (b)39.According to the constant growth model of stock valuation, capital appreciation in commonstock is a direct result of ________.(a)growth in future dividends(b)a reduction in the required rate of return(c)growth in corporate assets(d)a growth rate that exceeds the required rate of returnAnswer: (a)Questions 40 through 43 refer to the following information:New competition in Sophco’s market is going to have an impact on the growth in thefirm’s dividends. A current dividend of $1.00 was paid yesterday by Sophco, and thisdividend is expected to increase by 25% in the first year. After that point, the growth individends is expected to “decay” to the firm’s long-run constant growth of 10%. Such a“decay” process is one in which dividend growth declines by 5 percentage points per year up to the point where the expected constant rate of dividend growth is reached. So, year 2 dividend will be 20 percent higher than year 1, year 3 dividends will be 15 percent higher than year 1, and after year 3, dividends will grow by 10 percent forever. For problems 40 – 43, assume investors in Sophco require a rate of return of 15%.40.Calculate Sophco’s dividend in year 2.(a)$1.13(b)$1.25(c)$1.5(d)$1.73Answer: (c)41.Calculate the Sophco’s dividend in year 4.(a)$1.24(b)$1.57(c)$1.73(d)$1.90Answer: (d)42.Determine the price of Sophco’s stock at the en d of year 3 (just after the dividend has beenpaid).(a)$26.12(b)$28.34(c)$38.00(d)$39.73Answer: (c)43.Calculate the current price of Sophco’s stock.(a)$26.12(b)$28.34(c)$38.00(d)$39.73Answer: (b)Questions 44 through 47 refer to the following information:New competition in Acme Unlimited’s market is going to have an impact on the growth of the firm’s dividends. A current dividend of $1.50 was paid yesterday, and thisdividend is expected to increase by 35% in the first year. After that point, the growth in div idends is expected to “decay” to the firm’s long run constant growth of 5%. Such a“decay” process is one in which dividend growth declines by 10 percentage points peryear up to the point where the expected constant rate of dividend growth is reached. So, year 2 dividend will be 25 percent higher than year 1, year 3 dividend will be 15 percent higher, and after year 3, dividends will grow by 5 percent forever. Assume that investors require a rate of return of 17 on Acme Unlimited’s stock.44.Calculate the dividend in year 2.(a)$2.54(b)$2.92(c)$3.21(d)$3.30Answer: (a)45.Calculate the dividend in year 4.(a)$2.35(b)$2.54(c)$3.21(d)$3.53Answer: (c)46.Determine the price of Acme Unlimited’s stock at the end of year 3 (just after the dividendhas been paid).(a)$22.13(b)$26.75(c)$29.67(d)$34.24Answer: (b)47.Calculate the current price of Acme Unlimited’s stock.(a)$22.13(b)$26.75(c)$29.67(d)$34.24Answer: (a)Short Problems1.Discuss the two ways in which a corporation can distribute cash to its shareholders.Answer:There are two ways a corporation can distribute cash to its shareholders: by paying acash dividend or by repurchasing the company’s shares in the stock market. When acompany pays a cash dividend, all shareholders receive cash in amounts proportional to the number of shares they own.In a share repurchase, the company pays cash to buy shares of its stock in the stockmarket, thereby reducing the number of shares outstanding. In this case, onlyshareholders who choose to sell some of their shares will receive cash.2.Does growth “per se” add value to the current price of a share? If not, what does add value toa share’s current price?Answer:Growth per se does not add value. What adds value is the opportunity to invest inprojects that can earn rates of return in excess of the required rate, k. When a firm’sfuture investment opportunities yield a rate of return equal to k, the stock’s value can be estimated using the formula P0 = E1/k.3.In order to evaluate the stock of DippinDonuts, an analyst uses the constant growthdiscounted dividend model. Expected earnings of $15 per share are assumed, as are anearnings retention rate of 70% and an expected rate of return on future investments of 18% per year. If the market capitalization rate is 15% per year, what is the implied net present value of future investments?Answer:g = 0.7 x 0.18= 12.6%Use the constant growth formula to solve for P0:P0 = D1/(k – g)= 4.50/(0.15-0.126)= $187.50Next find P0 with the formula P0 = E1/k:= 15/0.15= $100The NPV of future investments is the difference between these two values: $187.50 –$100 = $87.504.In order to evaluate the stock of EasyStreet Corporation, an analyst uses the constant growthdiscounted dividend model. Expected earnings of $16 per share are assumed, as are anearnings retention rate of 60% and expected rate of return on future investments of 17% per year. If the market capitalization rate is 14% per year, what is the implied net present value of future investments?Answer:g = 0.6 X 0.17= 10.2%Use the constant growth formula to solve for P0:P0 = D1/(k – g)= $6.40/(0.14 – 0.102)= $168.42Next find P0 with the formula P0 = E1/k:= 16/0.14= $114.29The NPV of future investments is the difference between the two values: $168.42 –$114.29 = $54.13.anic Earth stock is expected to pay a dividend of $2.70 per share a year from now, and itsdividends are expected to grow by 7% per year thereafter. If its price is now $30 per share, what must be the market capitalization rate?Answer:Use the constant growth formula to solve for k:P0 = D1/(k – g)30 = 2.70/(k – 0.07)k = 16%6.Walch stock currently sells for $27.62 a share, and is expected to pay a dividend of D1 a yearfrom now. If its dividends are expected to grow by 4.5% per year thereafter and thecapitalization rate is 15% per year, what is the value of D1?Answer:Use the constant growth formula to solve for D1:P0 = D1/(k – g)D1 = P0(k – g)= $27.62(0.15 – 0.045)= $2.907.Discuss how outside investors may interpret an increase in a corporation’s cash dividend asopposed to a decrease.Answer:Investors may interpret an increase in a corporation’s cash dividend as a p ositive sign since it would suggest that management is confident the earnings can be sustained in the future.The result is most likely to be an increase in stock price. A decrease could be viewed as a bad signal that will most likely cause a decline in stock price.8.Consider the balance sheet of SureThing Corporation:Assets Liabilities and Shareholders’ EquityCash: $3 million Debt: $3 millionOther Assets: $11 million Equity: $11 millionTotal: $14 million Total: $14 millionNumber of shares outstanding = 440,000Price per share = $25If SureThing pays a cash dividend of $2.50 per share, what will the balance sheet look like afterward?Answer:Balance sheet after payment of cash dividend:Assets Liabilities and Shareholders’ EquityCash: $1.9 million Debt: $3 millionOther assets: $11 million Equity: $9.9 millionTotal: $12.9 million Total: $12.9 millionNumber of shares outstanding = 440,000Price per share = $22.509.Consider the balance sheet of SureThing Corporation:Assets Liabilities and Shareholders’ EquityCash: $3 million Debt: $3 millionOther assets: $11 million Equity: $11 millionTotal: $14 million Total: $14 millionNumber of shares outstanding = 440,000Price per share = $25If SureThing Corporation repurchases shares worth $2.5 million, what will the new balance sheet for SureThing Corporation look like?Answer:Balance sheet after share repurchase:Assets Liabilities and Shareholders’ Equity Cash: $0.5 million Debt: $3 millionOther assets: $11 million Equity: $8.5 millionTotal: $11.5 million Total: $11.5 million Number of shares outstanding = 340,000Price per share = $2510.Consider the balance sheet of SureThing Corporation:Assets Liabilities and Shareholders’ Equity Cash: $3 million Debt: $3 million Other assets: $11 million Equity: $11 million Total: $14 million Total: $14 million Number of shares outstanding = 440,000Price per share = $25If SureThing is paying a 20% stock dividend, what will the number of shares outstanding be?What will be the price per share?What would be the effect of a two-for-one stock split?Answer:After paying a 20% stock dividend:Number of shares outstanding = 528,000Price per share = $20.83After a two-for-one stock split:Number of shares outstanding = 880,000Price per share = $12.5011.Gough Fraser is considering purchasing the stock of ASIOA Companies, which he plans tohold indefinitely. ASIOA just paid an annual dividend of $3.00 and the price of the stock is $48 per share. The earnings and dividends of the company are expected to grow forever at a rate of 6 percent per year. What annual rate of return does Gough expect on his investment?Answer:D1 is 3.00. Given 6% annual growth, D1 = 3.00 x 1.06 = 4.80.Use the constant growth formula to solve for k:P0 = D1/(k – g)48 = 4.80/(k – 0.06)48k – 2.88 = 4.8048k = 7.68k = 16%12.Halpert Corporation would like to raise $100,000,000 by issuing preferred stock. Thepreferred stock will have a par value of $1,000 per share and pay a dividend of $48 per year.If the required rate of return for this stock is 15 percent, how many shares of preferred stock must Halpert issue?Answer:P0 = D1kP0 = $480.15= $320Number of shares = $100,000,000/$320= 312,500 shares13.Aslan Inc. just paid a dividend of $5.00 per share. This dividend is expected to grow at asupernormal rate of 20 percent per year for the next two years. It is then expected to grow at a rate of 5 percent per year forever. The appropriate discount rate for Aslan’s stock is 17percent. What is the price of the stock?Answer:D0 = $5D1 = $5(1.2)= $6.00D2 = $6.00(1.2)= $7.20D3 = $7.20(1.05) = $7.56P2 = D3/(k – g)= $7.56/(0.17 – 0.05)= $63.00P0 = $6.00/(1.17) + ($7.20 + $63.00)/(1.17)2= $56.4114.Druids Corp. just paid an annual dividend of $2.50. Dividends are expected to grow at aconstant rate forever. The price of the stock is currently $38.40. The required rate of return for this stock is 15 percent. What is the expected growth rate of Druids dividend?Answer:D0 = $2.50D1 = $2.50(1 + g)P0 = $38.40k = 15%Use the constant growth formula to solve for g:P0 = D1/(k – g)38.40 = 2.50(1 + g)/(0.15 – g)5.76 – 38.4g = 2.5 + 2.5g3.26 = 40.9g0.0797 = g15.The common stock of Century Inc. is expected to pay a dividend of $1.80 one year fromtoday. After that the dividend is expected to grow at a rate of 15 percent per year for two years and then at a rate of 5 percent per year forever. If the required rate of return for this stock is 15 percent, what is the current price?Answer:D1 = $1.80D2 = $2.07D3 = $2.38D4 = $2.50P3 = $2.50/(0.15 – 0.05)= $25.00P0 = 1.80/(1.15) + 2.07/ (1.15)2 + (2.38 + 25.00)/(1.15)3= $21.1416.A firm’s common stock is trading at $54 per share. In the past the firm has paid a constantdividend of $4 per share. However, the company has just announced new investments that the market did not know about. The market expects that with these new investments, thedividends should grow at 4% per year forever. Assuming that the discount rate remains the same, what will be the price of the stock after the announcement?Answer:P0 = $54Dividends have been constant, so:P0 = D1kk = $4/$54= 7.4%Now g = 4% and k stays same:P0 = 4(1.04)/(0.074 – 0.04)= $122.3517.Consider a stock that just paid a $3.00 dividend. You expect dividends on this stock to growat 25 percent per year for the next 3 years and 10 percent per year thereafter. If you require an18 percent return, how much are you willing to pay for this stock?Answer:D0 = $3D1 = $3(1.25)= $3.75D2 = 3.75(1.25)= $4.69D3 = 4.69(1.25)= $5.86D4 = $5.86(1.10)= $6.45P3 = $6.45/(0.18 – 0.10)= $80.63P0 = 3.75/(1.18) + $4.69/(1.18)2 + $86.63/(1.18)3= $59.19Longer Problems1.WannaGrow Corporation has expected earnings per share of $8. It has a history of payingcash dividends equal to 30% of earnings. The market capitalization rate for WannaGrow stock is 15% per year, and the expected rate of return on future investments is 18% per year.Using the constant growth rate discounted dividend model:a.What is the expected growth rate of dividends?b.What is the model’s estimate of the present value of the stock?c.What is the expected price of a share a year from now?Answer:a.g = earnings retention rate x ROE= 0.7 x 0.18= 12.6%b.D1 = 0.3 x $8= $2.40Use the constant growth formula to solve for D1:P0 = D1/(k – g)= $2.40/(0.15 – 0.126)= $100c.P1 = P0 (1 + g)= $100(1.126)P1 = $112.602.Dividends’R’Us Corporation is an all equity financed firm with a total market value of $150million. The company holds $20 million in cash and has $130 million in other assets. There are 2,500,000 shares of common stock outstanding for this company, each with a market price of $52. Consider the following decisions and the impact on Dividends’R’UsCorporation’s stock price and on numbe r of shares outstanding.a.The company pays a cash dividend of $5 per share.b.The company repurchases 250,000 shares.c.The company pays a 20% stock dividend.d.The company has a two-for-one stock split.Answer:a.The company pays out a total of $12.5 million in cash dividends. The stock pricefalls to $47 per share. Shareholder wealth may decline because personal taxesmay have to be paid on the cash dividend. The number of shares outstanding isstill 2.5 million shares.b.The stock price is unchanged. The number of shares outstanding is now2,250,000 shares.c.The number of shares outstanding is 1.2 x 2.5 million = 3 million shares.The stock price is $43.34.d.The number of shares doubles to 5,000,000.The stock price halves to $26.3.The stock of WishToGrow Corporation is currently selling for $15 per share. Earnings pershare in the coming year are expected to be $3. The company has a policy of paying out 70% of its earnings each year in dividends. The remaining 30% is retained and invested in projects that earn a 19% rate of return each year. This situation is expected to continue into theforeseeable future.ing the constant growth rate DDM, what rate of return do WannaGrow investorsrequire?b.By how much does its value exceed what it would be if all earnings were paid asdividends and nothing were reinvested?c.If WannaGrow were to cut its dividend payout ratio to 35%, what would happen to itsstock price?Answer:a.P0 = $15, E1 = $3, D1 = 0.7 x $3= $2.10g = 0.3 x 0.19= 5.7%P0 = D1/(k – g)15 = $2.10/(k – 0.057)k = 19.7%b.If all earnings were paid as dividends its price would be:P0 = 3/0.197= $15.23The current price is actually $0.23 less in value than the above model.c. D1 = 0.35 x $3 g = 0.65 x 0.19= $1.05 = 12.35%P0 = 1.05/(0.197 – 0.1235)= $14.29The stock price would drop by $0.71.。
兹维博迪金融学第二版精彩试题库9TB(1)
Chapter NineValuation of Common StocksThis chapter contains 47 multiple choice questions, 17 short problems, and 9 longer problems. Multiple Choice1.In a quote listing of stocks, the ________ is defined as the annualized dollar dividend dividedby the stock’s price, and is usually expressed as a percentage.(a)cash dividend(b)dividend payout(c)dividend coverage(d)dividend yieldAnswer: (d)2.According to the discounted-dividend model, the price of a share of stock is the ________value of all expected ________ dividends per share, discounted at the market capitalization rate.(a)present; current(b)present; future(c)future; future(d)future; currentAnswer: (b)3.The value of common stock is determined by which of the following expected cash flows?(a)dividends and interest payments(b)dividends and maturity value of stock(c)dividends and net cash flows from operations of the firm(d)interest payments and maturity valueAnswer: (c)4.The ________ is the expected rate of return that investors require in order to be willing toinvest in the stock.(a)market capitalization rate(b)risk-adjusted discount rate(c)cost of debt(d)a and bAnswer: (d)5.The ________ of dividends is the most basic assumption underlying the discounted dividendmodel.(a)industry average(b)non-constant growth(c)constant growth(d)variabilityAnswer: (c)6.BHM stock is expected to pay a dividend of $2.50 a year from now, and its dividends areexpected to grow by 6% per year thereafter. What is the price of a BHM share if the market capitalization rate is 7% per year?(a)$250.00(b)$192.31(c)$25.00(d)$19.23Answer: (c)7.IOU stock is expected to pay a dividend of $1.67 a year from now, and its dividends are notexpected to grow in the foreseeable future. If the market capitalization rate is 7%, what is the current price of a share of IOU stock?(a)$11.69(b)$23.86(c)$116.90(d)$238.60Answer: (b)8.GMATS stock is currently selling for $34.50 a share. The current dividend for this stock is$1.60 and dividends are expected to grow at a constant rate of 10% per year thereafter. What must be the market capitalization rate for a share of GMATS stock?(a)4.90%(b)5.36%(c)14.64%(d)15.10%Answer: (d)9.Avacor stock is expected to pay a dividend of $1.89 a year from now, and its dividends areexpected to grow at a constant rate of 5% per year thereafter. If the market capitalization rate is 14% per year, what is the current price of a share of Avacor stock?(a)$13.50(b)$18.90(c)$21.00(d)$37.80Answer: (c)10.GRITO stock is currently selling for $46.10 a share. If the company is expected to pay adividend of $5.60 a year from now and dividends are not expected to grow thereafter, what is the market capitalization rate for a share of GRITO stock?(a)7.56%(b)8.23%(c)10.50%(d)12.15%Answer: (d)11.In the DDM model, if D1 and k are held constant, what will happen to the price of a stock ifthe constant growth rate gets higher?(a)the price of the stock will be higher(b)the price of the stock will hold constant(c)the price of the stock will be lower(d)it cannot be determined from the information givenAnswer: (a)12.The relation between earnings and dividends in any period is ________.(a)Dividends = Earnings/Net New Investment(b)Dividends = Earnings x Net New Investment(c)Dividends = Earnings + Net New Investment(d)Dividends = Earnings – Net New InvestmentAnswer: (d)13.Consider a firm called Nowhere Corporation, whose earnings per share are $12. The firminvests an amount each year that is just sufficient to replace the production capacity that is wearing out, and so the new investment is zero. The firm pays out all its earnings asdividends. Calculate the price of a share of Nowhere Corporation stock, give that k = 14%.(a)$168.00(b)$166.67(c)$85.71(d)$82.40Answer: (c)14.Consider a firm called SureBet Corporation. SureBet reinvests 55% of its earnings each yearinto new investments that earn a rate of return of 17% per year. Currently, SureBetCorporation has earnings per share of $12 and pays out 45% or $5.40 as dividends. Calculate the growth rate of earnings and dividends.(a)7.65%(b)8.50%(c)9.35%(d)24.75%Answer: (c)15.What adds value to the current price of a share of stock is ________.(a)growth per se(b)tax advantages(c)investment opportunities that earn rates of return > k(d)all of the aboveAnswer: (c)16.In order to evaluate the stock of Beltran Inc., an analyst uses the constant growth discounteddividend model. Expected earnings of $12 per share is assumed, as are an earnings retention rate of 70% and an expected rate of return on future investments of 17% per year. If the market capitalization rate is 14% per year, calculate the price for a share of Beltran stock.(a)$171.43(b)$367.35(c)$400.00(d)$857.14Answer: (a)17.In order to evaluate the stock of The Rendell-Vine Corporation, an analyst uses the constantgrowth discounted dividend model. Expected earnings of $12 per share is assumed, as are an earnings retention rate of 70% and an expected rate of return on future investments of 17% per year. If the market capitalization rate is 14% per year, what is the implied net present value of future investments?(a)$314.29(b)$281.64(c)$171.43(d)$85.72Answer: (d)18.In order to evaluate the stock of Toys’R’Me, an analyst uses the constant growthdiscounted dividend model. Expected earnings of $14 per share is assumed, as are anearnings retention rate of 60% and an expected rate of return on future investments of 17% per year. If the market capitalization rate is 15% per year, what is the implied net present value of future investments?(a)$23.34(b)$70.00(c)$93.34(d)$116.67Answer: (a)19.Firms with consistently high P/E multiples are interpreted to have either relatively ________market capitalization rates or relatively ________ present value of value-added investments.(a)low; low(b)high; high(c)high; low(d)low; highAnswer: (d)20.In a “frictionless” financial environment, the shareholders wealth is ________ the dividendpolicy the firm adopts.(a)increased by(b)decreased by(c)not affected by(d)determined byAnswer: (c)21.In a ________ the company pays cash to buy shares of its stock in the stock market, therebyreducing the number of shares outstanding.(a)cash dividend(b)share repurchase(c)stock split(d)a and bAnswer: (b)22.Stock splits and stock dividends ________ the number of shares of stock outstanding.(a)decrease(b)do not alter(c)increase(d)a or bAnswer: (c)23.SureBet Corporation has total assets with a market value of $15 million: $3 million in cashand $12 million in other assets. The market value of its debt is $3 million; of its equity $12 million. There are 1,000,000 shares of SureBet common stock outstanding, each with amarket price of $12. If SureBet distributes a cash dividend of $1.50 per share, the market value of its assets and of its equity ________ by ________.