CHAPTER 11: THE EFFICIENT MARKET HYPOTHESIS
PROBLEM SETS
9.
c.
This is a predictable pattern in returns which should not occur if the weakform EMH is valid.
16.
While positive beta stocks respond well to favorable new information about the
economys progre

Chapter 02 - How to Calculate Present Values
CHAPTER 2
How to Calculate Present Values
Answers to Problem Sets
1. If the discount factor is .507, then .507*1.12 6 = $1
2. 125/139 = .899
3.
PV = 374/(1.09)9 = 172.20
4.
PV = 432/1.15 + 137/(1.152) + 797/(1.

Chapter 04 - The Value of Common Stocks
CHAPTER 4
The Value of Common Stocks
Answers to Problem Sets
1.
a.
True
b.
True
2.
Investors who buy stocks may get their return from capital gains as well as
dividends. But the future stock price always depends on

Chapter 13 - Efficient Markets and Behavioral Finance
CHAPTER 13
Efficient Markets and Behavioral Finance
Answers to Problem Sets
1.
2.
3.
c
Weak, semistrong, strong, strong, weak.
a.
False
b.
False
c.
True
d.
False
e.
False
f.
True
a.
False
b.
False
c.
T

Chapter 14 - An Overview of Corporate Financing
CHAPTER 14
An Overview of Corporate Financing
Answers to Problem Sets
1.
a.
False
b.
True
c.
True
a.
40,000/.50 = 80,000 shares
b.
78,000 shares
c.
2,000 shares are held as Treasury stock
d.
20,000 shares
e.

Chapter 11 - Investment, Strategy, and Economic Rents
CHAPTER 11
Investment, Strategy, and Economic Rents
Answers to Problem Sets
1.
a.
False
b.
True
c.
True
d.
False
2.
$15
3.
First consider whether renting the building and opening the Taco Palace is
pos

Chapter 03 - Valuing Bonds
CHAPTER 3
Valuing Bonds
Answers to Problem Sets
1.
2.
a.
Does not change
b.
Price falls
c.
Yield rises.
a.
If the coupon rate is higher than the yield, then investors must be
expecting a decline in the capital value of the bond

Chapter 15 - How Corporations Issue Securities
CHAPTER 15
How Corporations Issue Securities
Answers to Problem Sets
1.
a.
Further sale of an already publicly traded stock
b.
U.S. bond issue by foreign corporation
c.
Bond issue by industrial company
d.
Bon

Chapter 12 - Agency Problems, Compensation, and Performance Measurement
CHAPTER 12
Agency Problems, Compensation,
and Performance Measurement
Answers to Problem Sets
1.
a.
True
b.
True
c.
False
d.
True
a.
Agency costs: value lost when managers do not act

Chapter 10 - Project Analysis
CHAPTER 10
Project Analysis
Answers to Problem Sets
1.
a.
False
b.
True
c.
True
a.
Cash-flow forecasts overstated.
b.
One project proposal may be ranked below another simply because cash
flows are based on different forecasts

Chapter 08 - Portfolio Theory and the Capital Asset Pricing Model
CHAPTER 8
Portfolio Theory and the Capital Asset Pricing Model
Answers to Problem Sets
1.
a.
7%
b.
27% with perfect positive correlation; 1% with perfect negative correlation;
19.1% with no

Chapter 09 - Risk and the Cost of Capital
CHAPTER 9
Risk and the Cost of Capital
Answers to Problem Sets
1.
Overestimate
2.
Company cost of capital = 10 x .4 + (10 + .5 x 8) x .6 = 12.4%
After-tax WACC = (1 - .35) x 10 x .4 + (10 + .5 x 8) x .6 = 11.0%
3.

Chapter 07 - Introduction to Risk and Return
CHAPTER 7
Introduction to Risk and Return
Answers to Problem Sets
1.
Expected payoff is $100 and expected return is zero. Variance is 20,000 (%
squared) and standard deviation is 141%.
2.
a.
Standard deviation

CHAPTER 5: LEARNING ABOUT RETURN AND RISK
FROM THE HISTORICAL RECORD
PROBLEM SETS
7.
E(r) = [0.35 44.5%] + [0.30 14.0%] + [0.35 (16.5%)] = 14%
2 = [0.35 (44.5 14)2] + [0.30 (14 14)2] + [0.35 (16.5 14)2] = 651.175
= 25.52%
The mean is unchanged, but the s

CHAPTER 8: INDEX MODELS
PROBLEM SETS
6.
a.
The standard deviation of each individual stock is given by:
i [ i2 2M 2 (e i )]1 / 2
Since A = 0.8, B = 1.2, (eA ) = 30%, (eB ) = 40%, and M = 22%, we get:
A = (0.82 222 + 302 )1/2 = 34.78%
B = (1.22 222 + 402

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES
PROBLEM SETS.
2.
True. Under the expectations hypothesis, there are no risk premia built into bond
prices. The only reason for long-term yields to exceed short-term yields is an
expectation of higher short-

CHAPTER 16: MANAGING BOND PORTFOLIOS
PROBLEM SETS
3.
The percentage change in the bonds price is:
Duration
7.194
y
0.005 0.0327 3.27%
1 y
1.10
4.
a.
or a 3.27% decline
YTM = 6%
(1)
Time until
Payment
(years)
1
2
3
(2)
Cash Flow
$60.00
$60.00
$1,060.00

CHAPTER 22: FUTURES MARKETS
PROBLEM SETS
2.
The ability to buy on margin is one advantage of futures. Another is the ease with which
one can alter ones holdings of the asset. This is especially important if one is dealing in
commodities, for which the fut

CHAPTER3:HOWSECURITIESARETRADED
PROBLEM SETS
2.
The dealer sets the bid and asked price. Spreads should be higher on inactively traded
stocks and lower on actively traded stocks.
3.
a.
In principle, potential losses are unbounded, growing directly with in

CHAPTER 24: PORTFOLIO PERFORMANCE EVALUATION
PROBLEM SETS
8.
a.
Stock A
(i)
Alpha = regression intercept
Information ratio =
(ii)
*Sharpe measure =
(iii)
P
(eP )
rP rf
P
*Treynor measure =
(iv)
rP rf
P
Stock B
1.0%
2.0%
0.0971
0.1047
0.4907
0.3373
8.833

CHAPTER 18: EQUITY VALUATION MODELS
PROBLEM SETS
10.
a.
k rf [ E (rm ) r f ] 6% 1.25 (14% 6%) 16%
g
2
9% 6%
3
D1 E0 (1 g ) (1 b) $3 (1.06)
P0
1
$1.06
3
D1
$1.06
$10.60
k g 0.16 0.06
b.
Leading
P0/E1 = $10.60/$3.18 = 3.33
Trailing P0/E0 = $10.60/$3.00

CHAPTER 20: OPTIONS MARKETS: INTRODUCTION
PROBLEM SETS
6.
In terms of dollar returns, based on a $10,000 investment:
Stock Price
All stocks (100 shares)
All options (1,000 options)
Bills + 100 options
Price of Stock 6 Months from Now
$80
$100
$110
$120
$8

Chapter 06 - Making Investment Decisions with the Net Present Value Rule
CHAPTER 6
Making Investment Decisions with
the Net Present Value Rule
Answers to Problem Sets
1.
a, b, d, g, h.
2.
Real cash flow = 100,000/1.04 = $96,154; real discount rate = 1.08/