midterm2_practice_SOLUTIONS

midterm2_practice_SOLUTIONS - Midterm#2 PRACTICE EXAM...

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Unformatted text preview: Midterm #2: PRACTICE EXAM Name (no nicknames, please): Circle your Section #: XXX XXX XXX (XXX — XXX) (XXX — XXX) (XXX — XXX) 1. You are only allowed to have with you a pen/pencil and a calculator (no books, notes, computers, phones, etc). Extra scratch paper will be provided if you need it. You must have your own calculator (no sharing). 2. Round your interim work and final answers to the nearest three decimal places, and write your final answer in the provided boxes. You must show work where applicable. , 3. You have 90 minutes to complete the exam. There are 8 pages and 20 questions. Maximum possible score is 100 out of 100. True/False (4 points each / Total = 36 points) 1. The standard deviation on a portfolio can be greater than that on every False asset in the portfolio. 2. It is easier to take control over a firm whose board of directors has True False staggered election terms. 3. If Bond A has greater time to maturity than Bond B, then Bond A’s price True @ must be more sensitive to changes in interest rate fluctuations. ‘ z 4. Higher bond duration indicates that the bond’s price is more sensitive to @ False fluctuations in interest rates. 5. If you hold a zero-coupon bond to maturity, then your annualized rate of False return is guaranteed to equal the original yield to maturity at time of purchase (assuming the issuer does not default). 6. The ask price is the price at which a dealer/specialist/market maker will True False sell a security to you. i 7. The effective annual rate (EAR) tells you the rate at which your real Tme buying power increases. 8. According to CAPM, the risk premium on an asset is determined entirely @ False by its beta and the market risk premium. 1 out of8 Midterm #2: PRACTICE EXAM 9. Consider assets A and B, both with identical standard deviations. Then a True @ portfolio with positive weights on each of these assets, must have a standard deviation less than that on either asset. (This portfolio is not invested in any other assets) Multiple Choice (5 points each / Total = 15 points) 9. All else equal, if the expected return on Stock X suddenly decreases, then... A) The price per share decreases. Final Answer: B) The contemporaneous realized return is negative C) Both A and B b either A nor B 10. Which of the following is true of a bond selling below its face value: Final Answer: A) Its yield to maturity is less than the coupon rate. B) Its current yield is less than the coupon rate. C) Both A and B b @ither A nor B 11. Suppose that today, you just purchased a painting for $100,000. If in 10 years (time t=10) you were able to sell this painting for $200,000, your annualized rate of return on this investment - would be... Final Answer: A) L s than 10% Equal to 10 % A C) Greater than 10% but less than 20% D) Equal to 20% E) Greate r than 20% Amm. (rote. Ms M W’MT (gay/”Mac Io LOOOOU g ,, 7:0 ‘5) (’T'f‘> :100000 “’7 r» T Z ’1 f ”X, .07177 Zouto 8 of 71.7770 (era/Lt '- Midterm #2: PRACTICE EXAM — $ ‘§O/ v/ ea" 12. Consider a bond with a face value of $1000, time to maturity of 10 years, coupon rate of 5% (paid semi-annually), and a yield to maturity of 8%. A) What is the current price of the bond? (7 points) Final Answer: . ,_ . _ IOQQ a Z>><A(zo).ow) + mm M [41>wa - Op, . 2; as Z? ~ ‘ o ' L 7’ ' ’ ‘ — 20 a: 3; 761%. Pig B) What is the effective annual yield on this bond? (5 points) Final Answer: 08 7” ‘ CAY:(/+';: “i 8.