(a)increases; $1.5 million(b)increases; $10.5 million(c)decreases; $1.5 million(d)decreases; $10.5 millionAnswer: (c)24.SureBet Corporation has total assets with a market value of $15 million: $3 million in cashand $12 million in other assets. The market value of its debt is $3 million; of its equity $12 million. There are 1,000,000 shares of SureBet common stock outstanding, each with amarket price of $12. If SureBet repurchases shares worth $2.4 million, the resulting number of shares outstanding is ________ , with a price per share of ________.(a)200,000; $15(b)200,000; $12(c)800,000; $15(d)800,000; $12Answer: (d)25.“Frictions” that can cause a firm’s dividend policy to have an effect on the wealth ofshareholders include:(a)regulations(b)taxes(c)cost of external finance(d)all of the aboveAnswer: (d)26.Outside investors may interpret an increase in a corporation’s cash dividend as ________sign.(a)a positive sign(b)a negative sign(c)an indifferent sign(d)b or cAnswer: (a)27.From the perspective of a shareholder with regard to personal taxation, it is always ________for the corporation to pay out cash by ________.(a)better; cash dividends(b)worse; cash dividends(c)worse; share repurchases(d)it varies according to the situationAnswer: (b)28.An increase in a corporation’s cash dividend is most likely to ________.(a)decrease the price of its stock(b)increase the price of its stock(c)have no impact on the price of its stock(d)decrease trading activity of its stockAnswer: (b)29.Raising cash by issuing new stock is ________ to the corporation than raising cash byforegoing the payments of dividends.(a)is less costly(b)is more costly(c)is no different(d)just as costlyAnswer: (b)30.Gough Fraser is considering purchasing the stock of ASIOA Companies, which he plans tohold indefinitely. ASIOA just paid an annual dividend of $2.50 and the price of the stock is $48 per share. The earnings and dividends of the company are expected to grow forever at a rate of 6 percent per year. What annual rate of return does Gough expect on his investment?(a)10.58%(b)11.21%(c)11.52%(d)12.46%Answer: (c)31.Beazley Inc. just paid a dividend of $3.00 per share. This dividend is expected to grow at asupernormal rate of 15 percent per year for the next two years. It is then expected to grow at a rate of 6 percent per year forever. The appropriate discount rate for Beazley’s stock is 17 percent. What is the price of the stock?(a)$17.64(b)$27.27(c)$33.78(d)$46.15Answer: (c)32.Beazley Corporation would like to raise $100,000,000 by issuing preferred stock. Thepreferred stock will have a par value of $1,000 per share and pay a dividend of $72 per year.If the required rate of return for this stock is 16 percent, how many shares of preferred stock must Beazley issue?(a)450(b)16,000(c)222,222(d)265,332Answer: (c)33.If you use the constant dividend growth model to value a stock, which of the following iscertain to cause you to increase your estimate of the current value of the stock?(a)Decreasing the required rate of return for the stock(b)Decreasing the estimate of the amount of next year’s dividend(c)Decreasing the expected dividend growth rate(d)All of the aboveAnswer: (a)34.The constant dividend growth model may be used to find the price of a stock in all of thefollowing situations except when:(a)g < k(b)k < g(c)g = 0(d)k≠ gAnswer: (b)35.CarsonCorp just paid an annual dividend of $3.00. Dividends are expected to grow at aconstant rate forever. The price of the stock is currently $63.00. The required rate of return for this stock is 15 percent. What is the expected growth rate of CarsonCorp’s dividend?(a)5.00%(b)5.48%(c)6.33%(d)10.00%Answer: (a)36.The common stock of Century Inc. is expected to pay a dividend of $2.00 one year fromtoday. After that the dividend is expected to grow at a rate of 10 percent per year for two years and then at a rate of 5 percent per year forever. If the required rate of return for this stock is 15 percent what is the current price?(a)$12.00(b)$18.29(c)$21.69(d)$25.40Answer: (c)37.A firm’s common stock is trading at $80 per share. In the past the firm has paid a constantdividend of $6 per share. However, the company has just announced new investments that the market did not know about. The market expects that with these new investments, thedividends should grow at 4% per year forever. Assuming that the discount rate remains the same, what will be the price of the stock after the announcement?(a)$94.50(b)$156.00(c)$171.43(d)$178.29Answer: (d)38.If the model below is to give a reasonable valuation of a stock, which of the followingpossible situations must be excluded?P0 = D1/(r – g)(a)There is no growth.(b)The growth rate exceeds the required rate of return.(c)The required rate of return is exceptionally high.(d)Growth is constant.Answer: (b)39.According to the constant growth model of stock valuation, capital appreciation in commonstock is a direct result of ________.(a)growth in future dividends(b)a reduction in the required rate of return(c)growth in corporate assets(d)a growth rate that exceeds the required rate of returnAnswer: (a)Questions 40 through 43 refer to the following information:New competition in Sophco’s market is going to have an impact on the growth in thefirm’s dividends. A current dividend of $1.00 was paid yesterday by Sophco, and thisdividend is expected to increase by 25% in the first year. After that point, the growth individends is expected to “decay” to the firm’s long-run constant growth of 10%. Sucha “decay” process is one in which dividend growth declines by 5 percentage points peryear up to the point where the expected constant rate of dividend growth is reached. So,year 2 dividend will be 20 percent higher than year 1, year 3 dividends will be 15 percent higher than year 1, and after year 3, dividends will grow by 10 percent forever. Forproblems 40 – 43, assume investors in Sophco require a rate of return of 15%.40.Calculate Sophco’s dividend in year 2.(a)$1.13(b)$1.25(c)$1.5(d)$1.73Answer: (c)41.Calculate the Sophco’s dividend in year 4.(a)$1.24(b)$1.57(c)$1.73(d)$1.90Answer: (d)42.Determine the price of Sophco’s stock at the end of year 3 (just after the dividend has beenpaid).(a)$26.12(b)$28.34(c)$38.00(d)$39.73Answer: (c)43.Calculate the current price of Sophco’s stock.(a)$26.12(b)$28.34(c)$38.00(d)$39.73Answer: (b)Questions 44 through 47 refer to the following information:New competition in Acme Unlimited’s market is going to have an impact on the growth of the firm’s dividends. A current dividend of $1.50 was paid yesterday, and thisdividend is expected to increase by 35% in the first year. After that point, the growth individends is expected to “decay” to the firm’s long run constant growth of 5%. Such a “decay” process is one in which dividend growth declines by 10 percentage points per year up to the point where the expected constant rate of dividend growth is reached. So, year 2 dividend will be 25 percent higher than year 1, year 3 dividend will be 15 percent higher, and after year 3, dividends will grow by 5 percent forever. Assume that investors require a rate of return of 17 on Acme Unlimited’s stock.44.Calculate the dividend in year 2.(a)$2.54(b)$2.92(c)$3.21(d)$3.30Answer: (a)45.Calculate the dividend in year 4.(a)$2.35(b)$2.54(c)$3.21(d)$3.53Answer: (c)46.Determine the price of Acme Unlimited’s stock at the end of year 3 (just after the dividendhas been paid).(a)$22.13(b)$26.75(c)$29.67(d)$34.24Answer: (b)47.Calculate the current price of Acme Unlimited’s stock.(a)$22.13(b)$26.75(c)$29.67(d)$34.24Answer: (a)Short Problems1.Discuss the two ways in which a corporation can distribute cash to its shareholders.Answer:There are two ways a corporation can distribute cash to its shareholders: by paying acash dividend or by repurchasing the company’s shares in the stock market. When acompany pays a cash dividend, all shareholders receive cash in amounts proportional to the number of shares they own.In a share repurchase, the company pays cash to buy shares of its stock in the stockmarket, thereby reducing the number of shares outstanding. In this case, onlyshareholders who choose to sell some of their shares will receive cash.2.Does growth “per se” add value to the current price of a share? If not, what does add valueto a share’s current price?Answer:Growth per se does not add value. What adds value is the opportunity to invest inprojects that can earn rates of return in excess of the required rate, k. When a firm’sfuture investment opportunities yield a rate of return equal to k, the stock’s value can be estimated using the formula P0 = E1/k.3.In order to evaluate the stock of DippinDonuts, an analyst uses the constant growthdiscounted dividend model. Expected earnings of $15 per share are assumed, as are anearnings retention rate of 70% and an expected rate of return on future investments of 18% per year. If the market capitalization rate is 15% per year, what is the implied net present value of future investments?Answer:g = 0.7 x 0.18= 12.6%Use the constant growth formula to solve for P0:P0 = D1/(k – g)= 4.50/(0.15-0.126)= $187.50Next find P0 with the formula P0 = E1/k:= 15/0.15= $100The NPV of future investments is the difference between these two values: $187.50 –$100 = $87.504.In order to evaluate the stock of EasyStreet Corporation, an analyst uses the constant growthdiscounted dividend model. Expected earnings of $16 per share are assumed, as are anearnings retention rate of 60% and expected rate of return on future investments of 17% per year. If the market capitalization rate is 14% per year, what is the implied net present value of future investments?Answer:g = 0.6 X 0.17= 10.2%Use the constant growth formula to solve for P0:P0 = D1/(k – g)= $6.40/(0.14 – 0.102)= $168.42Next find P0 with the formula P0 = E1/k:= 16/0.14= $114.29The NPV of future investments is the difference between the two values: $168.42 –$114.29 = $54.13.anic Earth stock is expected to pay a dividend of $2.70 per share a year from now, and itsdividends are expected to grow by 7% per year thereafter. If its price is now $30 per share, what must be the market capitalization rate?Answer:Use the constant growth formula to solve for k:P0 = D1/(k – g)30 = 2.70/(k – 0.07)k = 16%6.Walch stock currently sells for $27.62 a share, and is expected to pay a dividend of D1 a yearfrom now. If its dividends are expected to grow by 4.5% per year thereafter and thecapitalization rate is 15% per year, what is the value of D1?Answer:Use the constant growth formula to solve for D1:P0 = D1/(k – g)D1 = P0(k – g)= $27.62(0.15 – 0.045)= $2.907.Discuss how outside investors may interpret an increase in a corporation’s cash dividend asopposed to a decrease.Answer:Investors may interpret an increase in a corporation’s cash dividend as a positive sign since it would suggest that management is confident the earnings can be sustained in the future.The result is most likely to be an increase in stock price. A decrease could be viewed as a bad signal that will most likely cause a decline in stock price.8.Consider the balance sheet of SureThing Corporation:Assets Liabilities and Shareholders’ EquityCash: $3 million Debt: $3 millionOther Assets: $11 million Equity: $11 millionTotal: $14 million Total: $14 millionNumber of shares outstanding = 440,000Price per share = $25If SureThing pays a cash dividend of $2.50 per share, what will the balance sheet look like afterward?Answer:Balance sheet after payment of cash dividend:Assets Liabilities and Shareholders’ EquityCash: $1.9 million Debt: $3 millionOther assets: $11 million Equity: $9.9 millionTotal: $12.9 million Total: $12.9 millionNumber of shares outstanding = 440,000Price per share = $22.509.Consider the balance sheet of SureThing Corporation:Assets Liabilities and Shareholders’ EquityCash: $3 million Debt: $3 millionOther assets: $11 million Equity: $11 millionTotal: $14 million Total: $14 millionNumber of shares outstanding = 440,000Price per share = $25If SureThing Corporation repurchases shares worth $2.5 million, what will the new balance sheet for SureThing Corporation look like?Answer:Balance sheet after share repurchase:Assets Liabilities and Shareholders’ EquityCash: $0.5 million Debt: $3 millionOther assets: $11 million Equity: $8.5 millionTotal: $11.5 million Total: $11.5 million Number of shares outstanding = 340,000Price per share = $2510.Consider the balance sheet of SureThing Corporation:Assets Liabilities and Shareholders’ Equity Cash: $3 million Debt: $3 million Other assets: $11 million Equity: $11 million Total: $14 million Total: $14 million Number of shares outstanding = 440,000Price per share = $25If SureThing is paying a 20% stock dividend, what will the number of shares outstanding be?What will be the price per share?What would be the effect of a two-for-one stock split?Answer:After paying a 20% stock dividend:Number of shares outstanding = 528,000Price per share = $20.83After a two-for-one stock split:Number of shares outstanding = 880,000Price per share = $12.5011.Gough Fraser is considering purchasing the stock of ASIOA Companies, which he plans tohold indefinitely. ASIOA just paid an annual dividend of $3.00 and the price of the stock is $48 per share. The earnings and dividends of the company are expected to grow forever at a rate of 6 percent per year. What annual rate of return does Gough expect on his investment?Answer:D1 is 3.00. Given 6% annual growth, D1 = 3.00 x 1.06 = 4.80.Use the constant growth formula to solve for k:P0 = D1/(k – g)48 = 4.80/(k – 0.06)48k – 2.88 = 4.8048k = 7.68k = 16%12.Halpert Corporation would like to raise $100,000,000 by issuing preferred stock. Thepreferred stock will have a par value of $1,000 per share and pay a dividend of $48 per year.If the required rate of return for this stock is 15 percent, how many shares of preferred stock must Halpert issue?Answer:P0 = D1kP0 = $480.15= $320Number of shares = $100,000,000/$320= 312,500 shares13.Aslan Inc. just paid a dividend of $5.00 per share. This dividend is expected to grow at asupernormal rate of 20 percent per year for the next two years. It is then expected to grow at a rate of 5 percent per year forever. The appropriate discount rate for Aslan’s stock is 17percent. What is the price of the stock?Answer:D0 = $5D1 = $5(1.2)= $6.00D2 = $6.00(1.2)= $7.20D3 = $7.20(1.05) = $7.56P2 = D3/(k – g)= $7.56/(0.17 – 0.05)= $63.00P0 = $6.00/(1.17) + ($7.20 + $63.00)/(1.17)2= $56.4114.Druids Corp. just paid an annual dividend of $2.50. Dividends are expected to grow at aconstant rate forever. The price of the stock is currently $38.40. The required rate of return for this stock is 15 percent. What is the expected growth rate of Druids dividend?Answer:D0 = $2.50D1 = $2.50(1 + g)P0 = $38.40k = 15%Use the constant growth formula to solve for g:P0 = D1/(k – g)38.40 = 2.50(1 + g)/(0.15 – g)5.76 – 38.4g = 2.5 + 2.5g3.26 = 40.9g0.0797 = g15.The common stock of Century Inc. is expected to pay a dividend of $1.80 one year fromtoday. After that the dividend is expected to grow at a rate of 15 percent per year for two years and then at a rate of 5 percent per year forever. If the required rate of return for this stock is 15 percent, what is the current price?Answer:D1 = $1.80D2 = $2.07D3 = $2.38D4 = $2.50P3 = $2.50/(0.15 – 0.05)= $25.00P0 = 1.80/(1.15) + 2.07/ (1.15)2 + (2.38 + 25.00)/(1.15)3= $21.1416.A firm’s common stock is trading at $54 per share. In the past the firm has paid a constantdividend of $4 per share. However, the company has just announced new investments that the market did not know about. The market expects that with these new investments, thedividends should grow at 4% per year forever. Assuming that the discount rate remains the same, what will be the price of the stock after the announcement?Answer:P0 = $54Dividends have been constant, so:P0 = D1kk = $4/$54= 7.4%Now g = 4% and k stays same:P0 = 4(1.04)/(0.074 – 0.04)= $122.3517.Consider a stock that just paid a $3.00 dividend. You expect dividends on this stock to growat 25 percent per year for the next 3 years and 10 percent per year thereafter. If you require an18 percent return, how much are you willing to pay for this stock?Answer:D0 = $3D1 = $3(1.25)= $3.75D2 = 3.75(1.25)= $4.69D3 = 4.69(1.25)= $5.86D4 = $5.86(1.10)= $6.45P3 = $6.45/(0.18 – 0.10)= $80.63P0 = 3.75/(1.18) + $4.69/(1.18)2 + $86.63/(1.18)3= $59.19Longer Problems1.WannaGrow Corporation has expected earnings per share of $8. It has a history of payingcash dividends equal to 30% of earnings. The market capitalization rate for WannaGrow stock is 15% per year, and the expected rate of return on future investments is 18% per year.Using the constant growth rate discounted dividend model:a.What is the expected growth rate of dividends?b.What is the model’s estimate of the present value of the stock?c.What is the expected price of a share a year from now?Answer:a.g = earnings retention rate x ROE= 0.7 x 0.18= 12.6%b.D1 = 0.3 x $8= $2.40Use the constant growth formula to solve for D1:P0 = D1/(k – g)= $2.40/(0.15 – 0.126)= $100c.P1 = P0 (1 + g)= $100(1.126)P1 = $112.602.Dividends’R’Us Corporation is an all equity financed firm with a total market value of$150 million. The company holds $20 million in cash and has $130 million in other assets.There are 2,500,000 shares of common stock outstanding for this company, each with a market price of $52. Consider the following decisions and the impact on Dividends’R’Us Corporation’s stock price and on number of shares outstanding.a.The company pays a cash dividend of $5 per share.b.The company repurchases 250,000 shares.c.The company pays a 20% stock dividend.d.The company has a two-for-one stock split.Answer:a.The company pays out a total of $12.5 million in cash dividends. The stock pricefalls to $47 per share. Shareholder wealth may decline because personal taxesmay have to be paid on the cash dividend. The number of shares outstanding isstill 2.5 million shares.b.The stock price is unchanged. The number of shares outstanding is now2,250,000 shares.c.The number of shares outstanding is 1.2 x 2.5 million = 3 million shares.The stock price is $43.34.d.The number of shares doubles to 5,000,000.The stock price halves to $26.3.The stock of WishToGrow Corporation is currently selling for $15 per share. Earnings pershare in the coming year are expected to be $3. The company has a policy of paying out 70% of its earnings each year in dividends. The remaining 30% is retained and invested in projects that earn a 19% rate of return each year. This situation is expected to continue into theforeseeable future.ing the constant growth rate DDM, what rate of return do WannaGrow investorsrequire?b.By how much does its value exceed what it would be if all earnings were paid asdividends and nothing were reinvested?c.If WannaGrow were to cut its dividend payout ratio to 35%, what would happen to itsstock price?Answer:a.P0 = $15, E1 = $3, D1 = 0.7 x $3= $2.10g = 0.3 x 0.19= 5.7%P0 = D1/(k – g)15 = $2.10/(k – 0.057)k = 19.7%b.If all earnings were paid as dividends its price would be:P0 = 3/0.197= $15.23The current price is actually $0.23 less in value than the above model.c. D1 = 0.35 x $3 g = 0.65 x 0.19= $1.05 = 12.35%P0 = 1.05/(0.197 – 0.1235)= $14.29The stock price would drop by $0.71.。
兹维博迪金融学第二版试题库13TB(1)
