Buisness Bus342 s06 Midterm2

Buisness Bus342 s06 Midterm2 - MidTerm 2 :1: v *1 Name:...

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Unformatted text preview: MidTerm 2 :1: v *1 Name: > * 13;? /5 if a stock is purchased for @er share and held one year, during which time a $3.50 dividend © is paid and the price climbs to $28.25, the holding period return is .v RF-r 00,100,947 50‘?) @ 13.00% PM’LEO p: PO’Pi = 772.1% 14.00% Do = 72.5 . I 9 O . _ _ L. c. 23.01% P, 1 L016 77 2% 7’5 E‘s/raw \ 27.00% 19 2. What is the expected return on a portfolio that will decline in value by 13% in a recession, will a. increase by 16% in normal times, and will increase by 23% during boom times if each scenario has equal likelihood? P R 11]} 8.67% at W —.\’b — .040?) A b. 13.00% WW“ I}, .W . 0573 c. 13.43% Wow“: ,b llrb [ij’l d. 17.33% W 3. In general, which stocks should be combined in a portfolio if th®s to reduce overall risk? a. Stocks with returns that are positively correlated. o: M L, ‘1) Stocks with returns that are negatively correlated. a Stocks with returns that are not correlated. - Stocks that have the highest expected returns. 4. Risk factors that are expected to affect only a specific firm are referred to as: a. Market risk. Diversifiable risk. c. Systematic risk. d. Risk premiums. . T C 0V m 5. F Beta u - sures a stock’s sensitivity to market risks. @3 "—31 g 6. A stock’measures the r W 1 )./ Average return on the stock /la./ Difference between the return on the stock and return on the market portfolio. @ Variability in the stock’s returns compared to that of the market portfolio. . Variety of shocks that the stock is exposed to in everyday business. 7. @F A project should be accepted if its return plots above the security market line. 8. What is the beta of a three-stock portfolio including 25% of Stock A with a beta of .90, 40% Stock B with a beta of 1.05, and 35% Stock C with a beta of 1.73? a. c vow-1"? ’6” '01 ‘ . 50 b. W13: 4— EWLOCD B '1 a C. 1.25 9. What is the expected return on the market portfolio at a time when Treasury bills yield\€/°/Ja‘nd a stock with a beta of 1.4 is expected to yield 18%? w<*&<ewmm> C. 10.8% El“; .Oifl 9:0 d. 12.0% I} l, v g 1 4_ .l%3 00"“! 4'( Prat-.Oe‘o) 1 1.7:] +0; ((4)471 w 4,; 4 Z 9° 2 w saw WV? (0)911 +7; 1":43 V 33.110.93.182) U9 5 3 39 ' 21.11 ; dal'WB! l p “Hulls/V 139.1103 919 3 pue e sluawalels 'p 'salqnop ueq1 aJow sumleu pannbaJ 51! elaq s,Auedu.Ioo e a|qnop noA 4| 'LungLuaJd >1ng lamew 9141 s! auu 18)|J8LU Awnaas aq; 4o adols aqi Q 'e1aqs! 3U1|13>|JELuAngn3953q1;03dO|SBL|_|_ Q ~— . .1 9)} (11391103 1mm 51 sluawalels Buymono; aql ;0 NM '91 cal mum-mum 420‘- =ng 33:22 . M ’ ‘ O ' L 0 +0 +0701|700| 3” 4% 2°? 91:05 %LS'6 'q ‘1! ' ; P); ~17 ' 40m %6£'L -e %Q I 9,0 ' (990 I . ,_ Bi 0) ° 2 am aaavm amen-use“ VAq M s! leqM ’%179 S; 9121 x21 aqa, y '% 18 01 panadxa 3J2 spuapgAgp ammj 001$ SEM puapwp luaan 150w 51! pue aJeqs Jed 51$ 12 sapen x3015 uowwoa s,q391-1152|d '%zt ;o 3121 lSBJSlU! x3: am? 59” lqap 51! 