FIN 614 Week 3 Midterm Exam | Assignment Help | KSBAU
- kogod-school-of-business-american-university / FIN 614
- 10 Feb 2020
- Price: $10
- Other / Other
Midterm 2
FIN 614– Financial Management
1) Sinking
funds are devices used to force companies to retire bonds on a scheduled basis
prior to their maturity. Many bond indentures allow the company to acquire
bonds for a sinking fund by either purchasing bonds in the market or selecting
the bonds to be acquired by a lottery administered by the trustee through a
call at face value.
a. True
b. False
2) A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical non callable bond.
a. True
b. False
3) The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.
a. True
b. False
4) A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if interest rates are below 10% and at a discount if interest rates are greater than 10%.
a. True
b. False
5) You have funds that you want to invest in bonds, and you just noticed in the financial pages of the local newspaper that you can buy a $1,000 par value bond for $800. The coupon rate is 10% (with annual payments), and there are 10 years before the bond will mature and pay off its $1,000 par value. You should buy the bond if your required return on bonds with this risk is 12%.
a. True
b. False
6) Brodkey Shoes has a beta of 1.30, the T-bill rate is 3.00%, and the T-bond rate is 6.5%. The annual return on the stock market during the past 3 years was 15.00%, but investors expect the annual future stock market return to be 13.00%. Based on the SML, what is the firm's required return?
o
13.51%
o
13.86%
o
14.21%
o
d.14.58%
o
14.95%
7) Returns for the Alcoff Company over the last 3 years are shown below. What's the standard deviation of the firm's returns? (Hint: This is a sample, not a complete population, so the sample standard deviation formula should be used.)
Year Return
2010 21.00%
2009 −12.50%
2008 25.00%
o
20.08%
o
20.59%
o
21.11%
o
21.64%
o
22.18%
8) In
portfolio analysis, we often use ex post (historical) returns and standard
deviations, despite the fact that we are really interested in ex ante (future)
data.
o
True
o
False
9) The
distributions of rates of return for Companies AA and BB are given below:
State of the Probability
of
Economy This
State Occurring AA BB
Boom 0.2 30% −10%
Normal 0.6 10% 5%
Recession 0.2 −5% 50%
We can conclude from the above information that any
rational, risk-averse investor
o
True
o
False
10) Your
friend is considering adding one additional stock to a 3-stock portfolio, to
form a 4-stock portfolio. She is highly risk averse and has asked for your
advice. The three stocks currently held all have b = 1.0, and they are
perfectly positively correlated with the market. Potential new Stocks A and B
both have expected returns of 15%, are in equilibrium, and are equally
correlated with the market, with r =
0.75. However, Stock A's standard deviation of
returns is 12% versus 8% for Stock B. Which stock should this investor add to
his or her portfolio, or does the choice not matter?
o
Stock A.
o
Stock B.
o
Neither A nor B, as neither has a return
sufficient to compensate for risk.
o
Add A, since its beta must be lower.
o
Either A or B, i.e., the investor should
be indifferent between the two.
11) Lance Inc.'s free cash flow was just $1.00 million. If the expected long-run growth rate for this company is 5.4%, if the weighted average cost of capital is 11.4%, Lance has $4 million in short-term investments and $3 million in debt, and 1 million shares outstanding, what is the intrinsic stock price?
o
$17.28
o
$17.70
o
$18.13
o
$18.57
o
$19.01
12) Which
of the following statements is CORRECT?
o
The preferred stock of a given firm is
generally less risky to investors than the same firm's common stock.
o
Corporations cannot buy the preferred
stocks of other corporations.
o
Preferred dividends are not generally
cumulative.
o
A big advantage of preferred stock is
that dividends on preferred stocks are tax deductible by the issuing
corporation.
o
Preferred stockholders have a priority
over bondholders in the event of bankruptcy to the income, but not to the
proceeds in a liquidation.
13) Stocks
A and B have the following data. The market risk premium is 6.0% and the
risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks
are in equilibrium, which of the following statements is CORRECT?
A B
Beta 1.10 0.90
Constant growth rate 7.00% 7.00%
o
Stock A must have a higher dividend
yield than Stock B.
o
Stock B's dividend yield equals its
expected dividend growth rate.
o
Stock B must have the higher required
return.
o
Stock B could have the higher expected
return.
o
Stock A must have a higher stock price
than Stock B.
14) The
Jameson Company just paid a dividend of $0.75 per share, and that dividend is
expected to grow at a constant rate of 5.50% per year in the future. The
company's beta is 1.15, the market risk premium is 5.00%, and the risk-free
rate is 4.00%. What is Jameson's current stock price, P0?
o
$18.62
o
$19.08
o
$19.56
o
$20.05
o
$20.55
15) Orwell
Building Supplies' last dividend was $1.75. Its dividend growth rate is
expected to be constant at 25% for 2 years, after which dividends are expected
to grow at a rate of 6% forever. Its required return (rs) is 12%. What is the
best estimate of the current stock price?
o
$41.58
o
$42.64
o
$43.71
o
$44.80
o
$45.92
16) Derivatives
are contracts enabling both buyers and sellers to execute a future transaction
at a price determined at the outset of the derivatives contract. Please answer
the following questions.
A. What
is the difference between a call and put option?
B. What
does the exercise - -or strike price denote?
C. Of
the five inputs used on the Black-Scholes model, please list three of the most
important inputs used in the model.
D. What
happens to the call-option premium when the strike price begins to rise
(Assuming that there are no changes to the other variables in the Black-Scholes
model)?
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