Chapter ThirteenCapital Market EquilibriumThis chapter contains 43 multiple choice questions, 19 short problems, and 9 longer problems. Multiple Choice1.If one holds a diversified portfolio in which securities are held in the same relative proportions as ina broad market index, this is referred to as ________.(a)eliminating(b)discounting risk(c)indexing(d)capitalizingAnswer: (c)2.The CAPM provides a way of estimating ________ for use in a variety of financial applications.(a)actual rates of return(b)expected rates of return(c)expected standard deviation(d)actual standard deviationAnswer: (b)3.The CAPM may be used to provide ________.(a)inputs to DCF valuation model for stocks(b)inputs to DCF valuation model for bonds(c)estimation of a “fair” rate of return on invested capital(d)both (a) and (c)Answer: (d)13-14.A(n) ________ is a portfolio that holds all assets in proportion to their observed market values.(a)market portfolio(b)riskless portfolio(c)efficient riskless portfolio(d)both (b) and (c)Answer: (a)5.Suppose there are three assets: BB stock, REM stock, and a risk-free asset. The total market values ofeach at current prices are $40 million of BB stock, $80 million of REM stock, and $10 million of the risk-free asset. The composition of the market portfolio is ________.(a)61.5% BB stock; 7.7% REM stock; 30.8% risk-free asset(b)33.33% BB stock; 66.67% REM stock; 0 risk-free asset(c)30.8% BB stock; 61.5% REM stock; 7.7% risk-free asset(d)30.8% BB stock; 66.67% REM stock; 7.7% risk-free assetAnswer: (c)6.Suppose there are three assets: BB stock, REM stock, and a risk-free asset. The total market value ofeach at current prices are $40 million of BB stock, $80 million of REM stock, and $10 million of the risk-free asset. The composition of the risky part of any investor's portfolio will be ________(a)30.8% BB stock; 61.5% REM stock(b)33.33% BB stock; 66.67% REM stock(c)30.8% BB stock; 66.67% REM stock(d)66.67% BB stock; 33.33% REM stockAnswer: (b)7.Suppose there are four securities: BB stock, REM stock, ACX stock, and a risk-free asset. The totalmarket values of each at current prices are $50 million of BB stock, $40 million of REM stock, $80 million of ACX stock, and $30 million of the risk-free asset. The composition of the market portfolio is ________.(a)25% BB stock; 20% REM stock; 40% ACX stock; 30% risk-free asset(b)25% BB stock; 40% REM stock; 40% ACX stock; 15% risk-free asset(c)25% BB stock; 20% REM stock; 40% ACX stock; 15% risk-free asset(d)50% BB stock; 40% REM stock; 80% ACX stock; 30% risk-free assetAnswer: (c)13-213-38. Suppose there are four securities: BB stock, REM stock, ACX stock, and a risk-free asset. The totalmarket values of each at current prices are $50 million of BB stock, $40 million of REM stock, $80million of ACX stock, and $30 million of the risk-free asset. Determine the holdings of the threerisky assets of a trader who invests $60,000 of a $300,000 portfolio in the riskless security.(a) $70,000 in BB stock, $50,000 in REM stock, $120,000 in ACX stock(b) $60,000 in BB stock, $48,000 in REM stock, $96,00 in ACX stock(c) $70,588 in BB stock, $56,471 in REM stock, $112,941 in ACX stock(d) $88,235 in BB stock, $70,588 in REM stock, $141,176 in ACX stockAnswer: (c)9. In the CAPM, the trade-off line is called the ________.(a) capital market line(b) portfolio market line(c) asset market line(d) capital asset lineAnswer: (a)10. The correct equation for the Capital Market Line (CML) is ________.(a) ()M f E r r σσ+=(b) ()()M f f M E r r E r r σσ⎡⎤-=+⎢⎥⎢⎥⎣⎦(c) ()()M f ME r r E r σ-= (d) ()M f M E r r σ=+Answer: (b)11.Investors must be offered an expected rate of return that ________ the risk-free rate of interest whenbeing induced to accept a market portfolio.(a)is less than(b)is the same as(c)exceeds(d)minimizesAnswer: (c)12.The ________ the average degree of risk aversion of the population, the ________ the risk premiumrequired.(a)greater; lower(b)greater; greater the insignificance of(c)lower; higher(d)greater; higherAnswer: (d)13.The slope of the Capital Market Line represents the:(a)volatility of interest rates(b)market reward-to-risk ratio(c)individual risk-to-reward ratio(d)individual preferenceAnswer: (b)14.Suppose the standard deviation of the market portfolio is 0.15 and the average degree of risk aversionis 1.5. Then the risk premium on the market portfolio is:(a)0.034(b)0.051(c)0.225(d)0.340Answer: (a)13-413-515. Suppose the standard deviation of the market portfolio is 0.15 and the average degree of risk aversionis 1.5. If the expected return on the market portfolio is 0.15 per year, what is the slope of the CapitalMarket Line?(a) 0.034(b) 0.180(c) 0.225(d) 0.516Answer: (c)16. Suppose the standard deviation of the market portfolio is 0.25 and the average degree of risk aversionis 3. If the expected return on the market portfolio is 0.24, what is the slope of the Capital MarketLine?(a) 0.1875(b) 0.6912(c) 0.7500(d) 0.7813Answer: (d)17. ________ is a measure of a security’s market-related risk and it tells us how much the security’srate of return tends to change when the return on the market portfolio changes.(a) alpha(b) beta(c) delta(d) gammaAnswer: (b)18. The equation for the Security Market Line (SML) is ________.(a) ()()()j f j f j M f E r r E r r E r r ββ⎡⎤=⨯=⨯-⎣⎦ (b) ()()j f j M f E r r E r r β⎡⎤=+-⎣⎦(c) ()()f j j M f r E r E r r β=⎡⎤-⎣⎦(d) ()()j j M f fE r E r r r β⎡⎤=--⎣⎦Answer: (b)19.If a security is more volatile than the market as a whole, it will have a beta ________, whereas if asecurity is less volatile than the market as a whole, it will have a beta ________.(a)equal to 1; less then 1(b)greater than 2; greater than 1(c)less than 1; greater than 1(d)greater than 1; less than 1Answer: (d)20.If you are examining a stock that has a beta of 2, according to the CAPM, what should be itsexpected rate of return? Let the market risk premium = 0.07.(a)the risk-free rate plus 0.035(b)the risk-free rate plus 0.07(c)the risk-free rate plus 0.14(d)the risk-free rate plus 2.00Answer: (c)21.________ refers to the difference between the average rate of return on a security or a portfolio ofsecurities and its SML relation.a. Alphab. Betac. Deltad. GammaAnswer: (a)22.A beta of 1.5 for a security indicates ________.(a)the security has below average market-related risk(b)the security has no market-related risk(c)the security has above average market-related risk(d)the security has average market-related riskAnswer: (c)13-623.The risk-free rate of return for a security is 6%. The expected return on the market is 13%. What isthe required rate of return for the security if it has a beta of 1.25?(a)22.25%(b)16.25%(c)14.75%(d)8.75%Answer: (c)24.Determine the beta of a portfolio consisting of the following stocks:Security % Invested BetaREM 30% 1.1ACX 20% 0.95BGB 40% 1.2CRY 10% 0.7(a)0.92(b)0.99(c)1.07(d)1.17Answer: (c)25.If the Treasury bill rate is currently 4% and the expected return on the market portfolio for the sameperiod is 13%, determine the risk premium on the market.(a)0.52%(b)8.50%(c)9.00%(d)11.00%Answer: (b)13-726.If the Treasury bill rate is currently 4% and the expected return on the market portfolio for the sameperiod is 13%, what is the equation of the CML if the standard deviation is 0.25?(a)E(r) = 0.04 + 0.36σ(b)E(r) = 0.04+ 0.09σ(c)E(r) = 0.09 + 0.36σ(d)E(r) = 0.09 + 0.16σAnswer: (a)27.Peggy has just been informed that the expected return from her portfolio is 15.5%. If 45% of Peggy'ssecurities have an expected return of 10.8% and 25% have an expected return of 16.5%, what is the expected return of the remaining portion of Peggy's portfolio?(a)21.72%(b)19.55%(c)13.64%(d)6.52%Answer: (a)28.ZB Enterprises pays a current dividend of $1.80 and dividends are expected to grow at a rate of 6%annually in the foreseeable future. ZB Enterprises has a beta of 1.1. If the risk-free rate is 8.5 and the market risk premium is 5%, at what price would a share of ZB stock be expected to sell?(a)$20.50(b)$23.85(c)$32.40(d)$32.90Answer: (b)29.Two industrial firms are considering a merger. Drysler has a beta of 0.95 and Bendz has a beta of1.25. Drysler's stock sells for $25 per share and there are 12 million shares outstanding. Bendz has 3million shares outstanding and its stock sells for $50 per share. What will be the merged firm's beta if the merger is carried out?(a)1.05(b)1.10(c)1.54(d)2.20Answer: (a)13-830.Monet Industries currently does not pay a dividend but expects to pay a dividend of $1.70 next year.Thereafter, the dividend is expected to grow at a rate of 5% per year. The risk-free rate is currently 6% and the expected return on the market portfolio is 12%. What is the price you would expect to pay for a share of Monet today if the beta for this stock is 1.05?(a)$12.50(b)$13.13(c)$23.29(d)$24.45Answer: (c)31.Joe Citizen is considering venturing into the sports utility vehicle field. As a result of such a venture,the beta would increase from 1.07 to 1.15 and the expected growth rate in earnings would increase from 10% to 12%. Determine whether this is a worthwhile venture if Joe also has the followinginformation: the risk-free rate is 6%, the current dividend is $0.95, and the expected return on the market portfolio is 13%.(a)No, it is not worthwhile since there is no change in stock price(b)Yes, it is worthwhile since the stock price increases by $21.96(c)Yes, it is worthwhile since the stock price increases by $29.94(d)No, it is not worthwhile - stock price decreases by $19.12Answer: (b)32.Consider a share of Rooble Less. If it has a beta of 0.7, and we also know that the risk-free rate is 7%,and the expected return on the market portfolio is 15%, what is the required rate of return for a share of Rooble Less stock?(a)10.5%(b)11.9%(c)12.6%(d)17.5%Answer: (c)13-933.Determine the beta of a portfolio containing the following stocks ________.Stock Market Value BetaREM $30,000 0.82Rooble $20,000 0.65Drysler $40,000 1.25Fourx $60,000 1.32Wotan $80,000 1.65(a)0.95(b)1.14(c)1.30(d)5.69Answer: (c)34.Kanga Enterprises stock currently sells for $33 a share and its current dividend is $1.90. Kangaenterprise stock is considered to be twice as volatile than the market as a whole. The expected return on the market portfolio is 14% and the risk-free rate is 6%. If dividends are expected to grow at a constant rate, g%, into the foreseeable future, then calculate this growth rate.(a)15.36%(b)16.24%(c)22.00%(d)26.71%Answer: (a)35.LLJ has a beta of 1.02. If the risk-free rate is 8% and the required return on LLJ’s stock is 16%,what is the required rate of return of the market?(a)12.00%(b)15.84%(c)16.16%(d)16.48%Answer: (b)13-1036.Hulot Corp. has a beta of 1.27. If the risk-free rate is 7.5% and the required return on the market is14%, what is the required return on Hulot stock?(a)8.23%(b)14.00%(c)15.76%(d)21.5%Answer: (c)37.Consider a market portfolio that has a standard deviation of 0.25. The average degree of risk aversionis 1.6. If the expected return on the market portfolio is 0.20, what is the equation for the Capital Market Line?(a)E(r) = 0.10 + 0.10σ(b)E(r) = 0.10 + 0.40σ(c)E(r) = 0.13 + 0.10σ(d)E(r) = 0.13 + 0.40σAnswer: (d)38.According to the CAPM, the risk premium on any asset is equal to ________.(a)its beta(b)its beta times the risk premium on the market portfolio(c)its market risk premium times alpha(d)its market risk premium divided by betaAnswer: (b)39.The market portfolio has a standard deviation of return of 0.22 and the expected return on the marketportfolio is 21%. Calculate the market degree of risk aversion if the risk-free rate of return is 10%.(a)0.50(b)1.41(c)2.27(d)6.40Answer: (c)13-1140.If a portfolio manager can consistently produce a positive alpha, then her performance is consideredto be ________.(a)superior(b)average(c)below average(d)indeterminateAnswer: (a)41.Consider the following information: the risk-free rate is 5% and the expected rate of return on themarket portfolio is 12%. If you have a stock with a beta of 1.50 and you expect it to offer a rate of return of 13%, then you(a)consider it fairly priced(b)sell short the stock because it is overpriced(c)sell the stock because it is fairly priced(d)buy the stock because it is underpricedAnswer: (b)Questions 42 and 43 refer to the following information:Consider a portfolio exhibiting an expected return of 21% in an economy in which the riskless interest rate is 8%, the expected return to the market portfolio is 14%, and the standard deviation of the return to the market is 0.30. Assuming this portfolio is efficient, complete the following problems:42.Determine the beta.(a)0.46(b)0.93(c)2.17(d)3.50Answer: (c)43.Determine the standard deviation of its return.(a)0.13(b)0.65(c)0.70(d)1.39Answer: (b)13-12Short Problems1.Explain the importance of the CAPM as a tool in finance.Answer:(1) It provides a theoretical justification for the practice of passive investing known as indexing.(2) The CAPM provides a way of estimating expected rates of return for uses in financialapplications. Such financial applications include the discounted-cash-flow valuation modelfor stocks and in models used in making capital-budgeting decisions.2.List two assumptions of the CAPM model. How is an investor expected or assumed to behave in theworld of the CAPM model?Answer:(1) Investors have the same expectations or agree in their forecasts of expected rates of return,standard deviations, and correlations of the risky securities, and will therefore hold riskyassets in the same relative proportions.(2) Investors will generally behave optimally. In equilibrium, the prices of securities adjust sothat when investors are holding their optimal portfolios, the aggregate demand for eachsecurity is equal to its supply.3.Suppose there are four securities: Oz stock, Xanadu stock, Ragtime stock, and a risk-free asset. Thetotal market values of each at current prices are $30 billion of Oz stock, $50 billion of Xanadu stock, $90 billion of Ragtime stock, and $30 billion of the risk-free asset.a. Determine the composition of the market portfolio.b. If an investor has a $500,000 portfolio with $90,000 invested in the risk-free asset, determinethe holdings of the three risky assets.Answer:(a) The total market value of all assets is $200 billion.The composition of the market portfolio is therefore 15% Oz stock, 25% Xanadu stock, 45%Ragtime stock, and 15% of the risk-free asset.(b) $72,352.94 in Oz stock, $120,588.24 in Xanadu stock and $217,058.82 in Ragtime stock.13-134.Consider a market portfolio that has a standard deviation of 0.30. The average degree of risk aversionis 2. If the expected return on the market portfolio is 0.25, what is the equation for the Capital Market Line?Answer:E(r M) - r f= 2 x (0.3)2= 0.18r f= 0.25 – 0.18= 0.07The equation for CML:E(r) = 0.07 + 0.60σ5.Apart from portfolio selection, discuss other applications of the CAPM in finance.Answer:Risk premiums derived from the CAPM are used in capital-budgeting decisions of the firm and in discounted cash flow valuation models. The CAPM is also used to establish "fair" rates of return on invested capital in regulated firms and in “cost plus” pricing.6.Two industrial firms are considering a merger. Comdat has a beta of 1.15 and BioTech has a beta of1.95. Comdat's stock sells for $60 per share and there are 6 million shares outstanding. BioTech has 4million shares outstanding and its stock sells for $90 per share. If the merger is carried out, what will be the merged firm's beta?Answer:Comdat's market value = $60 x 6 million= $360,000,000BioTech's market value = $90 x 4,000,000= $360,000,000Comdat weight = 0.5BioTech weight = 0.5Merged beta = (0.5)(1.15) + (0.5)(1.95)= 1.5513-147.Consider a portfolio exhibiting an expected return of 22% in an economy where the riskless interestrate is 7%, the expected return on the market portfolio is 14% and the standard deviation of the return to the market portfolio is 0.18. Assuming that the portfolio is efficient, determine:(a) its beta(b) the standard deviation of its returnAnswer:(a) E(r j) – r f= β[E(r M) – r f]0.22 – 0.07 = β[0.14 – 0.07]2.14 = β(b) Use CML:.22 = 0.07 + [(0.17 – 0.07)/0.18]σ0.3 = σ8.During the most recent 3-year period, Tartar Inc. earned an average annualized rate of return of 14%and had an annualized standard deviation of 20%. The average risk-free rate was 4.5% per year. The average rate of return in the market index over that same period was 10% with a standard deviation of 15%. How well did Tartar Inc. perform on a risk adjusted basis?Answer:Compare their reward-to-risk ratios:Tartar Inc. Market(0.14 – 0.45)/0.2 = 0.475 (0.10 – 0.045)/0.15 = 0.367On a risk adjusted basis, Tartar performed better than the market index.13-159.Joe Citizen is considering venturing into the sports accessories field. As a result of this investment,the beta would increase from 1.02 to 1.20 and the expected growth rate in earnings would increase from 6% to 9%. Determine whether this is a worthwhile venture if Joe also has the followinginformation: the risk-free rate is 4.5%, the current dividend is $1.05, and the expected return on the market portfolio is 12%.Answer:βold = 1.02 βnew = 1.20k old= r f+ βold [E(r M) – r f]= 4.5 + 1.02 [12 – 4.5]= 12.15%P old= $18.10Now look at βnew.k new= r f+ βnew [E(r M) – r f]= 4.5 + 1.20 [12 – 4.5]= 13.50%P new= $25.43Yes, it is a worthwhile venture since the stock price increases by $7.33.10.The market portfolio has a variance of return of 0.16 and the expected return on the market portfoliois 21%. Calculate the market degree of risk aversion if the risk-free rate of return is 10%.Answer:E(r M) – r f = Aσ20.18 – 0.10 = A(0.035)23.125 = A13-1611.Consider the following information: the risk-free rate is 5%, and the expected rate of return on themarket portfolio is 18%. If you have a stock with a beta of 1.5, and you expect it to offer a rate of return of 13%, what should you do?Answer:Look at: E(r j) = r f+ β(E(r M) – r f)= 0.05 + 1.5(0.12 – 0.05)= 15.5%You expect the stock to offer 13%. Since this is below the SML, its expected return is too low to support equilibrium.12.If the Treasury bill rate is currently 5%, and the expected return to the market portfolio over the sameperiod is 14%, determine the risk premium on the market. If the standard deviation of the return on the market is 0.25, what is the equation of the Capital Market Line?Answer:Market risk premium = 14% – 5%= 9%CML equation:E(r) = 0.05 + 0.09/0.25σ= 0.05 + 0.36σ13.If the Treasury bill rate is currently 6 %, and the expected return to the market portfolio over thesame period is 15%, determine the risk premium on the market. If the standard deviation of the return on the market is 0.4, what is the equation of the Capital Market Line?Answer:Market risk premium = 15% – 6= 9%CML equation:E(r) = 0.06 + 0.09/0.4σ= 0.06 + 0.225σ13-1714.Consider a portfolio exhibiting an expected return of 20% in an economy in which the risklessinterest rate is 6%, the expected return to the market portfolio is 12%, and the standard deviation of the return to the market is 0.25. Assuming this portfolio is efficient, determine:(i)its beta(ii)the standard deviation of its returnAnswer:(i) E(r j) – r f= β[E(r M) – r f]0.20 – 0.06 = β[0.12 – 0.06]2.33 = β(ii) Use CML:.20 = 0.06 + [(0.12 – 0.06)/0.25]σ0.583 = σ15.Consider a market portfolio that has a standard deviation of 0.35. The average degree of risk aversionis 1.5. If the expected return on the market portfolio is 0.23, what is the equation for the Capital Market Line?Answer:E(r m) - r f= 1.5 x (0.35)2= 0.1838r f= 0.23 – 0.1838= 0.0462E(r) = 0.0462 + 0.1838/0.35σThe equation for the CML is:(r) = 0.0462 + 0.525σ13-1816.Roland Corporation’s stock recently paid a dividend of $2.50 per share (D0 = $2.50). The companyhas a constant growth rate of 5% and a beta equal to 1.5. The rate of return on the market portfolio is 15%, and the risk-free rate is 7%. Roland is considering a change in policy that will increase its beta coefficient to 1.75. If market conditions remain unchanged, what new constant growth rate will cause the price of Roland stock to remain unchanged?Answer:k = r f + β[E(r M) - r f]= 7 + 1.5(15 – 7)= 19%Current stock price, P o = D o (1+g)/(k-g)= 2.50(1.05)/(0.19 – 0.05)= $18.75After policy change, β = 1.75New k = 21%For stock price to be unchanged:$18.75 = $2.50(1+g)/(0.21 – g)solve for g:g = 6.76%17.An all equity firm, Lyrebird Futures Inc. is considering the creation of a new division which willincrease the assets of the firm from $2,000,000 to $4,000,000 (that is, by 100%). Lyrebird currently has a required rate of return of 17%, the risk-free rate is 7%, and the return on the market portfolio is 16%. Lyrebird wants to reduce its required rate of return to 13%. What is the maximum betacoefficient the new division could have?Answer:Solve for current beta:17 = 7 + β(16 – 7)βcurrent = 1.11If the required return is to equal 13%, then recalculate beta.13 = 7 + β(16 – 7)β = 0.67Lyrebird will have created two new divisions of equal weight.0.5(1.11) + 0.5(βnew) = 0.67βnew= 0.2313-1918.An all equity firm, Rush Inc., has been growing at a 15% annual rate and is expected to do so for thenext three years. After year 3, dividend growth is expected to slow to a constant 6% rate. Currently, the firm maintains a 40% payout ratio, and this year’s retained earnings net of dividends was $1.8 million. The market risk premium is 7.5%, the risk-free rate is 8%, the beta is 1.55 and the firm has 1,500,000 shares outstanding. Given this information, what is the market value of the firm’scommon equity?Answer:k = 8 + 1.55(7.5) = 19.625%D o = ($1,800,000/0.6) x 0.4 = $1,200,000D1 = $1,380,000D2 = $1,587,000D3 = $1,825,050D4 = $1,934,553P3 = D4/(0.19625 – 0.06)= $14,198,554P o = $12,935,78013-2019.The returns of TNJ Inc. are displayed below, along with the returns on the market .Year TNJ Market1 –14% –122 16 93 21 154 4 15 –6 –26 2 –1If the risk-free rate is 7.5%, and the required rate of return on TNJ’s stock is 17 %, what is the required rate of return on the market?Answer:To calculate beta, use either a spreadsheet or financial calculator.β = 1.28 (to 2 decimal places)Substitute beta into SML to solve for E(r M)k = r f+ β[E(r M) – r f]17% = 7.5 + 1.28(E(r m) – 7.5)E(r M) = 14.92%13-21Longer Problems1.Wotan Industry stock currently sells for $45 a share and its current dividend is $2.20. Wotan Inc. isconsidered to be 40% more volatile than the market as a whole. The expected return on the market portfolio is 13% and the risk-free rate is 5%. If dividends are expected to grow at a constant rate, g% per year, into the future, then calculate the growth rate.Answer:To solve for g, use the dividend discount valuation model:To solve for k, use the SML formula.k = r f + β [E(r M) – r f]= 5 + 1.40 [13 – 5]k = 16.2%Now substitute k into DDM model.45(0.162 - g) = 2.20(1+g)7.29 – 45g = 2.20 + 2.20g47.2g = 5.09g = 10.8%The growth rate is 10.8%2.Consider a portfolio exhibiting an expected return of 21% in an economy where the riskless interestrate is 6%, the expected return on the market portfolio is 15%, and the corresponding standarddeviation is 0.19. Assuming that the portfolio is efficient, determine:(a) its beta(b) the standard deviation of its returnAnswer:(a) E(r j) – r f = β[E(r M) – r f]0.21 – 0.06 = β[0.15 – 0.06]β= 1.67(b) Use CML:0.21 = 0.06 + [(0.15 – 0.06)/0.19]σσ = 0.3213-223.Lenny's Leftorium (LL) is a store that has no long term debt in its capital structure. However, LL iscurrently considering an expansion project that will yield the following net cash flows:Year NCF0 –$1.2 million1 $700,0002 $810,0003 $860,0004 $920,0005 $940,000If the current risk-free rate is 4.5% and the current market risk premium is 7.2% and its beta is 15% more volatile than the market as a whole, should LL undertake the expansion project?Answer:First of all, compute cost of capital. Since LL is 100% equity financed,k = k e.k = r f + β[E(r M) – r f]= 4.5 + 1.15(7.2)k = 12.78%NPV = $1,740,880Yes, the project is worthwhile.13-234.Kanga Inc. is considering investing $8 million in computer equipment that is expected to have auseful life of 4 years, and is expected to reduce the firm's labor costs by $3 million per year. Assume that Kanga Inc. pays a 35% tax rate on accounting profits and uses the straight-line depreciation method. What is the after tax cash flow from the investment in years 1 through 4? If the firm's beta is1.25 and we also know that the current risk-free interest rate is 5%, the expected return on the marketportfolio is 14%, is the project worthwhile? Also assume Kanga Inc. has no long term debt.Answer:Increase in after tax cash flow = Increase in before tax cash flow –increase in taxes= $3 million – (3 – 2 million)(0.35)= $2.65 millionWe now need k, cost of capital.Use CAPMk = r f+ β[E(r M) – r f]= 5 + 1.25 [14 – 5]k = 16.25%NPV = PV – Initial OutlayUse k = 16.25% in calculations.NPV = –$621,674IRR = 12.29%Based on NPV and IRR, the project does not seem worthwhile.13-245.Barramundi Inc. stock is currently selling at $40 per share (its equilibrium price). The firm’slong-term growth is expected to remain 7% per year forever. Last year’s EPS were $4, and the dividend payout ratio is 50%. The risk-free rate is 8%, and the market risk premium is 6%. If beta increases by 50%, by how much will the stock price change? (Assume all other factors remain constant).Answer:First solve:P o = D o(1 + g)/(k – g)40 = 2.14/(k – 0.07)= 12.35%Solv e SML for β: 12.35 = 8 +β(6)β = 0.725New β = 0.725(1.5)= 1.0875New k = 8 + 1.0875(6)= 14.525New P o = 0.5($4)(1.07)/(0.14525 – 0.07)= $28.44The price would drop by approximately $11.5613-25。