'Allua-Unl) 'lqap WM %017 Due Allnba WM %09 P93UEUU 5! '3ul L{Dalilsleld 'SI '93ng x3015 531119240 AJOlSN aql Bugugwexa Aq SUJmaJ BSBJaAe aAoqe wea plnoa auo 12q1 sagldw! Aauapyga 13>peLu wJo;-Bu0JJ_ '171 ou' 13>} GO“ 4% %0'9I ‘ 0—3747 : %9'ZI '3 530* Eff”. _ a 0+ 29d %0'ZI 'q 04517 ' 52)] %9'L '2 ¢%s ;o alEJ 1u215u03 e 1e MOJB 01 panadxa s! 12:41 puapwp 017175 a flea “1M pue 017$ JO} su'as >pols E}!SJOlSB/\U!A1!nba Jo; wmaJ ,Lo alEJ pannbaJ aq; aq 01 alewusa noA p|n0M mum 'gt ‘ q %SO'ZI 'P 'f/aLO'H - ,, J71 ‘9!" “J W” '° LGH- 1779M 0’3 O" N“ WWC‘D flflmgw ‘ ~ 9 %ZL'OI '2 1 2;} ¥,V,.gg_.e-;~14¥\t a%se ;o 312.] x91 2 pue ’%o[ 40 umlaJ pannbaJ 2 mm >pols pauafiud %o[ ’%3 ;o UJnlaJ pannbaJ 2 WM 1an %SE '%SI 40 mm paunbeJ 2 WM A1!an %ss Bulsn uuu 2 Jo; DDVM an 5! lBHM 'ZI 'slsAleue |eluaLuepum wJoyadlno Auensn slsAleue leaguqaai 'p e 'slgmd palsnfpe-xsu |aaxa anJea uayo aAeq stg; News 4—— ')|ng ;o laAa| Jgaql Aq palsaBSns uqu, 1!;on BJOLU umoqs aAeq sung; 98121 'q Alnr u! smom ssaaxe papgAOJd uayo aAeq s>|3015 'e ’aldwexa JOj 'slsaqloqu slaxJew luapgya aqz audsap pa/uasqo uaaq aAeq sapuapggau! laxJew '[I V\ %IL'SZ 'P 63% Q 3 ’ ,-. LU} %SS'EI @ . o . . ) m we 2:25: .2 2/ z £1an ,to 1503 XEl—JBJJE %5 e seq 12m za>peJq x21 %55 am u! LUJQ 2 10; anp ;o 1503 XElaJd aq; s! 1214M 'OI :aLueN z wJaipgw MidTerm 2 Name: 17. lnflation, recession, and high interest rates are economic events that are characterized as Company-specific risk that can be diversified away 6 Systematic risk that cannot be diversified away. c. Systematic risk that can be diversified away. /d./ Diversifiable risk /e./ Unsystematic risk that can be diversified away. 18. Assume that the risk-free rate is 5% and that the market risk premium is 7%. If a stock has required rate of return of 13.75%, what is its beta? @125 RF: .l7975‘-OC3+.015 b. 1.35 Mm): _ o’l .O/IB: .0975 c. 1.37 ,I i d. 1.60 KC ' “979 8 L15 e. 1.96 19. An investor is forming a portfolio by investing 3150,0006 stock A that has a beta of.1.50, and $25,000 in stock B that has a beta of 0.90. The return on the market is equal to 6% and Treasury bonls have a yield of 4%. What is the required rate of return on the investor’s portfolio? 6.6% WP: ,(plfl 0,; H60 Kq:.07 b. 6.8% a .9973”) = 0.610 K9:.05© , c. 5.8% 2%: 00 am “1.04 tl.‘50('0(’ :- «’2: 20+ 6- W mow- 01> 5 10% . 20. Ripken Iron Works faces the following probability distribution . . 7.7%) 1 , (DOM Sttf Pbbllit Rt ' tt " —-L PC 12* 12> m - an m _ .. .. “'6 01:.005 What IS the coeffICIent of variation on the company’s stock? ' 7 a. 0.33 0’ ’ 070 0.47 CV: .47l‘l' c. 0.54 d. 0.67 e. 0.71 21. A firm has a required return on equity of 16% and an afterfaxcost of debt of 8%. What debt to equity ratio should be used in order to keep the WACC at 2%?) 0+ “of a. .50 \(3= allp \ 10(0 1:13.337, C- 1-50 UH . 1 5' m)1 iii— 1.00 m]: i ()O®x+, L (“0) .0450 .iio e . \/< 0+ E E ° D” ’ DH? \649 2:016 w : IL). ' o . v» ‘ ’ g I 04_ A V V .UOM+vl\0We:-i2- 915 T D15 ‘1 1V ‘—'-—O+D: 3 204+ (lglj’j/WWW + raw-- 1 ! J _ 3‘ M + Q ' umlaJ papadxa sppols aql@ . T A3 elaq 5913015 aqi LunquaJd >1ng s,>po;s aqi ' LunluuaJd >1ng 19)]JELU aqi Q] ‘ 1 3;! aanpaJ [lg/“Wm, u! sasefifi '52 ”\ 'SAO|dUJB 1! J,qu ,to Awmew aq101 $13431 W sung; v®L '3z )1ng anbgun meu 001 aAeq 1ws aql M0|aq s>pols {lsaAug Luca 'p awn JBAO 1mg aql o; uaAaJ s>pols use/\ul '3 umlaJ 01 GA!1B|3J qfigq 5! >1ng {lsaAu11,uoq j SH )1ng 019M18|9J qfigq s! wmaJ f1saAU| geuu 19)]JELU Ammas sq), MO/aq slold ’219q $1! 