“:2‘7e W [,oi—i 1.081% 0” 8.!B'7o 3 out of8 Midterm #2: PRACTICE EXAM 13. Consider a par-value bond with a face value of $1000, yield to maturity of 10%, and time to maturity of 10 years. What is its current yield? (5 points) Final Answer: ib/W Valli/(6' Méflc/lsi- l : Cure/emf Vie/{OJ K71M \ ,_ 1 - - M '+o+-J Ll.) i"(Mice (carom 0"“ e 7*“ “/0170 "7 any!“ 14. Suppose firm X is not currently paying dividends. You expect that the firm will pay its first dividend, in the amount of $1 per share, in four years (at time t=4). You expect to receive an annual dividend of $1 every year thereafter, forever. The expected return is 10%. What is the current price per share? (7 points) Final Answer: I 4 out of8 Midterm #2: PRACTICE EXAM 15. Suppose firm X just paid its annual dividend of $1 per share. For the next 10 years (ending t=10), you expect dividends to grow at a rate of 10%, after which point, you expect dividends to i grow at a rate of 5% thereafter (forever). The expected return is 8%. What is the current price per share? (5 points) Final Answer: i i i x r i i at 5 ‘08” " $08- .09 “>3 5 out of8 Midterm #2: PRACTICE EXAM 16. Suppose Firm X just paid out $30 million in dividends. It’s earnings at time t=0 is $100 million, its total assets are currently $1 billion, and it has 30 million shares outstanding. The firm must keep a constant dividend payout ratio, and cannot issue any debt or equity. ' m, Assuming the percentage of sales approach, if the required rate of return is 10%, what is the maximum justifiable price per share today under these conditions? (5 points) Final Answer: DV‘ 3&0 M1] M7; " $l00vvt§i A :— SIODU NH] ~ - E9 W‘“ _ ‘30 M.) J7 D6?" (00 «. " 307, by (”sum’ 3 {C $l/we: me «x {ps+fnid) 0"“ 3' Fiowbfi-wm 5707.: 70 Saws affraaota + 140 €‘<+’<’.-La/I ‘QMQMQi—xa/ ‘W‘z‘fls imat- maxi FOSSIL}? growl—u. fade fir All 1‘5 ' .._____ OM45) +IGK= .7 [0 M (woo ") /v 0075’27 or ’7,§Z7?D \——\ KL, / [/00 may :7 [000 Mu > W 550 7'14}; )3 +1.4 M426 FOSSiloie MN'm/amd Wed-Ha (72K 77 Max P T $) X i.0'7§27 , ° “5“ x $L J “,07327 13ng Gout of8 O Midterm #2: PRACTICE EXAM 17. What is the average beta across all assets? (1 point) Final Answer: avg/ér-l i 4.1Nam1‘g 18. Firm X just paid its annual dividend of 10 cents per share. Its next annual dividend is expected to be 20 cents per share, and is expected to remain constant each year thereafter. (5 points) Suppose the risk free rate is 3%, the market risk premium is 10%, and a market-model regression yields alpha and beta estimates of 0.01 and 0.80, respectively. The standard deviation of Firm X’s past returns is 35%. Under CAPM, What would be the current price per share of Firm X? Final Answer: (‘n f\ w \/ l 19 $> XI ‘9 X (>0 :.D$+~g(‘l> :7 ‘ ' l 6“ di‘SCcum+ {22 +6 . Z ll ”MWJ‘HE ,ll 7 out of8 l l i Midterm #2: PRACTICE EXAM t9 dowry“ 03E»:‘14v”" 19. You have just purchased a par-value bond, with face value of $1000 and yield to maturity of 10%. The bond makes annual coupon payments, and matures in 10 years. What is your realized return if you sell the bond next year right after you collect the annual coupon payment, at which point the market’s required rate of return has decreased to 5%? (5 points) Final Answer: 100 (00 too 100on _ u..__i___,________‘__4 <45. 3:341 75 O l ’2, 3 [O 6w, gem here afie— , \ he‘d fecm‘wvvb $100 coupon/l ?b ’ g ICCL WI VatwL) R Fwd/Mode. edge t looo N '_ ‘ 3 P\ = 100 *AM, .OS) + [039 ~ “Mass/sen e562“ PF‘CQ K/‘r— I l'l.oS-q iaS’ i} S E: t L 1 I /\ :6 \ 3° \/ 4— 6 O t v,q§§sa “0 or a S'S‘S‘I ”it 20. Draw the capital market line, assuming that the rate at which you can borrow money is greater than the rate at which you can invest in the riskless asset (i.e., the rate at which you lend money to the government). Label your figure clearly. (4 points) Ev). efiltu‘ 6:44 ‘Pwa ’t‘IV 8out of8 ...
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