兹维博迪金融学第二版试题库08TB
Chapter EightValuation of Known Cash Flows: BondsThis chapter contains 50 multiple choice questions, 18 short problems and 9 longer problems.Multiple Choice1. A ________ is a quantitative method used to infer an asset's value from market information about theprices of other assets and market interest rates.(a)fixed model(b)perpetual valuation model(c)valuation model(d)variable modelAnswer: (c)2.________ are examples of fixed-income securities.(a)Common stock and pension funds(b)Mortgages and pension annuities(c)Mutual funds and common stock(d)Preferred stock and common stockAnswer: (b)3.Consider a fixed-income security that promises to pay $150 each year for the next five years. Howmuch is this five-year annuity worth if the appropriate discount rate is 7% per year?(a)$534.74(b)$615.03(c)$802.50(d)$867.96Answer: (b)8-14.Consider a fixed-income security that promises to pay $120 each year for the next four years.Calculate the value of this four-year annuity if the appropriate discount rate is 6% per year.(a)$415.81(b)$508.80(c)$531.85(d)$629.06Answer: (a)5.The price of any existing fixed-income security ________ when market interest rates rise becauseinvestors will only be willing to ________ them if they offer a competitive yield.(a)rises; buy(b)rises; sell(c)falls; buy(d)falls; sellAnswer: (c)6. A fall in interest rates causes a ________ in the market value of a fixed-income security.(a)a rise(b)a fall(c)no change(d)it cannot be determined from the information givenAnswer: (a)7. A change in market interest rates causes ________ in the market values of all existing contractspromising fixed payments in the future.(a)a change in the same direction(b)a change in the opposite direction(c)no change(d)an unpredictable variationAnswer: (b)8-28.What happens to the value of a four-year fixed-income security promising $100 per year if the marketinterest rate rises from 5% to 6% per year?(a)A rise of 1% causes a drop of $4.87 in market value.(b)A rise of 1% causes a rise of $4.87 in market value.(c)A rise of 1% causes a drop of $8.09 in market value.(d)A rise of 1% causes a rise of $8.09 in market value.Answer: (c)9.What happens to the value of a four-year fixed-income security promising $100 per year if the marketinterest rate falls from 6% to 5% per year?(a)A fall of 1% causes a drop of $4.87 in market value.(b)A fall of 1% causes a rise of $4.87 in market value.(c)A fall of 1% causes a drop of $8.09 in market value.(d)A fall of 1% causes a rise of $8.09 in market value.Answer: (d)10.A zero-coupon bond is also known as ________.(a)a perpetual bond(b)a pure discount bond(c)a market rebate(d)an infinite bondAnswer: (b)11.The promised cash payment on a pure discount bond is called its ________.(a)face value(b)par value(c)fixed interest(d)both a and bAnswer: (d)8-312.What is the yield of a 1-year pure discount bond with a price of $850 and a face value of $1,000?(a)8.50%(b)9.09%(c)15.00%(d)17.65%Answer: (d)13.What is the yield of a 1-year pure discount bond with a price of $900 and a face value of $1,000?(a)5.26%(b)10.00%(c)11.11%(d)15.79%Answer: (c)14.Consider a four-year pure discount bond with a face value of $1,000. If its current price is $850,compute its annualized yield.(a)1.17%(b)4.15%(c)5.57%(d)17.60%Answer: (b)15.Consider a three-year pure discount bond with a face value of $1,000. If its current price is $900,compute its annualized yield.(a)1.036%(b)1.111%(c)3.57%(d)5.41%Answer: (c)8-416.Consider a five-year pure discount bond with a face value of $1,000. If its current price is $780, whatis its annualized yield?(a)5.09%(b)2.82%(c)1.28%(d)1.05%Answer: (a)17.A ________ obligates the issuer to make periodic payments of interest to the bondholder for the lifeof the bond and then to pay the face value of the bond when the bond matures.(a)pure discount(b)zero-coupon(c)perpetual bond(d)coupon bondAnswer: (d)18.The ________ of the bond is interest rate applied to the ________ of the bond to compute theperiodic payment.(a)coupon rate; face value(b)maturity rate; face value(c)coupon rate; price(d)maturity rate; priceAnswer: (a)19.For a bond with a face value of $1,000 and coupon rate of 11%, what is the annual coupon payment?(a)$100(b)$110(c)$1,000(d)$1,100Answer: (b)8-520.For a bond with a face value of $1,000 and a coupon rate of 9%, what is the annual coupon payment?(a)$90(b)$99(c)$1,000(d)$1,190Answer: (a)21.If the market price of a coupon bond equals its face value, it is also termed a ________.(a)par bond(b)premium bond(c)discount bond(d)zero-discount bondAnswer: (a)22.If the bond’s market price is higher than its face value, it is termed a ________.(a)par bond(b)premium bond(c)discount bond(d)zero-discount bondAnswer: (b)23.If the bond’s market price is lower than its face value, it is termed a ________.(a)par bond(b)premium bond(c)discount bond(d)zero-par bondAnswer: (c)8-624.If a bond selling for $850 has an annual coupon payment of $80 and a face value of $1,000, what isits current yield?(a)8.00%(b)9.41%(c)17.65%(d)27.05%Answer: (b)25.If a bond selling for $1,120 has an annual coupon payment of $110 and a face value of $1,000, whatis its current yield?(a)8.90%(b)9.82%(c)10.71%(d)11.00%Answer: (b)26.If a bond selling for $900 has an annual coupon payment of $80 and a face value of $1,000, what isits current yield?(a)8.00%(b)8.89%(c)11.00%(d)20.00%Answer: (b)27.The ________ is the discount rate that makes the present value of the bond’s stream of promised cashpayments equal to its price.(a)compound rate(b)yield to maturity(c)coupon rate(d)current yieldAnswer: (b)8-728.Suppose you are considering buying a one-year 11% coupon bond with a face value of $1,000 and acurrent price of $1,020. What is its yield to maturity?(a)8.82%(b)9.00%(c)10.78%(d)11.00%Answer: (a)29.Suppose you are considering buying a one-year 11% coupon bond with a face value of $1,000 and acurrent price of $1,050. What is its yield to maturity?(a)4.76%(b)5.71%(c)6.00%(d)10.48%Answer: (b)30.Suppose you are considering buying a five-year 11% coupon bond with a face value of $1,000 and acurrent price of $950. What is its yield to maturity?(a)5.62%(b)9.63%(c)11.58%(d)12.40%Answer: (d)31.Suppose you are considering buying a five-year 11% coupon bond with a face value of $1,000 and acurrent price of $1,100. What is its yield to maturity?(a)3.87%(b)8.47%(c)10.00%(d)13.62%Answer: (b)8-832.Suppose you are considering buying a six-year 10% coupon bond with a face value of $1,000 and acurrent price of $1,100. What are the current yield and yield to maturity of this bond?(a)CY = 11.00%; YTM = 12.23%(b)CY = 12.23%; YTM = 11.00%(c)CY = 7.85%; YTM = 9.09%(d)CY = 9.09%; YTM = 7.85%Answer (d)33.Suppose you are considering buying a seven-year 11% coupon bond with a face value of $1,000 and acurrent price of $950. What are the current yield and yield to maturity of this coupon bond?(a)CY = 12.10%; YTM = 11.58%(b)CY = 11.58%; YTM = 12.10%(c)CY = 9.92%; YTM = 10.45%(d)CY = 10.45%; YTM = 9.92%Answer: (b)34.Over time bond prices ________ their face value. Before maturity, bond prices can ________ a greatdeal as a result of changes in market interest rates.(a)diverge from; fluctuate(b)converge toward; flatten out(c)converge toward; fluctuate(d)diverge from; flatten outAnswer: (c)35.When the yield curve is not flat, bonds of the same ________ with different coupon rates have________ yields to maturity.(a)maturity, different(b)maturity, identical(c)callability, different(d)callability, identicalAnswer: (a)8-936.Bonds offering the same future stream of promised payments can differ in a number of ways, but thetwo most important are ________ and ________.(a)taxability, issue origin(b)type of issuer, default risk(c)type of issuer, taxability(d)taxability, default riskAnswer: (d)37.A ________ is one that gives the holder of a bond issued by a corporation the right to convert thebond into a pre-specified number of shares of common stock.(a)callable bond(b)convertible bond(c)stock bond(d)preferred bondAnswer: (b)38.A ________ is one that gives the issuer of the bond the right to redeem it before the final maturitydate.(a)callable bond(b)convertible bond(c)stock bond(d)preferred bondAnswer: (a)39.Five years ago, English and Co. issued 25-year coupon bonds with par value $1,000. At the time ofissuance, the yield to maturity was 6 percent and the bonds sold at par. The bonds are currently selling at 110 percent of their par value. Assuming that the coupon is paid annually, what is the current yield to maturity?(a)3.77%(b)5.18%(c)5.27%(d)5.46%Answer: (b)8-1040.Potemkin Corporation plans to raise $10,000,000 in funds by issuing zero coupon $1,000 par valuebonds with a 25 year maturity. Potemkin Corporation is able to issue these bonds at an after tax cost of debt of 12%. To the nearest whole number, how many bonds must Potemkin Corporation issue?(a)10,000 bonds(b)42,919 bonds(c)125,837 bonds(d)170,000 bondsAnswer: (d)41.Calculate the years to maturity for a bond based on the following information. The bond trades at$950, it has a par value of $1,000, a coupon rate of 11%, and a required rate of return of 12%.(a)8 years(b)12 years(c)15 years(d)16 yearsAnswer: (a)pute the current price of Walsingham bonds based on the following information. Walsinghambonds have a $1,000 par value, have 20 years remaining until maturity, a 12 percent coupon rate, anda yield to maturity of 10.5 percent.(a)$858.42(b)$982.47(c)$1,119.52(d)$1,124.41Answer: (d)pute the yield to maturity of Arundel bonds based on the following information. Arundel bondshave a $1,000 par value, 25 years remaining until maturity, an 11% coupon rate, and a current market price of $1,187.(a)4.55%(b)9.08%(c)9.27%(d)13.17%Answer: (b)8-1144.When prices of U.S Treasury strips are listed, principal from a Treasury bond is denoted by the letters________.(a)ci(b)tb(c)bp(d)npAnswer: (c)45.The ________ is the price at which dealers in Treasury bonds are willing to sell.(a)bid price(b)asked yield(c)ask price(d)maturity priceAnswer: (c)46.The ________ is the price at which dealers are willing to buy.(a)bid price(b)ask price(c)asked yield(d)maturity priceAnswer: (a)47.The bid price of a bond is always ________ the ask price.(a)greater than(b)less than(c)identical to(d)it varies from case to caseAnswer: (b)8-1248.The ________ of a bond price measures the sensitivity of the bond price to a change in the yield tomaturity.(a)callability(b)convertibility(c)immutability(d)elasticityAnswer: (d)49.Suppose you buy a 25-year pure discount bond with a face value of $1,000 and a yield of 6% per year.A day later market interest rates drop to 5% and so does the yield on your bond. What is theproportional change in the price of your bond?(a)a decrease of 26.74%(b)a decrease of 21.10%(c)an increase of 26.74(d)an increase of 21.20Answer: (c)50.Suppose you buy a 25-year pure discount bond with a face value of $1,000 and a yield of 6% per year.A day later market interest rates rise to 5% and so does the yield on your bond. What is the elasticityof the bond price to the change in the yield?(a)–0.62%(b)–1.27%(c)–1.60%(d)–2.67%Answer: (c)8-13Short Problems1.Consider a five-year fixed-income security which promises $120 per year. Calculate the value of thesecurity if the market interest rate rises from 5% to 6% per year.Answer:n i PV PMT Result5 5 ? $120 PV = $519.54n i PV PMT Result5 6 ? $120 PV = $505.48The price drops by $14.06.2.Consider a four-year fixed-income security which promises $120 per year. Calculate the value of thesecurity if the market interest rate falls from 7% to 6% per year.Answer:n i PV PMT Result4 7 ? $120 PV = $406.47n i PV PMT Result4 6 ? $120 PV = $415.81The price increases by $9.34.3.Discuss the general principles about the relation between prices and yields of coupon bonds.Answer:Principle #1: Par Bonds.If a bond's price equals its face value, then its yield equals its coupon rate.Principle #2: Premium Bonds.If a coupon bond has a price higher than its face value, its yield to maturity is less than its current yield, which is in turn less than its coupon rate.Principle #3: Discount Bonds.If a coupon bond has a price lower than its face value, its yield to maturity is greater than its current yield, which is in turn greater than its coupon rate.8-144.List some reasons why differences in the prices of fixed-income securities of a given maturity mayarise.Answer:Differences in the prices of fixed-income securities of a given maturity may arise due to differences in coupon rates, default risk, tax treatment, callability and convertibility.5.Explain why it is important to have a method for valuation of fixed-income contracts.Answer:(1) The parties to the contracts need to have an agreed-upon valuation procedure insetting the terms of the contracts at the outset.(2) Since market factors determining the value of fixed-income contracts change overtime, both buyers and sellers have to reevaluate them each time they are traded.6.Consider a five-year pure discount bond with a face value of $1,000. If its current price is $775,compute its annualized yield.Answer:n i PV FV Result5 ? –$775 $1,000 i = 5.23%7. A four-year bond has a coupon rate of 6% per year, a price of $950, and a face value of $1,000.Calculate its current yield and yield to maturity.Answer:Current yield = coupon/price= 60/950= 6.32%To calculate yield to maturity:n i = YTM PV FV PMT Result4 ? –$950 $1,000 $60 YTM = 7.49%8-158.What is the current price of a bond that has a coupon rate of 7%, a return rate of 8%, and a face valueof $1,000? Assume that this bond will mature in five years. Compare the current price of the bond against its face value.Answer:n i = YTM PV FV PMT Result5 8 ? $1,000 $70 PV = $960.07Because the price of the bond is below its face value, it is a discount bond.9. A five-year coupon bond has a coupon rate of 5%, a return rate of 6%, and a face value of $1,000.What is its current price and how does it compare to its face value?Answer:n i = YTM PV FV PMT Result5 6 ? $1,000 $50 PV = $957.88Because the price of the bond is below its face value, it is a discount bond.10.What is the yield to maturity of a five-year coupon bond with a current price of $850, a face value of$1,000, and coupon rate of 7%?Answer:n i = YTM PV FV PMT Result5 ? –$850 $1,000 $70 YTM = 11.07%11.Five years ago, English and Co. issued 30 year coupon bonds with a par value of $1,000. At the timeof issuance, the yield to maturity was 6 percent per year and the bonds sold at par. The bonds are currently selling at 85 percent of their par value. Assuming that the coupon is paid annually, what is the current yield to maturity?Answer:Five years ago, the bonds were issued at par, which means at the time yield to maturity equaled coupon rate. So the annual coupon is 0.06 x $1,000 = $60.For the current yield to maturity:n i = YTM PV FV PMT Result25 ? –850 1,000 60 YTM = 7.33%8-1612.Eisenstein Corporation plans to raise $100,000,000 in funds by issuing zero-coupon $1,000 par valuebonds with a 30-year maturity. Assuming that Eisenstein Corporation is able to issue these bonds at an after-tax cost of debt of 11%, how many bonds must Eisenstein Corporation issue?Answer:First, calculate the price of an Eisenstein bond:n i = YTM PV FV PMT Result30 11 ? 1,000 0 PV = $43.68The corporation wants to raise $100,000,000, so it must issue the following number of bonds:$100,000,000/$43.68 = 2,289,377 bonds13.Currently, an Eisenstein bond trades at $1,050 per bond and has a coupon rate of 10%. Assuming thebond matures at a $1,000 value, and the required rate of return is 9.5%, in how many years does an Eisenstein bond mature?Answer:n i = YTM PV FV PMT Result? 9.5 –1,050 1,000 0 n = 33pute the current price of Walsingham bonds based on the following information. Walsinghambonds have a $1,000 par value, 26 years remaining until maturity, a 13 percent coupon rate, and a current yield to maturity of 11 percent per year.Answer:n i = YTM PV FV PMT Result26 11 ? 1,000 0 PV = $1,169.6915.Health & US Corporation is a major pharmaceutical firm that has recently experienced a marketreevaluation. Currently, the firm has a bond issue outstanding with 18 years to maturity and a coupon rate of 9 percent, with interest paid annually. The required rate of return of this debt issue has risen to15 percent. Calculate the current price of this bond.Answer:n i = YTM PV FV PMT Result18 15 ? 1,000 90 PV = $632.328-1716.Calculate the coupon rate, current yield, and the yield to maturity for a bond that has $1,000 par value,pays a coupon of $85 annually, matures in 20 years, and has a current price of $985.25.Answer:Coupon rate = 85/1,000= 8.5% per yearCurrent yield = coupon/price= 85/985.25= 8.63%For yield to maturity:n i = YTM PV FV PMT Result20 ? –985.25 1,000 85 YTM = 8.66%17.Suppose you buy a 20-year pure discount bond with a face value of $1,000 and a yield of 7% per year.A day later, market interest rates rise to 8% and so does the yield of your bond. What is theproportional change in the price of your bond? What is the elasticity of the bond price to the change in the yield?Answer:n i = YTM PV FV PMT Result20 7 ? 1,000 0 PV = $258.42n i = YTM PV FV PMT Result20 8 ? 1,000 0 PV = $214.55The price of the bond decreased by $43.87, so the proportional decline in price is $43.87/$258.42 = 16.98%.Elasticity is % change in price over % change in YTM, or –16.98%/14.29% = –1.19.18.As of today, January 1, 2009, Flanders Corporation is holding $10,000,000 in long-term debt at parbonds. The bonds have a par value of $1,000, mature on January 1, 2019, and pay a 5 percent coupon.Calculate the current market value of Flanders’ debt, if the yield to maturity is 7 percent.Answer:Total number of bonds = $10,000,000/$1,000 = 10,000 bondsn i PV FV PMT Result10 7 ? 1,000 50 PV = $859.50The current market value = $859.50 x 10,000= $8,578,8008-18Longer Problems1.Consider the purchase of a 30-year pure discount bond with a face value of $1,000 and a yield of 7%per year. A week later the market interest rate rises to 8% and o does the yield on your bond.Calculate the proportional change in the price of the bond. What basic principle in valuation of known cash flows does this illustrate?Answer:n i PV FV Result30 7 ? $1,000 PV = $131.37n i PV FV Result30 8 ? $1,000 PV = $99.38The price drops by $31.99, so a rise of 1% in market interest rates results in a $31.99/$131.37 =24.35% drop in the price of the bond. The general principle illustrates is that a change in marketinterest rates causes a change in the opposite direction in the market value of the bonds.2.Suppose our want to know the price of a 15-year 8% coupon bond which pays interest annually. Theface value of the bond is $1,000.(a) You have been told the yield to maturity is 9%. What is the price? Assume coupons arepaid annually.