01 W2 9 Md Amati; M L (E 7 3 Bungooae 14:)ng luauusaAu! ue Buuapgsuoa s! qu JOJSBAU! ue 01 puewwooa; noA panM Jeqm 121949 %6'9I 'P 017 OI gal '60,, : dHW %6'IZ = elaq D )IDOlS 5%‘51: = UJnlSJ 13)].JEUJ 5%5 = 3121 an;->151J ZUOIlELUJOiU! 8U!MO||0}3L|1 uaAgfi 3 x3015 uo mm flalelnaleg 'gz E1503 U0!1€10|i‘59 01 pBJJ3;3J 9.12 SS!1!JHDBS Sugnss! _.}O é—l’SEBLLL %8'ZI 'p .171" : QQ‘ ‘-._ 551 %17'ZI @ +|- 1Hz! %Z'II 'q MOCH'M'WO‘ (27- .29, -e é%9 Jago AJnSBaJi pUE %17I 01 panadxa S! IBHJELU 9L”. UBHM JO elaq E seq lqu, X3015 8 J0} 139dX3 JOISBAU! LIE plnoqs UJnlaJ 3l0 312.] leqM 'Algnbe s,LuJuaq1 se )1ng ewes sq), un snafmd 'p 1qap SILUJH 3H1 SE )ISH SLUES 9L|1 SlDBIOJd '3 1'7 M ' b 3 W ssaugan luaJJnD SILUJU. 9H1 SE >|S§J BLUES Bql SlDBIOJd a “Li 'X 000! 4 im‘y‘d '>|su Aue un SloaIOJd 001‘ ‘Ad + " .—_ ’7; I ‘ @9th 01 pesn 513w mu '8 00! z/H I I I " %9§'II '9 011.10 (go-211+é0 7;?>\ QC idél-JW %66.OI .p a I I i- 01 N ‘50 1 3 men: (a i], i0} 0 ‘ L190 ' : 10>! $72 :Y’m %£I'6 'q goqor : 7,1" ‘- 35! CAL‘ 29m %IV'L '2 gagvm luauno s,AueduJo:> 3141 s! 1eq/v\ '%o17 s! 9121 x21 s,AueduJoo aql 'o-o—z—‘i—s Jo; Aepol “as spuoq aqi '000’1540 an|E/\ ave; e pue %z[ ;o 312.: uodnoa lenuue ue q1!M 512% oz u! Sugmlew spuoq aAeq Aaql 71 ;o elaq e seq )po15 UOUJUJOD s,||neN '%9 s! umguJade >1ng 13)]JELU 9L4), pue %s s! ale; aag-xsu aql '1qap %sz pue Auan uowwoa %SL 40 51$!su03 leql ampnns |e1gdeo e seq Alluauna suneN 1eq1 alou samsnpul snneN Jo; sstleue [EDUEUH 'zz :aLueN Z uuaiplw MidTerm 2 30. 31. Name: Company X has 2 million shares of common stock outstanding at a book value of $2 per share. The stock trades for $3.00 per share. It also has $2 million in face value of debt that trades at 906 par. What is the weight of debt foi WACC purposes? “1U? Vél a. 23.1% \Q (foo wax)le b. . °o , c. :33; all WOO J 1 "3300000 d. 33.3% Km The company cost of capital \- 6 Measures what investors require from the company 32. 33. 34. 35. b. Depends on current profits and cash flows / ls measured using security book values d. Depends on historical profits and cash flows Which/groupr investors is capable of earning consistent, superiorprgffics if financial markets are’itrong-form fficient? a. Only technical analysts will be able to profit b. Only fundamental analysts will be able to profit a Only inside traders will be able to profit. a No one will be capable of sustained, superior profits if the correlation of prices between two stocks is 0.35, then the price of one stock would be expected to PM; = - 9)"? /a./ Rise when the other stock price falls Rise by 35% when the other stock price is unchanged 9 Fall when the other stock price falls d. Fall by 35% when the othgrsteekpricej unchanged in 3 Miller and Modigliani worldWith corporate @ut no possibility of bankruptcy costs, the value of the firm ismaxirnized when the Firm uses little {6'63 debt in its capital structure. 0 Firm uses almost no equity in its capital structure. a Firm uses a debt—equity ratio of 1.0 cl. Corporate tax rate approaches 100% Bergeron, Inc. has a debt to equity ratio of .8 and a tax rate of 40%. The cost of debt is 8% and the cost of equity is 15%. There are 25 million shares and 17,000 bonds outstanding. What is the ACC? a. 10.47% b 976? W‘ ‘ lOIW" 59 Ket‘m c: 6.84% to: ' +0 d. 11.50% “44évwll— 4r)+ .9905) : .lOSll oéllll r .O®4~= .1011) l'L 1'?” 