# summer 08 - Family name comma personal names Your student...

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UNIVERSITY OF TORONTO ACT245H1S SUM08 TERM TEST 2 TB ACT245H1F McD v66 Sum08 TT2 PRIVACY CODE A Page 2 1. (000000 (Class July 16, 2008) Just before a 20% stock price drop, interest rates are 5% per annum effective and dividend growth (starting 12 months in the future) is assumed to be at a rate 3% per annum. Just after the drop, the assumed interest rate is unchanged. There is no change in the assumed time 1 dividends, Calculate the new assumed dividend growth rate, effective per annum. (A) Less than 2.400% (B) 2.400% but less than 2.600% (C) 2.600% but less than 2.800% (D) 2.800% but less than 3.000% (E) 3.000% or m0re (B): Solution: 0.80 = P(New)/P(old) = [Div1/(r-g new ) ] / [Div1/(r-g new )] = (0.05-0.03)/(0.05- g new ) g new = 0.025
UNIVERSITY OF TORONTO ACT245H1S SUM08 TERM TEST 2 TB ACT245H1F McD v66 Sum08 TT2 PRIVACY CODE A Page 3 2. (000000) (Assignment Jul 21, 2008) Suppose you short-sell 300 shares of XYZ stock at \$30.18 with a commission charge of 0.5%. There is a zero margin requirement. Supposing you pay commission charges for purchasing the security to cover the short-sale, how much profit have you made if you close the short-sale at a price of \$29.87? Risk-free interest rates are zero. (A) Less than \$3.600 (B) \$3.600 but less than \$3.700 (C) \$3.700 but less than \$3.800 (D) \$3.800 but less than \$3.900 (E) \$3.900 or more (A)Solution Profit = 300*[(30.18-29.87) – 0.005*30.18 – 0.005*29.87] = \$2.925

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UNIVERSITY OF TORONTO ACT245H1S SUM08 TERM TEST 2 TB ACT245H1F McD v66 Sum08 TT2 PRIVACY CODE A Page 4 3. (000000 Today is January 1, 2009. Market risk-free interest rates are 4.8% per annum
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summer 08 - Family name comma personal names Your student...

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