(b) What is the price if coupons are paid semi-annually and the yield to maturity is 9% peryear?Answer:(a) If coupons are paid annually:n i PV FV PMT Result15 9 ? $1,000 $80 PV = $919.39(b) If coupons are paid semi-annually:n i PV FV PMT Result30 4.5 ? $1,000 $40 PV = $918.563. A media report recently stated that prices of 30-year treasury bonds increased substantially becauseinflation was falling and the Federal Reserve was not expected to increase interest rates. How would you describe this interpretation using discounted cash flow techniques?Answer:Inflation is a component of i, the required return on bonds, so when inflation decreases, idecreases and bond prices rise.8-194.Suppose you want to know the price of a 10-year 7% coupon bond which pays interest annually. Theface value of the bond is $1,000.(a) What is the price of this bond if the yield to maturity is 8%?(b) What is the current yield of this coupon bond?(c) What is the price of this bond if coupons are paid semi-annually and the yield to maturityis 8%?Answer:a. n i PV FV PMT Result10 8 ? $1,000 $70 PV = $932.90b. Current yield = coupon/price= 70/932.9= 7.5%c. n i PV FV PMT Result20 4 ? $1,000 $35 PV = $932.055.Suppose you buy a 30-year pure discount bond with a face value of $1,000 and a yield of 9% per year.A day later, market interest rates fall to 8% and so does the yield of your bond. What is theproportional change in the price of your bond? What is the elasticity of the bond price to the change in the yield?Answer:n i = YTM PV FV PMT Result30 9 ? 1,000 0 PV = $75.37n i = YTM PV FV PMT Result30 8 ? 1,000 0 PV = $99.38The price of the bond decreased by $24.01, so the proportional increase in price is $24.01/$75.37 = 31.86%.Elasticity is % change in price over % change in YTM, or 31.86%/–11.11% = –2.87.8-206.As part of a reorganization plan, a bankruptcy court has permitted a new indenture on an outstandingbond issue to be put into effect for Leicester Corporation, which recently filed for bankruptcy. It is known that the issue has $1,000 par value per bond, 15 years to maturity, and a coupon rate of 11 percent paid annually. The reorganization plan allows the following arrangement: In years 1 through 7, there will be no coupon paid (that is, coupon = $0). In years 8 through 15, regular couponpayments will resume. At maturity in year 15, the par value plus the sum of all coupon payments that were not paid during years 1 through 7 must be paid. However, no interest will be paid on thedeferred coupon payments. If the required rate of return is 18 percent, calculate the current price the Leicester bonds would sell for in the market.Answer:Coupon = 0.11 x 1000= $110 per yearThe present value of this cash flow stream, using a discount rate of 18%, is $288.62 per bond.8-217.The Dharma Corporation has recently experienced a market reevaluation. Currently, the firm has abond issue outstanding with 18 years to maturity, a face value of $1,000, and a coupon rate of 10 percent paid annually. The required rate of return on this debt issue has risen to 16 percent. Calculate the current price of this bond.Answer:n i = YTM PV FV PMT Result18 16 ? 1,000 100 PV = $650.928.Calculate the coupon rate, current yield, and the yield to maturity for a bond that has $1,000 par value,pays $95 interest annually, matures in 25 years, and has a current price of $1,087.75.Answer:Coupon rate = 95/1,000= 9.5% per yearCurrent yield = coupon/price= 95/1,087.75= 8.73%To calculate yield to maturity:n i = YTM PV FV PMT Result25 ? –1,087.75 1,000 95 YTM = 8.63%9.As of today, January 1, 2009, Gala Worldwide is holding $1,000,000 in long-term debt at par bonds.The bonds have a par value of $1,000, mature on January 1, 2029, and pay a 7 percent coupon.Cal culate the current market value of Flanders’ debt, if the yield to maturity is 8 percent.Answer:Total number of bonds = $100,000,000/$1,000 = 100,000 bondsn i PV FV PMT Result20 8 ? 1,000 70 PV = $901.85The current market value = $901.85 x 100,000= $90,185,0008-22。
兹维博迪金融学第二版试题库4TB(1)
兹维博迪金融学第二版试题库4T B(1)-CAL-FENGHAI.-(YICAI)-Company One1Chapter FourAllocating Resources Over TimeThis chapter contains 46 multiple-choice questions, 18 short problems and 9 longer problems. Multiple Choice1.________ is the process of going from present value to future value, whereas ________ isfinding the present value of some future amount.(a)Discounting; compounding(b)Compounding; annualizing(c)Compounding; discounting(d)Discounting; leasingAnswer: (c)2.________ refers to the interest rate at which money received before the end of the planninghorizon can be reinvested.(a)Internal rate(b)Reinvestment rate(c)Cost of equity(d)Compound interestAnswer: (b)3.The difference between an immediate annuity and an ordinary annuity is ________.(a)the number of periods(b)the amount of the payments(c)the interest rate(d)the timing of the paymentsAnswer: (d)4.The preferred stock of Tavistock Realty offers a cash dividend of $2.28 per year and it isselling at a price of $110 per share. What is the yield of Tavistock Realty preferred stock?(a)2.07%(b)2.12%(c) 2.28%(d)48.25%Answer: (a)5.Consider the situation where you have won a $10 million lottery to be received in 25 annualequal payments of $400,000. What will happen to the present value of these winnings if the interest rate increases during the next 25 years?(a)it will not change(b)it will be worth more(c)it will be worth less(d)it cannot be determinedAnswer: (c)6.What is the effective annual rate on a bank account that has APR of 8 percent with interestcompounded quarterly?(a)6.12%(b)8.24%(c)8.48%(d)17.17%Answer: (b)7.You take out a loan with an APR of 10% with monthly compounding. What is the effectiveannual rate on your loan?(a)23.87%(b)21.6%(c)19.56%(d)18%Answer: (a)8.The CFO of CyberHelp Inc. has $250,000 in cash today that he wants to invest. How muchwill this investment be worth in four years if the current interest rate is 8%(a)$270,000(b)$330,000(c)$340,125(d)$342,150Answer: (c)9.If you purchase a $12,000 certificate of deposit today with an APR of 14%, with quarterlycompounding, what will the CD be worth when it matures in 5 years?(a)$20,846.99(b)$20,865.60(c)$23,104.97(d)$23,877.47Answer: (d)10.The CFO of CyberChain Inc. plans to unleash a media campaign that is expected to cost $15million four years from today. How much cash should she set aside to pay for this if the current interest rate is 13%(a)$9.2 million(b)$13.3 million(c)$14.4 million(d)$16.9 millionAnswer: (a)11.The NPV is a measure of how much your ________ wealth changes as a result of your choiceand if the NPV is ________it does not pay to undertake that choice.(a)future; negative(b)current; negative(c)current; positive(d)future; positiveAnswer: (b)12.The ________ is the rate that one can earn somewhere else if one did not invest in theproject under evaluation.(a)opportunity cost of capital(b)cost of debt(c)cost of equity(d)weighted average cost of capitalAnswer: (a)13.You are trying to decide whether or not to buy a bond for $990 that will make one paymentfor $1,050 four years from today. What is the internal rate of return on the bond’s cash flows?(a)1.06%(b)1.48%(c)10.6%(d)14.8%Answer: (b)14.Calculate the NPV of the following cash flows: you invest $3,000 today and receive $300 oneyear from now, $700 two years from now, and $1,100 starting four years from now. Assume that the interest rate is 7%.(a)–$1,962.62(b)–$1,269.04(c)$1,269.04(d)$1,962.62Answer: (b)15.After each payment of an amortized loan, the outstanding balance is reduced by the amountof principal repaid. Therefore, the portion of the payment that goes toward the payment of interest is ________ than the previous period’s interest payment and the portion going toward repayment of principal is ________ than the previous period’s.(a)greater; lower(b)lower; lower(c)greater; greater(d)lower; greaterAnswer: (d)16.The present value of a future amount can be calculated with the equation ________.(a) PV = FV(1 + i)n(b) PV = FV(1 + i)(n)(c) PV = FV/(1 + i)n[NOTE: this should be formatted as a stacked fraction](d) PV = FV/(1 + i)(n) [NOTE: this should be formatted as a stacked fraction]Answer: (c)17.To compute the future value of a present amount use the compound amount factor definedas ________.(a) FV = PV(1 + i)n(b) FV = PV(1 + i)(n)(c) FV = PV/(1 + i)n [NOTE: this should be formatted as a stacked fraction](d) FV = PV/(1 + i)(n) [NOTE: this should be formatted as a stacked fraction]Answer: (a)18.The earnings of BGB Computers have grown from $3.20 to $6.90 in 6 years. Determine theannual compound rate.(a)1.14%(b)13.7%(c)15.6%(d)115.6%Answer: (b)19.In five years you intend to go to graduate school. For each of your four years in graduateschool, you need to have a fund that will provide $25,000 per year at the beginning of each year. If the interest rate is 9% throughout, how much must you put in the fund today?(a)$64,996(b)$57,379(c)$50,184(d)$16,249Answer: (b)20.As part of your new job at CyberInc. the company is providing you with a new Jeep. Yourfirm will lease this $34,000 Jeep for you. The terms of the lease are seven annual payments at an interest rate of 10%, which will fully amortize the cost of the car. What is the annual lease payment?(a)$6,984.39(b)$5,342.86(c)$4,857.14(d)$3,584.00Answer: (a)21.A rule of thumb with using the internal rate of return is to invest in a project if the IRR is________ the opportunity cost of capital.(a)greater than(b)less than(c)less than or equal to(d)one-half ofAnswer: (a)22.When considering the timeframe of an investment, a rule followed by some is to choose theinvestment with ______ payback period.(a)the longest(b)the shortest(c)no(d)an infiniteAnswer: (b)23.A major problem with using the internal rate of return rule is ________.(a)there may be multiple cash outflows and multiple cash inflows(b)the internal rate of return may not exist(c)the internal rate of return may not be unique(d)all of the aboveAnswer: (d)24.The NPV is the difference between the ________ value of all ________ cash inflowsminus the ________ value of all current and future cash outflows.(a)future; present; present(b)present; future; present(c)present; present; future(d)present; future; futureAnswer: (b)25.When considering effective interest rates, as the compounding frequency increases, theeffective annual rate gets ________ and ________ but approaches ________.(a)larger; larger; a limit(b)smaller; smaller; a limit(c)larger; larger; infinity(d)smaller; smaller; infinityAnswer: (a)26.In 10 years you wish to own your business. How much will you have in your bankaccount at the end of 10 years if you deposit $300 each quarter (assume end of the period deposits) Assume the account is paying an interest rate of 12% compounded quarterly.(a)$20,220(b)$21,060(c)$21,626(d)$22,620Answer: (d)27.The director of marketing for CyberProducts Inc. plans to unleash a media blitz that isexpected to cost $4.7 million three years from today. How much cash should she set aside today to pay for this if the current interest rate is 11%(a) $6.43 million(b) $4.23 million(c) $3.62 million(d) $3.44 millionAnswer: (d)28.If you purchased a $10,000 certificate of deposit today with an APR of 12%, with monthlycompounding, what would be the CD worth when it matures in 6 years?(a) $56,340(b) $20,468(c) $19,738(d) $5,066Answer: (b)29.The manufacturing manager of CyberProducts Inc. estimates that she can save the company$16,000 cash per year over the next 8 years by implementing a recycling plan. What is the value of the savings today if the appropriate interest rate for the firm is 9% Assume cash flows occur at the end of the year.(a) $64,240(b) $88,557(c) $96,527(d) $128,000Answer: (b)30.If the exchange rate between the U.S. dollar and the French Franc is $0.17 per French Franc,the dollar interest rate is 5.5% per year, and the French Franc interest rate is 4.5% per year, what is the "break-even" value of the future dollar/French Franc exchange rate one year from now?a)$0.172 per FFb)$0.179 per FFc)$5.827 per FFd)$5.882 per FFAnswer: (a)31.In any time value of money calculation, the cash flows and the interest rate must bedenominated ________.a)in the same currencyb)in different currenciesc)in terms of a third currencyd)in terms of the ECUAnswer: (a)32.If the exchange rate between the U.S. dollar and the Japanese yen is $0.00745 per yen, thedollar interest rate is 6% per year, and the Japanese interest rate is 7% per year, what is the “break-even” value of the future dollar/yen exchange rate one year from now?a)$135.49 per yenb)$134.23 per yenc)$0.00752 per yend)$0.00738 per yenAnswer: (d)33.Consider the situation where you are trying to decide if you should invest in a Swiss projector an American project. Both projects require an initial outlay of $15,000. The Swiss project will pay you 17,100 Swiss Francs per year for 6 years, whereas the American one will pay you $11,000 per year for 6 years. The dollar interest rate is 5% per year, the Swiss Franc interest rate is 6% per year, and the current dollar price of a Swiss Franc is $0.68 per Swiss Franc. Which project has the higher NPVa)the U.S. project; its NPV is $55,832b)the U.S. project; its NPV is $40,833c)the Swiss project; its NPV is $42,179d)the Swiss project; its NPV is $57,178Answer: (c)34.The ________ is the rate denominated in dollars or in some other currency, and the________ is denominated in units of consumer goods.a)nominal interest rate; inflation interest rateb)nominal interest rate; real interest ratec)real interest rate; inflation interest rated)real interest rate; nominal interest rateAnswer: (b)35.Consider the situation where you are trying to decide if you should invest in a British projector U.S. project. Both projects require an initial outlay of $55,000. The British project will pay you 30,000 pounds per year for 6 years, whereas the American one will generate $40,000 per year for 6 years. The British interest rate is 5% per year, and the American interest rate is 6% per year; the current dollar price of a pound sterling is $1.6320 per pound sterling.Which project has the higher NPV?a)choose the U.S. one, it has a NPV of $196,693b)choose the U.S. one, it has a NPV of $141,693c)choose the British one, it has a NPV of $248,506d)choose the British one, it has a NPV of $193,506Answer: (d)36.What is the real interest rate if the nominal interest rate is 9% per year and the rate ofinflation is 6% per year?a) 1.5%b) 2.75%c) 2.83%d)7.5%Answer: (c)37.What is the nominal interest rate if the real rate of interest is 4.5% and the rate of inflationis 6% per year?a)10.5%b)10.77%c)10.86%d)14.5%Answer: (b)38.What is the real rate of interest if the inflation rate is 6% per year and the nominal interestrate per year is 12.5%a) 1.32%b) 6.13%c) 5.78%d)11.79%Answer: (b)pute the real future value, to the nearest dollar, of $2,000 in 35 years time. The realinterest rate is 3.2%, the nominal interest rate is 8.36%, and the rate of inflation is 5%.a)$6,023b)$6,853c)$33,223d)$11,032Answer: (a)40.The real interest rate is 3.2%, the nominal interest rate is 8.36% and the rate of inflation is5%. We are interested in determining the future value of $200 in 35 years time. What is the future price level?a) 2.91b) 3.012c) 5.516d)16.61Answer: (c)41.Suppose your child is 9 years old and you are planning to open a fund to provide for thechild’s college education. Currently, tuition for one year of college is $22,000. How much must you invest now in order to pay enough for the first year of college nine years from now, if you think you can earn a rate of interest that is 4% more than the inflation rate?a)$21,154b)$16,988c)$15,585d)$15,457Answer: (d)42.Suppose you have a child who is 10 years old and you are planning to open a fund to providefor the child’s college education. Currently, tuition for one year is $22,000. Your child is planning to travel for two years before starting college. How much must you invest now in order to pay enough for the first year of college ten years from now, if you think you can earn a rate of interest that is 5% more than the inflation rate?a)$10,190b)$13,506c)$13,660d)$20,952Answer: (b)43.When considering a plan for long run savings, if one does not have an explicit forecast ofinflation, then one can make plans in terms of:a)constant real payments and a real rate of interestb)constant nominal payments and a nominal rate of interestc)constant real payments and a nominal rate of interestd)constant nominal payments and a real rate of interestAnswer: (a)44.If the real rate is 4% and the rate of inflation is 6%, what is the nominal rate?a)8.16%b)10.16%c)10.24%d)10.36%Answer: (c)45.You have an investment opportunity with a nominal rate of 6% compounded daily. If youwant to have $100,000 in your investment account in 15 years, how much should you deposit today, to the nearest dollar?a.$43,233b.$41,727c.$40,930d.$40,660Answer: (d)46.You have determined the present value of an expected cash inflow stream. Which of thefollowing would cause the stream to have a higher present value?a)The discount rate increases.b)The cash flows are paid over a shorter period of time.c)The discount rate decreases.d)Statements (b) and (c) are both correct.Answer: (d)Short Problems1.CyberNow is opening an office in the U.S. CyberNow expects cash flows to be $500,000 forthe first year, $530,000 for the second year, $560,000 in the third year. If CyberNow uses 12 percent as its discount rate, what is the present value of the cash flows Assume cash flows are made at the end of the year.Answer: PV = FV/(1 + i)n= 500,000/(1.12)1 + 530,000/(1.12)2 + 560,000/(1.12)3= 446,429 + 422,513 + 398,597= $1,267,5392. GeorgiaSun Inc. has preferred stock that pays an annual dividend of $10.50. If the securityhas no maturity (an “infinite” life), what is its value to an investor who wishes to obtain an8.5 percent rate of return?Answer: PV of a level Perpetuity = $10.50/0.085= $123.533.Let us suppose you have a choice between investing in a bank savings account that pays 9%compounded annually (Bank Yearly) and one that pays 8.5% compounded daily (Bank Daily).(Assume this is based on 365 days). Using only effective annual rates, which bank would you prefer?Answer: Effective annual rate: Bank Yearly = 9%Effective annual rate: Bank Daily = [1 + 0.085/365]365 – 1= 8.87%You would prefer Bank Yearly because you will earn more money.4.Steptoe’s bank account has a floating interest rate on certain deposits. That is, every yearthe interest rate is adjusted. Four years ago Steptoe deposited $35,000 into the bank account, when interest rates were 6%. The following year the rate was 6.5%, last year the rate was 8% and this year the rate fell to 7.5%. How much will be in his account at the end of the year Assume annual compounding.Answer: Amount = $35,000 x 1.06 x 1.065 x 1.08 x 1.075= $45,872.855.Calculate the net present value of the following cash flows: you invest $4,000 today andreceive $400 one year from now, $900 two years from now and $2000 three years from now.Assume the interest rate is 9%.Answer: NPV = $400/(1.09) +$900/(1.09)2 + $2,000(1.09)3 –$4,000= $366.97 + $757.51 + $1,544.37 – $4,000= $ -1,331.156.The manufacturing manager of CyberNow Inc. estimates that she can save the company$20,000 cash per year over the next 5 years by implementing a recycling plan. What is the value of the savings today if the appropriate interest rate for the firm is 8%. Assume that cash flows occur at the end of the year.Answer:n i PV FV PMT Result5 8 ? 0 $20,000 PV = $79,854.207.Stroll Inc. has been offered a $2,000,000 jet under a 10 year loan agreement. The loanrequires Stroll Inc. to make equal, annual, end-of-year payments that include both principal and interest on the outstanding balance. The interest rate on the loan is 11%. Calculate the amount of these annual payments.Answer:n i PV FV PMT Result10 11 –$2,000,000 0 ? PMT = $339,602.858.Herb Flint decides to put $2,000 a year into an IRA fund over his 35 year working life andthen retire. Assume the deposits are made at the end of the year. If the account earns 11% compounded annually, what will Herb have in the account when he retiresAnswer:n i PV FV PMT Result35 11 0 ? $2,000 FV = $683,179.119.Regarding retirement funds, there is some debate as to whether investors should invest atthe beginning of the year rather than at the end of the year. If an investor invests $2,000 per year at 12% over a 35 year period, what is the difference between the two funds?Answer: End of Year Fund:n i PV FV PMT Result35 12 0 ? $2,000 PV = $863,326.99Under an immediate annuity the entire amount earns interest for an additional year. So the FV for the immediate annuity is $863,326.99 X 1.12 = $996,926.23.Therefore the difference between the funds is: $996,926.23 – $863,326.99 = $103,599.24 10.You have the chance to buy a bond for $900 that will make one payment of $1,100 six yearsfrom today. What is the internal rate of return in the bond’s cash flows?Answer: 900(1 + i)6 = 1,100(1 + i)6 = 1.222i = (1.222)1/6 - 1i= 3.40%11.Consider the situation where you are trying to decide if you should invest in an Australianproject or an American project. Both projects require an initial outlay of $20,000. TheAustralian project will pay you Aust $40,000 per year for 6 years, whereas the American one will generate $25,000 per year for 6 years. The Australian dollar interest rate is 6% per year and the American interest rate is 5% per year; the current dollar price of an Australian dollar is $0.65 per Australian dollar. Which project has the higher NPV?Answer:American Project:n i PV FV PMT PV Result6 5 ? 0 $25,000 $126,892Australian Project:n i PV FV PMT PV Result6 6 ? 