7“,” A , A jab—1%“ (92% e Mb LI! -gLoIgu my M ‘ 619% «r mgvmo O (890")é‘c" +CH<22’)10H’ Hera—momma \ dyWh +2gwn4wyw4yvaw\znflwm %_7[:r{+1)—i :mo “)1,” :05! 771792" » :Zb 1 1Lo°»\$° M: 0d :Qd at; . : (7.}..0’ -é~ 1) (917'! WWW? etc_ 7 ’ 0' £7 (M40) 701 b 110 1b171000‘ . MOVE} M14701 2‘0} é/ dun/LAOXOQOD (990.)g1‘.|+\. wammm I 0 \ / Qw- C 0000an 000ml 09» been 51/ \dd (090 ~ 0097947640 ooo’eco 990 :fa ma gg’QQQQIQflg 00000076 LT“ 7’0)“. a 1g ‘bl®° ’ (my; a? W / get/k} ’ 71%;“! “mm 00099 (MW) Paw/d a 91'” J3 90:09 W” 1"” amour #1111 flazg oe'w=od élr'lfu‘d JV ” . J]: m %.‘:oa Og‘bzd Q90 '00: d "’7 :Vfi gingvm sluAumg s! leqM '%52 s! quog JO} 91121 x21 aqL 230 mm qlMOJg 1uelsu03 Q7‘ 2 seq pue 91mg ;0 puapwp e pged lsnMignba uowLuoa aqj" 1pu21s1no >pon,s uowwoa Q” v m yon 3 amowm aJaqi 'Sugp elslno saJeqs asaql ;@912 3.1qu 'og'zvs 12 p93ng Allua d s! pue spuapgngpfig'v sAed 12q1 x3015 pausfircfiéq osle AuedLuoo aql 'Bugpuelsmo spuoq asaq1;@m akiaq/ 'JeaA qaea sag/“mo sluawAed 1531mm sa>|eLu pue (39'55 Eugaq se saSed le. uleug/aql u! palonb A|1UBSBJC| s! an‘ss‘g/sgqi 'mu! aJnleLu mm \ 12m Bugpuelslno anssg puoq e seq Aueduuoa aql '1LungLuaJd >1ng EaxJeCL/J aqn, pue A 1005 dvgsl‘aql uo UJnlaJ aql -s! )pols uAUJog 3141 p leql auq SUJnlaJ laxJeuJ L41 ;0 aoué’lJ’EA aql :51) s! luapggaoa uonelauoa aql leql qons 13)].IBUJ a e sou), un palelauoa 15_________, .._._ \d 3.12 )pols uowwoa an, uo SUJnlaJ aqi 'Bquuelslno >poxs uowwoa seq samelaw uAUJog [St] '92 141mm 5! wa/qojd 10441 $1u10djo Jaqwnu aq; alas/pm wa/qOJd gone [a bujuwfiaq 3141 10 mm u! SJaqwnu aql 'aands 3L]; u! SJaMSUD aql 1nd ’paijOJd s! sands Jamsun up fl pun SJamsuo JnoA punom xoq n MDJp asna/d ’swa/qOJd Emma/[013w 10;] :aweN z wJalpgw MidTerm 2 Name: 37. [6] Bledlow Boxes nifiléfipOOpOtflnd has decided to use a rights offering to do it. They presently have 5,000,000 hares outstanding and are willing to sell 1,000,000 in the offering. The stock is presently priced a@ per sh e. Answer the following questions about thERO' 6:7 («Ya share 9%9 a. What is the value of 1 right? l l . Ni“ : ’3 rights R : Po —?‘ :_ {1000200 for (me mare of)” a 2_ $000,000 ri'CQMS rt» gall b. What will be the price of the stock after the fering is successfully completed? c. Exactly what is necessary to purchase one new share? 4746 /7/ right“) + l share 77% t it) '~' WW7“ “f” l Elma-.3 BC??? + ; 45-) 38. [9] Given the values in the table below, calculate the required values. K 9 4+ 6 RETURN BETA Number Price/Share shares STOCK Will/UL 1 G - 000 _ I.- igooo - ----— - a. What is the betza 0852152 portfolio desc igeodoigthe table above? I :Jw\fv____~\,+.lf90\ 9990 4sewX"4)+ «woe/U") (Woo 10'4") Emac = l. 446 O . llplfo or 114457- b. What is the expected return on the portfolio? 0 \ r .ialgjggolth—gg‘; (1% 15%; .lb) ...
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This homework help was uploaded on 02/06/2008 for the course BUS 342 taught by Professor Staff during the Spring '06 term at Cal Poly.

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Buisness Bus342 s06 Midterm2 - MidTerm 2 :1: v *1 Name:...

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