sp09 bus172 exam2 - BUS 172A — Investment Analvsis Spring...

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Unformatted text preview: BUS 172A — Investment Analvsis Spring 2009 Exam 2 + g / Last Nanak—First Noriega Class Time: @103 PM Instructions: There are 13 questions. Questions 1—5 are multiple—choice questions. Questions 6—12 are problems for which computations are necessary. Finally, question 13 is an open question. For each question you deed to report the correct final answer in the space provided. For questions 6—12, in addition to reporting the final answer. you must also report the complete and correct solution With clear computations. When reporting the solutions to the questions 6-12 you must label all the amounts you use in the computations. Your computations and solutions to the questions 6-12 must be clear and easy to understand. For question 13 you must report a concise and clearly understandable answer. Grading: Each multiple-choice question is worth 5 points. No partial credit is granted for questions 1-5. For the problems 6-12 you can onlyr receive the maximum points allowed if you record the correct final answer along with the complete and correct solution for the problem. If you report the correct final answer, but you do not provide a complete and consistent solution‘for the problems, you will not receive any points. Partial credit is granted for questions 6—13. Section I — Multi le Choice uestions: 5 oints each uestion 1. An individual investor‘s investment objectives should be expressed in terms of: @1131: and return. .- ii. Capital market expectations. c. Liquidity needs and time horizon. d. Tax factors and legal and regulatory constraints. e. Risk-free rate of return. ANSWER: 70V 2. Which of the foilowing would provide evidence against the semi-strong form of the efficient market theory? 21. About 50% of pension funds outperform the market in any year. . Afier a manager exercises his/her stock options, the stock experiences no excess returns. c. All investors have learned to exploit signals about future performance. (1 Trend analysis is worthless in determining stock prices. a) Low Price-to-Eamings (PIE) stocks tend to have positive abnormal returns over the long run. / ANSWER: 1; 3. l‘rice—to-Eamings Ratio [P."EJ. A company‘s return on equity (ROE) is greater than its required return on equity (1:). The eamings multiplier (PIE) for that company’s stock is most likely to be positively related to the a. Risk-free rate. fdf ; .10 b. Market risk premium. /c/Dividend payout ratio. ? J; ,d/ ing‘s retention ratio. / Stock‘s ca ital asset pricing model beta. . P _ ANSWER: 4. Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz‘.’ Portfolio Expected return ("/10 Standard Deviation (“/u) a. W 15 36 K b. X 12 , - 15 ' e. Z 5 7 \/ d. Y 9 21 e. Not enough infonnation to be able to decide. ANSWER: D U: After lengthy trial and error, you discover a trading system that would have doubled the value of your investment every six months if applied over the last three years. Which of the following EIOblems make it difficult to conclude that this is an example of market inefficiency? '. Risk-adjustment problem. _ b. Relevant information problem. c. Dumb luck problem; d. Data snooping problem. e. Time value of money problem. ANSWER: l 2 La) .4. Section II — Problems “Vb? ‘yfl’ 6. Fortuna Inc. just paid $1.00 in dividends. The company expects to pay in one year a dividend of $2.00 (t=1). After this first payment, the dividends are expected to grow at a rate of 11% per year (annual compounding) and will be paid at the end of each year for the foreseeable future {t=2, t=3,...). In addition to these “normal“ end-of— year dividends, the company expects to pay some “extraordinary” dividends for a few years. In particular, Fortune expects to pay $1.50 at the end of each quarter for 5 years. starting in two years. Hence, the first extraordinary quarterly dividend will be paid in two years and three months (t=2.25). If the required rate of return for the shares of Fort - - ' 15% with monthly compounding, what is the current stock price? Do:l ’ $/\{P’Mr r9; graze: 49k- '2 Dr :1 7m? U} 3 (2'9“ Chiba/mg I! . V 1 L50 “0 + ”D {15: :r 1r 1 M14513} If? ' ‘ ‘21 id 4:5 r. '- K t a}. “(W3 16 u; 3"; “(3371. +T§a%’ $17!; 4-“: {Ii/532'; us” 1. r 4' far 4' +14; M' 11.1.1 .| L Ir/f‘? “Sis”, +5??? 73ng Ink??? 4' Iii-:2; '5. #q' :30 C ‘_ ( 3L gL'fl, 7,50 m -' 7,36 in __~__. — u = m ' + «mg—r Jr - '1. 