0 $40,000 $196,693 (Aust)NPV US project = $126,892 - $20,000 = $106,892Today the Australian project is worth A$196,693 x $0.65 per Aust= $127,850.45 (in U.S. dollars)NPV Aust project = $127,850.45 - $20,000 = $107,850.45Choose the Australian project since it has a higher NPV.12.If the exchange rate between the U.S. dollar and the Dutch Guilder is $0.49903 per Guilder,the dollar interest rate is 7% per year and the Dutch interest rate is 8% per year, what is the “break-even” value of the future dollar/Guilder exchange rate one year from now?Answer:Today One Year From Now$1 @7% $1.072.00389 Guilders @8% 2.16420 Guilders“Break-even” point = $1.07/2.16420 Guilders= $0.49441 per Guilder13.What is the real rate of interest if the nominal rate is 11.5% per year and the rate of inflationis 7% per year?14.Answer:Real interest rate = Nominal interest rate – rate of inflation1 + rate of inflation= 0.115 – 0.071.07= 0.04206Real interest rate = 4.21%15.I have $200 today and am interested in finding out what its equivalent real future value willbe in 40 years. What are the two ways I have available to me in computing the real future value?Answer:pute the future value using the real rate of interest.pute the nominal future value using the nominal rate, and then deflate it tofind the real future value.16.The real rate of interest is 3.756%, the nominal rate of interest is 10.5% and the rate ofinflation is 6.5%. What is the real future value of $2,000 in 40 years time Show bothmethods.Answer:Method One:Real future value = $,2000 x 1.0375640= $8,741Method Two:Nominal future value = $2,000 x 1.10540= $108,522.83Future price level = 1.06540= 12.16Real FV = nominal future valuefuture price level= $108,522.83 12.416 = $8,74117.As part of your new job at CyberInc. the company is providing you with a new Jeep. Yourfirm will lease this $34,000 Jeep for you. The terms of the lease are seven annual payments at an interest rate of 10%, which will fully amortize the cost of the car. Assuming that all payments are made on time and no additional money is paid towards the lease in any year, what percent of the 5th payment will go towards repayment of principal?18.Answer:n i PV FV PMT Result7 10 –$34,000 0 ? PMT = $6,984.39The monthly payment = $6,984.39Of the monthly payment, principal = $5,247% principal repayment in 5th payment =$5,247/$6,984.39= 75.12%19.You have decided to buy a car that costs $35,000. The dealer offers you a 5 year loan withmonthly payments of $814 per month. What is the annual interest rate on the loan?Answer:n i PV FV PMT Result60 ? –$35,000 0 $814 i = 1.165The annual nominal interest rate = 1.165 * 12= 13.98% per year20.A subscription to the magazine “National Tattler” states that you can purchase a one yearsubscription for $45 today, which can be renewed after a year at this rate. Alternately, you can purchase a two year subscription for $80 today. If you wish to subscribe to the magazine for two years and your required rate of return is 9% per year, which subscription offershould you choose?Answer:PV of the two year subscription = $80PV of one year subscription and renewal = $45 + 45/1.09= $86.28The two year subscription is the cheaper alternative.Longer Problems1.Heathcliff is currently 25 years old and expects to retire at age 65. Suppose that Heathclifftakes a job immediately and can earn $35,000 for the remainder of his working life. What is the present value of his future earnings?Answer:n i PV FV PMT Result40 5 ? 0 $35,000 PV = $600,5682.In order to finance your dream home, you are considering borrowing $120,000. The annualpercentage rate is 9% and payments are made annually over 5 years. Construct the loan-amortization schedule for the annual paymentsAnswer:n i PV FV PMT Result5 9 –$120,000 0 ? PMT = $30,856Loan Amortization Schedule is as follows:3.You are 60 years old and are considering whether it pays to buy an annuity from aninsurance company. For a cost of $25,000, the insurance company will pay you $3,000 per year for the rest of your life. If you can earn 8% per year on your money in a bank account and expect to live until age 80, is it worth buying the annuity What implied interest rate is the insurance company paying you4.Answer: First compute the present value of the annuity.n i PV FV PMT Result20 8 ? 0 $3,000 PV = $29,454.44Now compute the NPV of the investment of the annuity:NPV = $29,454.44 - $25,000= $4,454.44So the annuity looks worth buying.To compute the implied interest rate on the annuity, we need to find thediscount rate that makes the NPV zero. On a financial calculator, we find theanswer to be 10.32% per year.4. Gemma Peel is 30 years today and she wishes to accumulate enough money over the next 35 years to provide for a 20 year retirement annuity of $100,000 at the beginning of each year, starting with her 65th birthday. Assume the rate of the return over the entire period will be 11%. What is the present value of this annuity?Answer:n i PV FV PMT Result20 11 ? 0 $100,000 PV = $883,9295. The exchange rate between the Canadian dollar and the U.S. dollar is currently $0.69190 perCanadian dollar, the dollar interest rate is 6% per year, and the Canadian dollar interest rate is 7% per year. You have $100,000 in a one-year account that allows you to choose between either currency and it pays the corresponding interest rate. What is the “break-even” value of the dollar/Canadian dollar exchange rate one year from now?Answer:U.S. today One year from now $1 @6% $1.06Canadian today One year from now$1.44530(Cdn) @7% $1.54647“Break-even” point = $1.06/1.54647 (Cdn dollar)= $0.68543 per Canadian dollar6.Assume that you have just taken out a $300,000 30 year mortgage with monthly paymentsat an annual 8 percent rate. At the end of the 3rd year (after 36 payments), you begin paying an additional $100 each month towards the mortgage. That is, for months 37 onward you make the scheduled payment plus an extra $100 each month. To the nearest whole number, how many additional payments (payments in addition to the first 36) must you make before the mortgage is paid off?7.Answer:First compute the monthly payment-PV FV Interest N Result________-300,000 0 0.67 360 360 PMT = $2,201.29Initially, you made $2,201.29 for the first three years. After 36 payments, theremaining balance = $291,840.45. After period 37, compute number of additional payments now that your monthly payment is $2,301.29.PV FV Interest PMT Result__-$291,840.45 0 0.67 $2,301.29 N = 281You must make 281 additional payments before the mortgage is paid off.8.The company you work for has been experiencing financial difficulties and has just filed areorganization plan. Three years ago, one of the firm’s creditors lent the firm $80,000 on a ten year annual payment loan at a 15% interest rate. Immediately after the firm made the third payment, as a result of the court settlement, the creditor agreed to decrease thecurrent outstanding balance of the loan by 20%, to lower the interest rate to 10%, and to increase the remaining term of the loan to 15 years. What will be the new annual payments on the firm’s loan, assuming all these changes take place?Answer:Under the original plan, your firm had annual payment obligations of:n i PV FV PMT Result10 15 –$80,000 0 ? PMT = $15,940Originally, your firm had to pay $15,940 per year to its creditors.After the third balance, the remaining balance = $66,318Under the new arrangement, new outstanding balance = $66,318 X 0.80= $53,054Under the new payment arrangement, annual payments are:n i PV FV PMT Result15 10 –$53,054 0 ? PMT = $6,975.219.Five banks offer CDs at the following stated annual percentage rates:Bank A: 10% APR compounded annuallyBank B: 9.8% APR compounded semiannuallyBank C: 9.6% APR compounded quarterlyBank D: 9.5% APR compounded monthlyBank E: 9.4% APR compounded dailyAnton has inherited $150,000 and decides to invest the money in a 20 year CD. He decides to invest the money with Bank E. If Anton had invested his money in the CD offering the best rate instead of Bank E, how much more money would he have had after 20 years?Answer:First determine the effective annual rates at each bank.Bank A: Effective Annual Rate = 10% per yearBank B: Effective Annual Rate = 10.04% per yearBank C: Effective Annual Rate = 9.95% per yearBank D: Effective Annual Rate = 9.92% per yearBank E: Effective Annual Rate = 9.85% per yearBest Account = Bank BAfter 20 years, the FV at Bank B:n i PV FV PMT Result20 10.04 –$150,000 ? 0 FV = $1,016,489.49Compare the above with the FV at Bank E after 20 years:n i PV FV PMT Result20 9.85 –$150,000 ? 0 FV = $981,957.03If Anton had invested with Bank B, he would have earned $1,016,489.49 - $981,957.03 = $34,532.46 more.。
(完整word版)兹维博迪金融学第二版试题库2TB
Chapter TwoFinancial Markets and InstitutionsThis chapter contains 49 multiple-choice questions, 20 short problems and 10 longer problems。
Multiple Choice1. A market that has no one specific location is termed a(n) ________ market.(a)over—the—counter(b)geographic location(c)intermediary(d)conceptualAnswer: （a)2. ________ problems arise because parties to contracts often cannot easily monitor or control one another。
(a)Payment(b)Counter(c)Incentive(d)ExchangeAnswer: （c）3. Incentive problems take a variety of forms and include：(a)moral hazard(b)adverse selection(c)principal-agent(d)all of the aboveAnswer: (d）4. The ________ problem exists when having insurance against some risk causes the insured party to take greater risk or to take less care in preventing the event that gives rise to the loss.(a)moral hazard(b)adverse selection(c)principal—agent(d)all of the aboveAnswer： (a）5。
兹维博迪金融学第二版试题库10TB(1)
兹维博迪金融学第二版试题库10T B(1)-CAL-FENGHAI.-(YICAI)-Company One1Chapter TenPrinciples of Risk ManagementThis chapter contains 30 multiple choice questions, 10 short problems, and 5 longer problems. Multiple Choice1.________ that “matters” because if affects people's welfare. ________ exists whenever one doesnot know for sure what will occur in the future.(a)Uncertainty is risk; Uncertainty(b)Risk is uncertainty; Uncertainty(c)Risk is uncertainty; Risk(d)Uncertainty is risk; RiskAnswer: (b)2.________ is a measure of willingness to pay to reduce one's exposure to risk.(a)Risk aversion(b)Risk avariciousness(c)Risk predilection(d)Risk inflationAnswer: (a)3.When choosing among investment alternatives with the same expected rate of return, a risk averseindividual chooses the one with the ________ risk.(a)surest(b)most uncertain(c)lowest(d)highestAnswer: (c)14.________ is a particular type of risk people face because of the nature of their business or pattern ofconsumption.(a)Operational efficiency exposure(b)Opportunity exposure(c)Risk exposure(d)Risk reductionAnswer: (c)5.________ are investors who take positions that increase their exposure to certain risks in the hope ofincreasing their wealth.(a)Operations insurers(b)Foreign exporters(c)Hedgers(d)SpeculatorsAnswer: (d)6.The riskiness of an asset or a transaction ________ be assessed in isolation or in the abstract.(a)can(b)cannot(c)must(d)it varies according to the situationAnswer: (b)7.By definition, ________ are investors who take positions to reduce their exposures.(a)operations insurers(b)foreign exporters(c)hedgers(d)speculatorsAnswer: (c)28.The risk of loss arising from obsolescence due to technological change or changes in consumer tasteis an example of ________.(a)unemployment risk(b)liability risk(c)financial-asset risk(d)d consumer-durable asset riskAnswer: (d)9.The risk arising from holding different kinds of financial assets such as equities or fixed incomesecurities denominated in one or more currencies is an example of ________.(a)unemployment risk(b)liability risk(c)financial-asset risk(d)consumer-durable asset riskAnswer: (c)10.Business risks of the firm are borne by its ________.(a)shareholders(b)creditors(c)employees(d)all of the aboveAnswer: (d)11.________ consists of figuring out what the most important risk exposures are for the unit of analysis.(a)Risk assessment(b)Selection of risk management techniques(c)Implementation(d)Risk identificationAnswer: (d)312.Which of the following is most likely to need a lot of life insurance?(a)a single person with no dependents(b)a divorced person with no dependents(c) a double-income couple with no kids(d)married person with childrenAnswer: (d)13.________ is the quantification of the costs associated with the risks that have been identified in thefirst step of risk management.(a)Risk assessment(b)Selection of risk management techniques(c)Implementation(d)ReviewAnswer: (a)14.Selling a risky asset to someone else and buying insurance are examples of ________.(a)risk avoidance(b)loss prevention and control(c)risk transfer(d)risk retentionAnswer: (c)15.One is said to ________ a risk when the action taken to reduce one’s exposure to a loss also causesone to give up the possibility of a gain.(a)insure(b)diversify(c)hedge(d)pay a premium withAnswer: (c)416.When you ________ you pay a premium to eliminate the risk of loss and retain the potential for gain.(a)insure(b)diversify(c)hedge(d)speculateAnswer: (a)17.In order for diversification to reduce your risk exposure, the risks must be ________(a)less than perfectly correlated with each other(b)more than perfectly correlated with each other(c)uncorrelated(d)none of the aboveAnswer: (a)18.The demand for ways to manage risk has been increased by ________.(a)increased volatility of exchange rates(b)increased volatility of interest rates(c)increased volatility of commodity prices(d)all of the aboveAnswer: (d)19.Moral hazard and adverse selection are examples of ________.(a)transactions costs(b)incentive problems(c)transference costs(d)both a and bAnswer: (b)520.________ is defined as quantitative analysis for optimal risk management.(a)Portfolio theory(b)Corporate theory(c)Diversification theory(d)Probability theoryAnswer: (a)21.An asset portfolio's expected return is identified with the ________ of the distribution, and its riskwith the ________.(a)variance; average(b)mean; standard deviation(c)standard deviation; average(d)median; normal distributionAnswer: (b)22.Suppose you buy shares of RayFran stock at a price of $110 per share and intend to hold them for ayear. Suppose RayFran pays a dividend of $3.50 per share over that year. Compute the total rate of return on a share of RayFran stock if at the end of the year you sell it for $122.50 per share.(a)10.20%(b)11.36%(c)13.06%(d)14.55%Answer: (d)23.The ________ a stock's volatility, the ________ the range of possible outcomes and the ________ theprobabilities of those returns at the extremes of the range.(a)larger; narrower; larger(b)larger; narrower; smaller(c)larger; wider; larger(d)larger; wider; smallerAnswer: (c)624.Consider the probability distribution of rate of return on RayFran stock:Rate of Return Probability40% 0.2515% 0.55–8% 0.20Compute the expected rate of return on RayFran stock.(a)9.75%(b)15.60%(c)16.65%(d)19.85%Answer: (c)25.Refer to question 24. Now compute the standard deviation of RayFran stock.(a)12.95%(b)13.10%(c)16.10%(d)25.90%Answer: (c)26.Consider a stock with an expected return of 15% and a standard deviation of 8% that is normallydistributed. What is the 0.95 confidence interval for this stock's rate of return?(a)(7%, 23%)(b)(–9%, 39%)(c)(–1%, 39%)(d)(–1%, 31%)Answer: (d)7For questions 27 through 30, use the following table:27.What are the mean returns for Toys’R’Me and S.A.O. Rouge, respectively?(a)Toys R Me: 12.4%; S.A.O. Rouge: 10.2%(b)Toys R Me: 10.4%; S.A.O. Rouge: 7.4%(c)Toys R Me: 10.4%; S.A.O. Rouge: 10.2%(d)Toys R Me: 7.4%; S.A.O. Rouge: 10.4%Answer: (b)28.What is the standard deviation of returns for Toys R Me For S.A.O. Rouge29.(a)Toys R Me: 8.4%; S.A.O. Rouge: 7.4%(b)Toys R Me: 8.40%; S.A.O. Rouge: 8.16%(c)Toys R Me: 10.4%; S.A.O. Rouge: 7.4%(d)Toys R Me: 10.4%; S.A.O. Rouge: 8.16%Answer: (b)30.Suppose the returns for Toys R Me and S.A.O. Rouge are normally distributed. Determine the 0.68confidence interval for Toys R. Me.(a)(8.4%, 10.4%)(b)(–14.8%, 35.6%)(c)(–6.4%, 27.2%)(d)(2.00%; 18.80%)Answer: (d)831.Determine the 0.95 confidence interval for S.A.O. Rouge.(a)(7.14%, 8.16%)(b)(–0.76, 15.56%)(c)(-8.92, 23.72%)(d)(–17.08, 31.88%)Answer: (c)Short Problems1.Briefly distinguish between the three methods available to transfer risk: hedging, insuring anddiversifying.Answer:Hedging: One is said to hedge a risk when the action taken to reduce one’s exposure toa loss also causes one to give up the possibility of a gain.Insuring: Insuring means paying a premium to eliminate the risk of loss and retain thepotential for gain.Diversifying: Diversifying means holding similar amounts of many risky assets instead ofconcentrating all of your investment in only one. Diversification thereby limits yourexposure to the risk of any single asset.2.Outline the steps in the risk-management process.Answer:The risk management process can be broken down into five steps:1. Risk identification2. Risk assessment3. Selection of risk management techniques4. Implementation5. Review93.Think of a bookstore. What risks is such a business exposed to, and who bears them?4.Answer:Major risks:Risk that inventory will not arrive on timeRisk that employees will be late or absentRisk that computers/registers will break downRisk of new competition in the area (especially - the “superstores”)Risk that distributors' prices will increase dramaticallyThese risks are borne by shareholders, owners, employees, creditors, customers,suppliers.5.Explain why the sale/purchase of a house is similar to a forward contract in nature.Answer:Both parties eliminate the uncertainty associated with price volatility in the housingmarket during the months of settling the contract between them. Even though the transferof ownership for the house won't happen for many months, the buyer and seller of ahouse can contractually settle on a transaction price for the house.6.Explain the difference between insuring and hedging.Answer:When you hedge, you eliminate the risk of loss by giving up the potential for gain.However, when you insure, you pay a premium to eliminate the risk of loss and retain thepotential for gain.7.Discuss the two factors limiting the efficient allocation of risks.Answer:Transactions costs and incentive problems are the two key factors limiting the efficientallocation of risks. Transactions costs include the costs of establishing and runninginstitutions such as insurance companies or securities exchanges and the costs of writingand enforcing contracts.Moral hazard and adverse selection are examples of incentive problems, which stand inthe way of the development of institutions for efficient risk sharing. Moral hazard existswhen having insurance against some risk causes the insured party to take greater risk orto take less care in preventing the event that gives rise to the loss.The problem with adverse selection relates to the fact that those who purchase insuranceagainst risk are more likely than the general population to be at risk.108.In the case of insuring a ship, explain how the moral hazard problem can lead to unwillingness on thepart of the insurance company to insure against certain types of risk.Answer:If a ship owner buys insurance for his vessel, the existence of insurance may reduce theowner's incentive to spend money on the upkeep of the vessel. Failure to take suchprecautions makes a safety hazard a more likely occurrence. In an extreme case, theowner may be tempted to sabotage the ship in order to collect the insurance money, if thecoverage exceeds the market value of the ship.Due to this potential moral hazard, companies may limit the amount they will insure orsimply refuse to insure under certain circumstances or require rigid inspections of avessel to make sure its meets minimum safety standards.Consider the following table to answer questions 8 through 10:9.What is the mean share for OutDell For MiniMoo10.Answer:OutDell:E(r) = [–10% + (–2%) + 5% + 10% + 18%]/5= 4.2%MiniMoo:E(r) = [5% + 15% +(– 7%) + 12% + 22%]/5= 9.4%MiniMoo has the higher expected return.1111.What is the standard deviation of returns for OutDell For MiniMoo12.Answer:OutDell:SD=15[(-10%-4.2%2)+(-2%-4.2%2)+(5%-4.2%2)+(10%-4.2%2)+(18%-4.2%2)]SD=15(464.80%)SD=9.64%MiniMoo:SD=15[(5%-9.4%2)+(15%-9.42%)+(-7%-9.4%2)+(12%-9.4%2)+(22%-9.4%2)]SD=15(485.20%)SD=9.85%13.Suppose the returns for OutDell and MiniMoo have normally distributed returns with means andstandard deviations calculated in questions 8 and 9. For each stock, determine the range of returns within two standard deviations of the mean.Answer:OutDell:0.95 confidence interval = 4.2 ± (2 x 9.64)= 4.2 ± 19.28= (–15.08%, 23.48%)MiniMoo:0.95 confidence interval = 9.4 ± (2 x 9.85)= 9.4 ± 19.70= (–10.30%, 29.10%)12Challenging Questions1.Consider the following investment opportunity. You have the opportunity to open a restaurant in yourtown for $180,000. If business is healthy and strong, you could net $100,000 in after-tax cash flows each year over the next six years.a) Would you consider hedging or insuring Whyb) What risk is such a business exposed to:Answer:a) You would be more likely to consider insuring. You would insure the restaurantagainst fire or other disasters, take all necessary safety precautions. You wouldalso want to retain the potential for gain in operating your business.b) Risk that employees will be late or absent.Risk that inventory will not arrive on time.Risk that equipment will break down.Risk that fire may occur.Risk that restaurant may be robbed.Risk that the restaurant may be vandalized.Risk that raw material prices will increase unpredictability.Risk of new competition in the area.2.Consider a person's life cycle - that is, at various ages say, mid-twenties, late thirties to early forties,mid-fifties and late sixties and beyond. What risks is a person likely to face in each of these age groups and how would cash, bonds and stocks be perceived at these various stages of life?Answer:Mid-twenties: A person may tend to be more aggressive in terms of risk tolerance. Stocksare more likely to be the choice of investment, followed by bonds and cash.Late thirties to early forties: For “DINK,” the capacity for risk is still quite high.However, those who are parents may be faced with college tuition, life insurance, etc. sosome risk options diminish. A person in this group would perhaps be a little lessaggressive with stocks.Mid-fifties: People in this group need to start thinking more about retirement and incomeprotection. Major health costs may also be a consideration as it is for people in the sixtiesand beyond group. There tends to be little or no capacity for risk and the securities orinvestments sought at this stage tend to be very conservative.13e the following table:a) Compute the mean return on DinkiDi stock.b) Compute the standard deviation on DinkiDi stock.c) Comment on value you obtained in (b).Answer:a. E(r) = (0.20)(60%) + (0.60)(12%) + (0.20)(–20%)E(r) = 12% + 7.2% + (–4%)E(r) = 15.2%b.SD=0.20(60%-15.2%2)+0.60(12%-15.2%2)+0.20(-20%-15.2%2)SD=401.408%+6.144%+247.808%SD=25.6%c. On its own, the value obtained in (b) does not mean as much as it would were itcompared relative to another number or some industry standard.4.Suppose you are a U.K. citizen who has won a writer’s 30,000 pound scholarship to study in France.How can you hedge your foreign exchange risk How can you insure against it5.Answer:To hedge the risk you would enter into a contract now to sell your 30,000 pounds at afixed per euro.To insure against a decline in the euro price of the pound, you could pay a premium nofor a put option that would give you the right to sell your 30,000 pound scholarship at afixed euro price per pound.14e the table below:a) What is the mean return for DinkiDi For SirPassb) What is the standard deviation for DinkiDi For SirPassc) Suppose the returns for DinkiDi and SirPass have normally distributed returns withmeans and standard deviations calculated in both a and b. Calculate the range of returnswithin two expected deviations of the mean.Answer:a. DinkiDi:E(r) = 1/6 (11 + 16 – 5 – 3 + 15 + 8)= 7%SirPass:E(r) = 1/6 (8 + 17 – 7 – 4 + 17 + 11)= 7%Both stocks have the same mean return.b. DinkiDi:σ= 16 (406%)= 8.23% SirPass:σ= 16 (534%)= 9.43%SirPass has a wider dispersion or higher volatility.c. 0.95 confidence intervals:DinkiDi: 0.95 Confidence Intervals = 7 ± (2 x 8.23)= (–9.46%, 23.46%)SirPass: 0.95 Confidence Intervals =7 ± (2 x 9.43)= (–11.86%, 25.86%)15。
兹维博迪金融学第二版试题库08TB
Chapter EightValuation of Known Cash Flows: BondsThis chapter contains 50 multiple choice questions, 18 short problems and 9 longer problems.Multiple Choice1. A ________ is a quantitative method used to infer an asset's value from market information about theprices of other assets and market interest rates.(a)fixed model(b)perpetual valuation model(c)valuation model(d)variable modelAnswer: (c)2.________ are examples of fixed-income securities.(a)Common stock and pension funds(b)Mortgages and pension annuities(c)Mutual funds and common stock(d)Preferred stock and common stockAnswer: (b)3.Consider a fixed-income security that promises to pay $150 each year for the next five years. Howmuch is this five-year annuity worth if the appropriate discount rate is 7% per year?(a)$534.74(b)$615.03(c)$802.50(d)$867.96Answer: (b)8-14.Consider a fixed-income security that promises to pay $120 each year for the next four years.Calculate the value of this four-year annuity if the appropriate discount rate is 6% per year.(a)$415.81(b)$508.80(c)$531.85(d)$629.06Answer: (a)5.The price of any existing fixed-income security ________ when market interest rates rise becauseinvestors will only be willing to ________ them if they offer a competitive yield.(a)rises; buy(b)rises; sell(c)falls; buy(d)falls; sellAnswer: (c)6. A fall in interest rates causes a ________ in the market value of a fixed-income security.(a)a rise(b)a fall(c)no change(d)it cannot be determined from the information givenAnswer: (a)7. A change in market interest rates causes ________ in the market values of all existing contractspromising fixed payments in the future.(a)a change in the same direction(b)a change in the opposite direction(c)no change(d)an unpredictable variationAnswer: (b)8-28.What happens to the value of a four-year fixed-income security promising $100 per year if the marketinterest rate rises from 5% to 6% per year?(a)A rise of 1% causes a drop of $4.87 in market value.(b)A rise of 1% causes a rise of $4.87 in market value.(c)A rise of 1% causes a drop of $8.09 in market value.(d)A rise of 1% causes a rise of $8.09 in market value.Answer: (c)9.What happens to the value of a four-year fixed-income security promising $100 per year if the marketinterest rate falls from 6% to 5% per year?(a)A fall of 1% causes a drop of $4.87 in market value.(b)A fall of 1% causes a rise of $4.87 in market value.(c)A fall of 1% causes a drop of $8.09 in market value.(d)A fall of 1% causes a rise of $8.09 in market value.Answer: (d)10.A zero-coupon bond is also known as ________.(a)a perpetual bond(b)a pure discount bond(c)a market rebate(d)an infinite bondAnswer: (b)11.The promised cash payment on a pure discount bond is called its ________.(a)face value(b)par value(c)fixed interest(d)both a and bAnswer: (d)8-312.What is the yield of a 1-year pure discount bond with a price of $850 and a face value of $1,000?(a)8.50%(b)9.09%(c)15.00%(d)17.65%Answer: (d)13.What is the yield of a 1-year pure discount bond with a price of $900 and a face value of $1,000?(a)5.26%(b)10.00%(c)11.11%(d)15.79%Answer: (c)14.Consider a four-year pure discount bond with a face value of $1,000. If its current price is $850,compute its annualized yield.(a)1.17%(b)4.15%(c)5.57%(d)17.60%Answer: (b)15.Consider a three-year pure discount bond with a face value of $1,000. If its current price is $900,compute its annualized yield.(a)1.036%(b)1.111%(c)3.57%(d)5.41%Answer: (c)8-416.Consider a five-year pure discount bond with a face value of $1,000. If its current price is $780, whatis its annualized yield?(a)5.09%(b)2.82%(c)1.28%(d)1.05%Answer: (a)17.A ________ obligates the issuer to make periodic payments of interest to the bondholder for the lifeof the bond and then to pay the face value of the bond when the bond matures.(a)pure discount(b)zero-coupon(c)perpetual bond(d)coupon bondAnswer: (d)18.The ________ of the bond is interest rate applied to the ________ of the bond to compute theperiodic payment.(a)coupon rate; face value(b)maturity rate; face value(c)coupon rate; price(d)maturity rate; priceAnswer: (a)19.For a bond with a face value of $1,000 and coupon rate of 11%, what is the annual coupon payment?(a)$100(b)$110(c)$1,000(d)$1,100Answer: (b)8-520.For a bond with a face value of $1,000 and a coupon rate of 9%, what is the annual coupon payment?(a)$90(b)$99(c)$1,000(d)$1,190Answer: (a)21.If the market price of a coupon bond equals its face value, it is also termed a ________.(a)par bond(b)premium bond(c)discount bond(d)zero-discount bondAnswer: (a)22.If the bond’s market price is higher than its face value, it is termed a ________.(a)par bond(b)premium bond(c)discount bond(d)zero-discount bondAnswer: (b)23.If the bond’s market price is lower than its face value, it is termed a ________.(a)par bond(b)premium bond(c)discount bond(d)zero-par bondAnswer: (c)8-624.If a bond selling for $850 has an annual coupon payment of $80 and a face value of $1,000, what isits current yield?(a)8.00%(b)9.41%(c)17.65%(d)27.05%Answer: (b)25.If a bond selling for $1,120 has an annual coupon payment of $110 and a face value of $1,000, whatis its current yield?(a)8.90%(b)9.82%(c)10.71%(d)11.00%Answer: (b)26.If a bond selling for $900 has an annual coupon payment of $80 and a face value of $1,000, what isits current yield?(a)8.00%(b)8.89%(c)11.00%(d)20.00%Answer: (b)27.The ________ is the discount rate that makes the present value of the bond’s stream of promised cashpayments equal to its price.(a)compound rate(b)yield to maturity(c)coupon rate(d)current yieldAnswer: (b)8-728.Suppose you are considering buying a one-year 11% coupon bond with a face value of $1,000 and acurrent price of $1,020. What is its yield to maturity?(a)8.82%(b)9.00%(c)10.78%(d)11.00%Answer: (a)29.Suppose you are considering buying a one-year 11% coupon bond with a face value of $1,000 and acurrent price of $1,050. What is its yield to maturity?(a)4.76%(b)5.71%(c)6.00%(d)10.48%Answer: (b)30.Suppose you are considering buying a five-year 11% coupon bond with a face value of $1,000 and acurrent price of $950. What is its yield to maturity?(a)5.62%(b)9.63%(c)11.58%(d)12.40%Answer: (d)31.Suppose you are considering buying a five-year 11% coupon bond with a face value of $1,000 and acurrent price of $1,100. What is its yield to maturity?(a)3.87%(b)8.47%(c)10.00%(d)13.62%Answer: (b)8-832.Suppose you are considering buying a six-year 10% coupon bond with a face value of $1,000 and acurrent price of $1,100. What are the current yield and yield to maturity of this bond?(a)CY = 11.00%; YTM = 12.23%(b)CY = 12.23%; YTM = 11.00%(c)CY = 7.85%; YTM = 9.09%(d)CY = 9.09%; YTM = 7.85%Answer (d)33.Suppose you are considering buying a seven-year 11% coupon bond with a face value of $1,000 and acurrent price of $950. What are the current yield and yield to maturity of this coupon bond?(a)CY = 12.10%; YTM = 11.58%(b)CY = 11.58%; YTM = 12.10%(c)CY = 9.92%; YTM = 10.45%(d)CY = 10.45%; YTM = 9.92%Answer: (b)34.Over time bond prices ________ their face value. Before maturity, bond prices can ________ a greatdeal as a result of changes in market interest rates.(a)diverge from; fluctuate(b)converge toward; flatten out(c)converge toward; fluctuate(d)diverge from; flatten outAnswer: (c)35.When the yield curve is not flat, bonds of the same ________ with different coupon rates have________ yields to maturity.(a)maturity, different(b)maturity, identical(c)callability, different(d)callability, identicalAnswer: (a)8-936.Bonds offering the same future stream of promised payments can differ in a number of ways, but thetwo most important are ________ and ________.(a)taxability, issue origin(b)type of issuer, default risk(c)type of issuer, taxability(d)taxability, default riskAnswer: (d)37.A ________ is one that gives the holder of a bond issued by a corporation the right to convert thebond into a pre-specified number of shares of common stock.(a)callable bond(b)convertible bond(c)stock bond(d)preferred bondAnswer: (b)38.A ________ is one that gives the issuer of the bond the right to redeem it before the final maturitydate.(a)callable bond(b)convertible bond(c)stock bond(d)preferred bondAnswer: (a)39.Five years ago, English and Co. issued 25-year coupon bonds with par value $1,000. At the time ofissuance, the yield to maturity was 6 percent and the bonds sold at par. The bonds are currently selling at 110 percent of their par value. Assuming that the coupon is paid annually, what is the current yield to maturity?(a)3.77%(b)5.18%(c)5.27%(d)5.46%Answer: (b)8-1040.Potemkin Corporation plans to raise $10,000,000 in funds by issuing zero coupon $1,000 par valuebonds with a 25 year maturity. Potemkin Corporation is able to issue these bonds at an after tax cost of debt of 12%. To the nearest whole number, how many bonds must Potemkin Corporation issue?(a)10,000 bonds(b)42,919 bonds(c)125,837 bonds(d)170,000 bondsAnswer: (d)41.Calculate the years to maturity for a bond based on the following information. The bond trades at$950, it has a par value of $1,000, a coupon rate of 11%, and a required rate of return of 12%.(a)8 years(b)12 years(c)15 years(d)16 yearsAnswer: (a)pute the current price of Walsingham bonds based on the following information. Walsinghambonds have a $1,000 par value, have 20 years remaining until maturity, a 12 percent coupon rate, anda yield to maturity of 10.5 percent.(a)$858.42(b)$982.47(c)$1,119.52(d)$1,124.41Answer: (d)pute the yield to maturity of Arundel bonds based on the following information. Arundel bondshave a $1,000 par value, 25 years remaining until maturity, an 11% coupon rate, and a current market price of $1,187.(a)4.55%(b)9.08%(c)9.27%(d)13.17%Answer: (b)8-1144.When prices of U.S Treasury strips are listed, principal from a Treasury bond is denoted by the letters________.(a)ci(b)tb(c)bp(d)npAnswer: (c)45.The ________ is the price at which dealers in Treasury bonds are willing to sell.(a)bid price(b)asked yield(c)ask price(d)maturity priceAnswer: (c)46.The ________ is the price at which dealers are willing to buy.(a)bid price(b)ask price(c)asked yield(d)maturity priceAnswer: (a)47.The bid price of a bond is always ________ the ask price.(a)greater than(b)less than(c)identical to(d)it varies from case to caseAnswer: (b)8-1248.The ________ of a bond price measures the sensitivity of the bond price to a change in the yield tomaturity.(a)callability(b)convertibility(c)immutability(d)elasticityAnswer: (d)49.Suppose you buy a 25-year pure discount bond with a face value of $1,000 and a yield of 6% per year.A day later market interest rates drop to 5% and so does the yield on your bond. What is theproportional change in the price of your bond?(a)a decrease of 26.74%(b)a decrease of 21.10%(c)an increase of 26.74(d)an increase of 21.20Answer: (c)50.Suppose you buy a 25-year pure discount bond with a face value of $1,000 and a yield of 6% per year.A day later market interest rates rise to 5% and so does the yield on your bond. What is the elasticityof the bond price to the change in the yield?(a)–0.62%(b)–1.27%(c)–1.60%(d)–2.67%Answer: (c)8-13Short Problems1.Consider a five-year fixed-income security which promises $120 per year. Calculate the value of thesecurity if the market interest rate rises from 5% to 6% per year.Answer:n i PV PMT Result5 5 ? $120 PV = $519.54n i PV PMT Result5 6 ? $120 PV = $505.48The price drops by $14.06.2.Consider a four-year fixed-income security which promises $120 per year. Calculate the value of thesecurity if the market interest rate falls from 7% to 6% per year.Answer:n i PV PMT Result4 7 ? $120 PV = $406.47n i PV PMT Result4 6 ? $120 PV = $415.81The price increases by $9.34.3.Discuss the general principles about the relation between prices and yields of coupon bonds.Answer:Principle #1: Par Bonds.If a bond's price equals its face value, then its yield equals its coupon rate.Principle #2: Premium Bonds.If a coupon bond has a price higher than its face value, its yield to maturity is less than its current yield, which is in turn less than its coupon rate.Principle #3: Discount Bonds.If a coupon bond has a price lower than its face value, its yield to maturity is greater than its current yield, which is in turn greater than its coupon rate.8-144.List some reasons why differences in the prices of fixed-income securities of a given maturity mayarise.Answer:Differences in the prices of fixed-income securities of a given maturity may arise due to differences in coupon rates, default risk, tax treatment, callability and convertibility.5.Explain why it is important to have a method for valuation of fixed-income contracts.Answer:(1) The parties to the contracts need to have an agreed-upon valuation procedure insetting the terms of the contracts at the outset.(2) Since market factors determining the value of fixed-income contracts change overtime, both buyers and sellers have to reevaluate them each time they are traded.6.Consider a five-year pure discount bond with a face value of $1,000. If its current price is $775,compute its annualized yield.Answer:n i PV FV Result5 ? –$775 $1,000 i = 5.23%7. A four-year bond has a coupon rate of 6% per year, a price of $950, and a face value of $1,000.Calculate its current yield and yield to maturity.Answer:Current yield = coupon/price= 60/950= 6.32%To calculate yield to maturity:n i = YTM PV FV PMT Result4 ? –$950 $1,000 $60 YTM = 7.49%8-158.What is the current price of a bond that has a coupon rate of 7%, a return rate of 8%, and a face valueof $1,000? Assume that this bond will mature in five years. Compare the current price of the bond against its face value.Answer:n i = YTM PV FV PMT Result5 8 ? $1,000 $70 PV = $960.07Because the price of the bond is below its face value, it is a discount bond.9. A five-year coupon bond has a coupon rate of 5%, a return rate of 6%, and a face value of $1,000.What is its current price and how does it compare to its face value?Answer:n i = YTM PV FV PMT Result5 6 ? $1,000 $50 PV = $957.88Because the price of the bond is below its face value, it is a discount bond.10.What is the yield to maturity of a five-year coupon bond with a current price of $850, a face value of$1,000, and coupon rate of 7%?Answer:n i = YTM PV FV PMT Result5 ? –$850 $1,000 $70 YTM = 11.07%11.Five years ago, English and Co. issued 30 year coupon bonds with a par value of $1,000. At the timeof issuance, the yield to maturity was 6 percent per year and the bonds sold at par. The bonds are currently selling at 85 percent of their par value. Assuming that the coupon is paid annually, what is the current yield to maturity?Answer:Five years ago, the bonds were issued at par, which means at the time yield to maturity equaled coupon rate. So the annual coupon is 0.06 x $1,000 = $60.For the current yield to maturity:n i = YTM PV FV PMT Result25 ? –850 1,000 60 YTM = 7.33%8-1612.Eisenstein Corporation plans to raise $100,000,000 in funds by issuing zero-coupon $1,000 par valuebonds with a 30-year maturity. Assuming that Eisenstein Corporation is able to issue these bonds at an after-tax cost of debt of 11%, how many bonds must Eisenstein Corporation issue?Answer:First, calculate the price of an Eisenstein bond:n i = YTM PV FV PMT Result30 11 ? 1,000 0 PV = $43.68The corporation wants to raise $100,000,000, so it must issue the following number of bonds:$100,000,000/$43.68 = 2,289,377 bonds13.Currently, an Eisenstein bond trades at $1,050 per bond and has a coupon rate of 10%. Assuming thebond matures at a $1,000 value, and the required rate of return is 9.5%, in how many years does an Eisenstein bond mature?Answer:n i = YTM PV FV PMT Result? 9.5 –1,050 1,000 0 n = 33pute the current price of Walsingham bonds based on the following information. Walsinghambonds have a $1,000 par value, 26 years remaining until maturity, a 13 percent coupon rate, and a current yield to maturity of 11 percent per year.Answer:n i = YTM PV FV PMT Result26 11 ? 1,000 0 PV = $1,169.6915.Health & US Corporation is a major pharmaceutical firm that has recently experienced a marketreevaluation. Currently, the firm has a bond issue outstanding with 18 years to maturity and a coupon rate of 9 percent, with interest paid annually. The required rate of return of this debt issue has risen to15 percent. Calculate the current price of this bond.Answer:n i = YTM PV FV PMT Result18 15 ? 1,000 90 PV = $632.328-1716.Calculate the coupon rate, current yield, and the yield to maturity for a bond that has $1,000 par value,pays a coupon of $85 annually, matures in 20 years, and has a current price of $985.25.Answer:Coupon rate = 85/1,000= 8.5% per yearCurrent yield = coupon/price= 85/985.25= 8.63%For yield to maturity:n i = YTM PV FV PMT Result20 ? –985.25 1,000 85 YTM = 8.66%17.Suppose you buy a 20-year pure discount bond with a face value of $1,000 and a yield of 7% per year.A day later, market interest rates rise to 8% and so does the yield of your bond. What is theproportional change in the price of your bond? What is the elasticity of the bond price to the change in the yield?Answer:n i = YTM PV FV PMT Result20 7 ? 1,000 0 PV = $258.42n i = YTM PV FV PMT Result20 8 ? 1,000 0 PV = $214.55The price of the bond decreased by $43.87, so the proportional decline in price is $43.87/$258.42 = 16.98%.Elasticity is % change in price over % change in YTM, or –16.98%/14.29% = –1.19.18.As of today, January 1, 2009, Flanders Corporation is holding $10,000,000 in long-term debt at parbonds. The bonds have a par value of $1,000, mature on January 1, 2019, and pay a 5 percent coupon.Calculate the current market value of Flanders’ debt, if the yield to maturity is 7 percent.Answer:Total number of bonds = $10,000,000/$1,000 = 10,000 bondsn i PV FV PMT Result10 7 ? 