9’ r ' ‘ H [‘70 5.. t 11 l. [.5— ’I—Q: 7‘. '1 - 2Q> .1, '50 d r lfla *L'Tm * W k 1.15%? * W‘fkmrfl” Vi , it" .t e In. 1. Lima" 4, tr 4 L5 yr 1,; Lyn-garb? 1L LS’ ,r ___,_._-—-—-’_'_—‘ ‘1 .../ —-—-— _z____ Hf; $751, '47 %' “fl!" 4/ U5, hrs?" 4’“; 2. ' ‘1 trr’m 4L 4r ”4 10'” - +,.—?—_' : + IJYW?’ Hf; ""5 4 — *"‘ new “law - new '3 ,mur 1‘ 1 Irv. 1' “genetic“ (.053 441°“ ' ' rim/i4 W 6618 + .“Jriw Jr m 1144. MR» 4’3? 1215?: film 7. The stocks of Tamien Co. are currentiy trading at $35.50 in the market. The company has just paid a dividend of $1.20 and next dividend is expected to be $1.80. The . shares of Tamien are expected to be trading at $141.00 in exactly 10 years. « Assuming that the dividends are pain : the end of each year forever, and their growth rate of return for the shares of Tamien. [5 points) 5:63 W SEEK :3“ 3 TC l .3 \l s; 5.: l$\ we. 8“? 0-. U‘ 'J :fl— , _ 1% L1; .9 V—ig ' 35.50kL-HJS- ' (0;: I'Lflk _?¢5—' page“) 8. Joe‘s Restaurant has current earnings per share of $625. The current book value is . . . . . or [m1 $4.70 per share. The appropriate discount rate for J oe's Restaurant 15 12%. Calcuiate the share price for Joe‘s Restaurant if the earnings grow at a constant rate of 4% fnrever. (5 points) ANSWER: “19]??? ~70 gym 3, WNW 1.5% H1:[email protected]®'° -' UI 9. Use the following information to calculate the expected return and standard deviation of a portfolio that is 40% invested in stock A and 60% invested in stock B. {5 points) I —.———H—-_—_——_'——————_._—, Stock A Stock B Expected Retum E{Ri] 0.14 0.] Standard deviation, o,- 0.42 0.31 Correlation coefficient. pkg 0.15 ANSWERS: lamp H: 6 7, fég) :: “AZ = \—/”'/ fig: .Lifim-Jtiy' 4’ .é(.I-.Hé>hL gr.) 1 .6083»! rf' , obolg3é, m 10. = 3'5;-_.'_ Tym- hdlding'pe'riod Show the account's balm: ce‘ sheer when you enter .e- - mafia/(85% ”r CW®> 2-376 .‘EZ ll. Assume the Clean Surplus Relationship and that dividends, earnings. and book values of equity all increase at a constant perpetual growth rate of g%. Under these conditipns, Show that the Dividend Discount Model (Len, Gordon Model) is equivalent to the Residual Income Model. (5 points) Clean Surplus Relationship." BPS, - D, = B, — BM 12. 011 March 14, Kosko Inc. announced a merger with Walrnark inc. Given the information below, calculate the cumulative abnormal return (CAR) around the announcement_date [[-5 days, + 5. days]]. Assume the company has an expected rate of return equal to the market return. Graph and interpret your results. Do you support market efficiency? (6 points} Date Market Kosko Return Return 0310'? 0.5 0.4 03308 0.3 0.4 03:09 41.2 -0.3 03/10 -0.6 -0.5 D3r'11 1.3 1.1 03:14 -0.1 1.8 03:15 0.1 0.1 03K16 0.9 0.? 03M? " 0.2 0.3 03;”18 —0.2 0.0 03:19 0.3 0.2 Daily Cumulative Days from Abnormal Abnormal Announcement Return Return -5 I: r i -4 _ .I e ,__._. *' H J ’3 1 12 *1 a ‘ l U _ 1- .11“ * .._fl——1 - I u- Tha amP‘h ZUWJG Mark/V eggxdlcnv Q5 -H~4L CHI basin 444. quwuawzi T5 SH; ("3 “L 59%; 3n he $67 6&1 +1.1 gummwfv‘.‘ L Sfiwfi m‘u‘k‘wrl? QM” (1% “Vi VGHRBOAJEWA'P‘ fiprwn‘hvg WM kfifiwt 13. Mark Hulbert in his article “I t 's not the Manager it is the Liquidity", presents a study by Alexander, Gibson, and Cici that focuses on the underperformance of mutual funds. The researchers argue. that fimd managers are unfairly blamed for the poor performance of their funds. In fact, the underpe-rformance of mutual funds compared to a simple buy-and—hold strategy is motivated by the fact that mutual fund managers are forced by the buy-and—sell decisions of shareholders in unprofitable transactions. Basically, it is the liquidity provision feature of mutual funds that generates the underperformance. a The authors try to study the performance of liquidity-motivated trades and valuation-motivated trades. How do they differentiate the two types of u‘ades'? What is the performance of the two types of trades? (4 points) 44%» dudes L; tilt; Make; dubs "9 rflfrgenw '97 WW; :2) WVAL ilfi'utA’AT 3h) imm‘l’bfi hi” ”dwéju‘i: m suns. “elonF‘m/MVW an»: m w a’w‘hn Mlkfls u/écruelut’é‘; 6-3: Agile; “4" WM}! sang).- a «lawn. ~Hu'l’ H“— W'MJQ C5} > ww b. Given the negative effect of the liquidity feature on mutual funds’ performance, What is the advice that Professor Gibson gives to investors? (2 points) mm a at; AM he an ant tea é} 21. {X 3’9 W’i KI) {timing—é \m’i a 44“” Mmi Lame, kin of ALF JrD (oxfr % loses ”QM tutti-31. “ a i \/ ...
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