1,000 50 PV = $859.50The current market value = $859.50 x 10,000= $8,578,8008-18Longer Problems1.Consider the purchase of a 30-year pure discount bond with a face value of $1,000 and a yield of 7%per year. A week later the market interest rate rises to 8% and o does the yield on your bond.Calculate the proportional change in the price of the bond. What basic principle in valuation of known cash flows does this illustrate?Answer:n i PV FV Result30 7 ? $1,000 PV = $131.37n i PV FV Result30 8 ? $1,000 PV = $99.38The price drops by $31.99, so a rise of 1% in market interest rates results in a $31.99/$131.37 =24.35% drop in the price of the bond. The general principle illustrates is that a change in marketinterest rates causes a change in the opposite direction in the market value of the bonds.2.Suppose our want to know the price of a 15-year 8% coupon bond which pays interest annually. Theface value of the bond is $1,000.(a) You have been told the yield to maturity is 9%. What is the price? Assume coupons arepaid annually.(b) What is the price if coupons are paid semi-annually and the yield to maturity is 9% peryear?Answer:(a) If coupons are paid annually:n i PV FV PMT Result15 9 ? $1,000 $80 PV = $919.39(b) If coupons are paid semi-annually:n i PV FV PMT Result30 4.5 ? $1,000 $40 PV = $918.563. A media report recently stated that prices of 30-year treasury bonds increased substantially becauseinflation was falling and the Federal Reserve was not expected to increase interest rates. How would you describe this interpretation using discounted cash flow techniques?Answer:Inflation is a component of i, the required return on bonds, so when inflation decreases, idecreases and bond prices rise.8-194.Suppose you want to know the price of a 10-year 7% coupon bond which pays interest annually. Theface value of the bond is $1,000.(a) What is the price of this bond if the yield to maturity is 8%?(b) What is the current yield of this coupon bond?(c) What is the price of this bond if coupons are paid semi-annually and the yield to maturityis 8%?Answer:a. n i PV FV PMT Result10 8 ? $1,000 $70 PV = $932.90b. Current yield = coupon/price= 70/932.9= 7.5%c. n i PV FV PMT Result20 4 ? $1,000 $35 PV = $932.055.Suppose you buy a 30-year pure discount bond with a face value of $1,000 and a yield of 9% per year.A day later, market interest rates fall to 8% and so does the yield of your bond. What is theproportional change in the price of your bond? What is the elasticity of the bond price to the change in the yield?Answer:n i = YTM PV FV PMT Result30 9 ? 1,000 0 PV = $75.37n i = YTM PV FV PMT Result30 8 ? 1,000 0 PV = $99.38The price of the bond decreased by $24.01, so the proportional increase in price is $24.01/$75.37 = 31.86%.Elasticity is % change in price over % change in YTM, or 31.86%/–11.11% = –2.87.8-206.As part of a reorganization plan, a bankruptcy court has permitted a new indenture on an outstandingbond issue to be put into effect for Leicester Corporation, which recently filed for bankruptcy. It is known that the issue has $1,000 par value per bond, 15 years to maturity, and a coupon rate of 11 percent paid annually. The reorganization plan allows the following arrangement: In years 1 through 7, there will be no coupon paid (that is, coupon = $0). In years 8 through 15, regular couponpayments will resume. At maturity in year 15, the par value plus the sum of all coupon payments that were not paid during years 1 through 7 must be paid. However, no interest will be paid on thedeferred coupon payments. If the required rate of return is 18 percent, calculate the current price the Leicester bonds would sell for in the market.Answer:Coupon = 0.11 x 1000= $110 per yearThe present value of this cash flow stream, using a discount rate of 18%, is $288.62 per bond.8-217.The Dharma Corporation has recently experienced a market reevaluation. Currently, the firm has abond issue outstanding with 18 years to maturity, a face value of $1,000, and a coupon rate of 10 percent paid annually. The required rate of return on this debt issue has risen to 16 percent. Calculate the current price of this bond.Answer:n i = YTM PV FV PMT Result18 16 ? 1,000 100 PV = $650.928.Calculate the coupon rate, current yield, and the yield to maturity for a bond that has $1,000 par value,pays $95 interest annually, matures in 25 years, and has a current price of $1,087.75.Answer:Coupon rate = 95/1,000= 9.5% per yearCurrent yield = coupon/price= 95/1,087.75= 8.73%To calculate yield to maturity:n i = YTM PV FV PMT Result25 ? –1,087.75 1,000 95 YTM = 8.63%9.As of today, January 1, 2009, Gala Worldwide is holding $1,000,000 in long-term debt at par bonds.The bonds have a par value of $1,000, mature on January 1, 2029, and pay a 7 percent coupon.Cal culate the current market value of Flanders’ debt, if the yield to maturity is 8 percent.Answer:Total number of bonds = $100,000,000/$1,000 = 100,000 bondsn i PV FV PMT Result20 8 ? 1,000 70 PV = $901.85The current market value = $901.85 x 100,000= $90,185,0008-22。
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Chapter SevenPrinciples of Market ValuationThis chapter contains 30 multiple choice questions，10 short problems and 5 longer problems. Multiple Choice1.In regard to an asset，the ________ is defined as the process well-informed investors mustpay for it in a free and competitive market.(a)analyst value(b)technical value(c)competitive value(d)fundamental valueAnswer：(d)2.In corporate finance decision making，an extremely important rule is to choose theinvestment that ________ current shareholders’ wealth.(a)minimizes(b)maximizes(c)provides zero change in(d)jeopardizesAnswer：(b)3.In asset valuation，the method used to accomplish the estimation depends on the ________.(a)number of participants(b)quality of calculating instruments(c)richness of the information set available(d)geographic locationAnswer：(c)4.The ________ states that in a competitive market，if two assets are equivalent，they willtend to have the same market price.(a)Law of Real Interest Rates(b)Law of One Price(c)Law of Price Equivalency(d)Law of FuturesAnswer：(b)5.The Law of One Price is enforced by a process called ________，the purchase andimmediate sale of equivalent assets in order to earn a sure profit from a difference in their prices.(a)swapping(b)maximization(c)arbitrage(d)speculationAnswer：(c)6.________ refers to the totality of costs such as shipping，handling，insuring，and brokerfees.(a)Shipping costs(b)Transaction costs(c)Installation costs(d)Insurance costsAnswer：(b)7.The Law of One price is a statement about the price of one asset ________ the price ofanother.(a)absolute to(b)relative to(c)multiplied by(d)independent ofAnswer：(b)8.If an entity borrows at a lower rate and lends at a higher rate，this is an example of________.(a)opportunity arbitrage(b)interest-rate arbitrage(c)exchange arbitrage(d)nominal arbitrageAnswer： (b)9.If arbitrage ensures that any three currencies are freely convertible in competitivemarkets，then:(a)it is enough to know only one exchange rate to determine the third(b)we can estimate two exchange rates based on one exchange rate only(c)it is enough to know the exchange rates between any two in order to determine thethird(d)it is necessary to know all three ratesAnswer：(c)10.Suppose you have $15,000 in a bank account earning an interest rate of 4% per year. At thesame time you have an unpaid balance on your credit card of $6,000 on which you are paying an interest rate of 17% per year. What arbitrage opportunity do you face?(a)$240 per year(b)$600 per year(c)$780 per year(d)$1,020 per yearAnswer：(c)11.If the dollar price of Japanese Yen is $0.009594 per Japanese Yen and the dollar price ofChinese Yuan is $0.1433 per Chinese Yuan，what is the Japanese Yen price of a Chinese Yuan?(i.e.，JPY/CNY)(a)0.001375 JPY/CNY(b)0.066950 JPY/CNY(c)9.594 JPY/CNY(d)14.936419 JPY/CNYAnswer：(d)12.If the dollar price of guilders is $0.5634 per Guilder and the dollar price of Euros is $1.5576per Euro，what is the Euro price of the Guilder?(i.e.，EUR/ANG)(a)0.361700 EUR/ANG(b)0.877552 EUR/ANG(c)2.764643 EUR/ANG(d)5.634 EUR/ANGAnswer：(d)13.Suppose the price of gold is 51.09 British pounds per ounce. If the dollar price of gold is$100 per ounce，what would you expect the dollar price of a British pound to be?(a)$1.95733 per GBP(b)$1.5109 per GBP(c)$0.5109 per GBP(d)$0.4891 per GBPAnswer：(a)Questions 14-18 refer to the following exchange rate table. To answer 14-18 you will have to fill in the missing exchange rates.14.What is the Euro/Peso exchange rate?(i.e.，EUR/MXN)(a)0.617426EUR/MXN(b)0.641807 EUR/MXN(c)6.675516 EUR/MXN(d)16.196262 EUR/MXN Answer：(a)15.What is the Cdn Dlr/Euro exchange rate?(i.e.，CAD/EUR)(a)0.641807 CAD/EUR(b)1.558099 CAD/EUR(c)6.420 CAD/EUR(d)16.196262 CAD/EURAnswer：(b)16.What is the Euro/Cdn Dlr exchange rate?(i.e.，EUR/CAD)(a)0.3583 EUR/CAD(b)0.641807 EUR/CAD(c)1.558099 EUR/CAD(d)10.394 EUR/CADAnswer：(b)17.What is the Peso/Cdn Dlr exchange rate?(i.e.，MXN/CAD)(a)0.096201 MXN/CAD(b)0.641807 MXN/CAD(c)10.394882 MXN/CAD(d)16.196262 MXN/CADAnswer：(c)18.What is the Peso/Euro exchange rate?(i.e.，MXN/EUR)(a)0.617426 MXN/EUR(b)6.675516 MXN/EUR(c)15.581112 MXN/EUR(d)16.196262 MXN/EUR Answer：(d)19.You are travelling in FarOut where you can buy 130 kranes (a krane being the unit ofcurrency of FarOut) with a U.S. dollar at official FarOut banks. Your tour guide has a relative who dabbles in the black market and this particular relative will sell you kranes for just$0.00833 each on the black market. How much will you lose or gain by exchanging $200 on the black market instead of going to the bank?(a)you would gain approximately 1,660 kranes(b)you would lose approximately 1,660 kranes(c)you would gain approximately 1,990 kranes(d)you would lose approximately 1,990 kranesAnswer：(d)20.In estimating the value of a share of a firm’s stock，a simple model is to :(a)divide EPS by a P/E multiple(b)multiply EPS by a P/E multiple(c)multiply EPS by EAT(d)divide EPS by market valueAnswer：(b)21.A firm’s earnings per share are $6 and the industry average P/E multiple is 9. What wouldbe an estimate of the value of a share of the firm’s stock?(a)$54.00(b)$45.00(c)$1.50(d)$0.67Answer：(a)22.The value of the asset as it appears in the financial statement is called the asset’s ________.(a)market value(b)fixed value(c)book value(d)expected valueAnswer：(c)23.Consider the following stock market reaction to the information contained in a company’sannouncement. A corporation has just announced that it must pursue the issuance of company equity. We could expect to see ________ in the price of company stock.(a)a rise(b)a drop(c)a rapid rise(d)zero changeAnswer：(b)24.Consider what the stock market reaction to the following announcement would be. Acorporation has just announced that it is engaging in a stock split of the company’s shares.We could expect to see a ________ in the overall market capitalization rate and a ________ in the price of company stock.(a)rise；drop(b)drop；rise(c)rise；drop(d)rise；dropAnswer：(a)25.The ________ is the proposition that an asset’s current price fully reflects all publiclyavailable information about future economic fundamentals affecting the asset’s value.(a)public markets hypothesis(b)efficient markets exchange rates(c)fundamental value proposition(d)efficient markets hypothesisAnswer：(d)26.The market price of an asset reflects the ________ of all analysts’ opinions with heavierweights on analysts who control large amounts of money and on those analysts who have better than average information.(a)best estimate(b)weighted average(c)highest estimate(d)lowest estimateAnswer：(b)27.Assume that the worldwide risk-free real rate of interest is 4% per year. Inflation in Denmarkis 9% per year and in the United States it is 7% per year. Assuming there is no uncertainty about inflation，what are the implied nominal interest rates denominated in Danish krone and in U.S. dollars，respectively?(a)16.63% (DKK)；13.50% (USD)(b)13.50% (DKK)；16.63% (USD)(c)13.36% (DKK)；11.28% (USD)(d)11.28% (DKK)；13.36% (USD)Answer：(c)28.The ________ theory states that the expected real interest rate on risk-free loans is the sameall over the world.(a)nominal interest-rate parity(b)real interest-rate parity(c)efficient inflation rate parity(d)efficient market rateAnswer：(b)29.________ states that exchange rates adjust so as to maintain the same “real” price of a“representative” basket of goods and services around the world.(a)Purchasing power parity(b)Efficient markets hypothesis(c)Market valuation model(d)Exchange rate equityAnswer：(a)30.Assume that the worldwide risk-free real rate of interest is 5% per year. Inflation in Australiais 9% per year and in Great Britain it is 12% per year. Assuming there is no uncertainty about inflation，what are the implied nominal interest rates denominated in Australian dollars and Great Britain pounds，respectively?(a)22.08% (AUD)，11.45% (GBP)(b)11.45% (AUD)，22.08% (GBP)(c)17.60% (AUD)，14.45% (GBP)(d)14.45% (AUD)，17.60% (GBP)Answer：(d)Short Problems1.Suppose you have $20,000 in a bank account earning an interest rate of 4% per year. At thesame time you have an unpaid balance on your credit card of $7,000 on which you are paying an interest rate of 18% per year. What is the arbitrage opportunity you face?Answer：You could take $7,000 out of your bank account and pay down your creditcard balance. You would give up 4% per year in interest earnings ($280) but you wouldsave 18% per year in interest expenses ($1,260). So the arbitrage opportunity is worth$980 per year.2.Fill in the missing exchange rates in the following table:Answer:3.You observe that the dollar price of the Mexican peso is $0.09618 and the dollar price of theCanadian dollar is $0.9997. What must the exchange rate between the Mexican peso and the Canadian dollar be for there to be no arbitrage opportunity?Answer: CAD/MXN = 0.096180.9997= 0.096208 CAD/MXN4.Suppose that the exchange rate is $0.2970 to the Israeli shekel. How could you makearbitrage profits with $10,000 if the dollar price of gold is $200 per ounce and the shekel price is 750 ILS per ounce?Answer：Take $10,000 and buy 50 ounces of gold at $200 per ounce. Sell 50 ounces of gold in Israel for 37,500 ILS (750 ILS per ounce). Take 37,500 ILS and exchange it into dollars worth $11,137.50. The arbitrage profit is $1,137.50.5.You are travelling in FarOut where you can buy 150 kranes (a krane being the unit ofcurrency in FarOut) with a U.S. dollar at official FarOut banks. Your tour guide has a relative who dabbles in the black market and this particular relative will sell you kranes for just $0.00685 each on the black market. How much would you gain or lose by exchanging $300 on the black market instead of going to the bank?Answer:On the official market：$300 x 150 kranes = 45,000 kranesOn the black market：$300 x 1/0.00685 kranes = 43,796 kranesHence，you would lose 1,204 kranes.6. A firm’s earnings per share are $5.50 and the industry average P/E multiple is 8. Whatwould be an estimate of the value of a share of the firm’s stock?Is it possible for firms being classified in the same industry to have different price/earnings multiples?Answer:Estimated value share of stock = firm’s EPS x Industry average P/E= $5.50 x 8= $44.00Firms classified as being in the same industry may have different opportunities for growth in the future and may therefore differ in their P/E multiples.7.The P/E multiple of BHM Corporation is currently 5，while the P/E ratio of the S&P 500 is10. What reasons could account for this difference?Answer:•BHM’s reported earnings may be higher than they are expected to be in the future，or they may be inflated due to special accounting methods used by BHM.•BHM may be riskier than the S&P 500 either because it is in a relatively risky industry or has a relatively higher debt ratio.8.The price of Hubris Co. stock recently jumped when the CEO for the company announced anincreased dividend payment for the year. What might account for such a market reaction?Answer：The market may believe the company’s future prospects look very bright (that is，higher earnings，less risk，sound growth，etc.) and that the company can sustain such an earnings growth.9.Assume that the worldwide risk-free real rate of interest is 4% per year. Denmark has anexpected rate of inflation of 9% per year and in Spain has an expected rate of inflation of 14% per year. Assuming there is no uncertainty about inflation，what are the implied nominal interest rates denominated in Kroner and Euros?Answer: Denmark：nominal interest rate = (1.04) x (1.09) – 1= 13.36% per yearSpain：nominal interest rate = (1.04) x (1.14) –1= 18.56% per year10.Assume that the worldwide risk-free real rate of interest is 4% per year. The United Kingdomhas an expected rate of inflation of 8% per year and in Belgium it is 10% per year. Assuming there is no uncertainty about inflation，what are the implied nominal interest rates denominated in Pounds Sterling and Euros?Answer: United Kingdom：nominal interest rate = (1.04) x (1.08) – 1= 12.32% per yearBelgium：nominal interest rate = (1.04) x (1.10) – 1= 14.40% per yearLonger Problems1.Let’s assume that you have operated your own business for 18 years. For the most recentfiscal year，sales were $15 million. Net Income for the most recent fiscal year was $1.5million. The book value of your business was $11 million. Recently，a firm which isengaged in similar activities to your own was sold and the following information was made public:Multiple of Book Value 0.8xMultiple of Net Income 11xMultiple of Sales 0.7xa)How would you determine an appropriate range of value for your company?b)It has come to your attention that your company has future investment opportunitiesthat would be less profitable than the competing company above. What does this sayabout the valuation of your company?Answer：a) Multiple of Sales： 0.7x = $15 million x 0.7 = $10.5 millionMultiple of Net Income： 11x = $1.5 million x 11 = $16.5 millionMultiple of Book Value： 0.8x = $11 million x 0.8 = $8.8 millionb) The valuation of your company would be at the lower end of the range.2.BHM stock is trading for $47 per share on the NYSE and $45 per share on the Sydney StockExchange. Assume that the costs of buying and selling BHM stock are negligible.a)How can you make an arbitrage profit?b)Over time what would you expect to happen to stock prices in New York and Sydney?c)Now assume that the cost of buying and selling shares of BHM are 2% pertransaction. How does this affect your answers?Answer：a) You could buy BHM stock in Sydney and simultaneously sell it in New York. Your arbitrage profit would be $2 per share.b)The prices would become equal.c)There could remain a 2% discrepancy between the prices whichwould be $1.84 in this instance.3.Suppose you have $50,000 in a bank account earning an interest rate of 3.5% per year. At thesame time you have an unpaid balance on your credit card of $13,000 on which you arepaying an interest rate of 21% per year. What is the arbitrage opportunity you face?Answer：You could take $13,000 out of your bank account and pay down your creditcard balance. You would give up 3.5% per year in interest earnings ($455) but you would save 21% per year in interest expenses ($2,730). So the arbitrage opportunity is worth$2,275 per year.4.The quotes from Hubris Bank and Modesty Bank are given below:Hubris Bank: 106 Yen/$Modesty Bank: 104 Yen/$Answer the following questions based on these figures.a)If we assume no transaction costs，there is evidently an opportunity for arbitragehere. If an arbitrageur started with $10,000，exactly how would (s)he make profitsand how much profit would (s)he make?b)As many traders engage in arbitrage who do you expect to see in the above quotes atthese two banks?c)If there is a 1% transaction cost for transactions is there still an opportunity forarbitrage?Answer:Hubris Bank：106 Yen/$ Modesty Bank：104 Yen/$a)At Hubris Bank，buy Yen with dollars (Yen are cheaper).At Modesty Bank，buy dollars with Yen (dollars are cheaper).Start with $10,000:At Hubris Bank： $10,000 x 106 Yen/$ = 1,060,000 YenAt Modesty Bank： 1,060,000 Yen x 1$/104 Yen = $10,192.31You make a profit of $192.31.b)The Yen will appreciate at Hubris Bank and it will depreciate at Modesty Bank.Eventually the exchange rate will stabilize between 106 Yen/$ and 104 Yen/$.c)Assume 1% transaction cost.At Hubris Bank: $10,000 (0.99) x 106 Yen/$ = 1,049,400 YenAt Modesty Bank: 1,049,400 Yen x (0.99) x $1/104 Yen = $10,090.38There is still an opportunity for arbitrage profit，but it has decreased from$192.31 to $90.38.5.In the United States，the real rate of return is expected to be 5% and in Switzerland it isexpected to be 4%.a)If the inflation rate in the United States is expected to be 6% and the Swissinflation rate is expected to be 8%，what will the nominal interest rates be in theUnited States and Switzerland?b)Are these markets in equilibrium?Where would you prefer to invest and why?c)What if the Swiss inflation rate were 6%?Are the markets in equilibrium?d)What are the respective nominal rates if the worldwide risk-free real rate ofreturn is 4% and inflation in the U.S. is 6% and in Switzerland it is 8%?Answer:a) United States: Nominal interest rate = (1.05)(1.06) – 1= 11.30% per yearSwitzerland: Nominal interest rate = (1.04)(1.08) – 1= 12.32% per yearb)The markets are not in equilibrium. Investors will go where the real rate is highest.That is，in the U.S.c) United States: Nominal interest rate = (1.05)(1.06) – 1= 11.30% per yearSwitzerland: Nominal interest rate = (1.04)(1.06) – 1= 10.24% per yearMarkets are still not in equilibrium.d) United States: Nominal interest rate = (1.04)(1.06) – 1= 10.24% per yearSwitzerland: Nominal interest rate = (1.04)(1.08) – 1= 12.32% per year。