2021年兹维博迪金融学第二版试题库TB
兹维博迪金融学第二版试题库9TB
Chapter NineValuation of Common StocksThis chapter contains 47 multiple choice questions, 17 short problems, and 9 longer problems. Multiple Choice1.In a quote listing of stocks, the ________ is defined as the annualized dollar dividend dividedby the stock’s price, and is usually expressed as a percentage.(a)cash dividend(b)dividend payout(c)dividend coverage(d)dividend yieldAnswer: (d)2.According to the discounted-dividend model, the price of a share of stock is the ________value of all expected ________ dividends per share, discounted at the market capitalization rate.(a)present; current(b)present; future(c)future; future(d)future; currentAnswer: (b)3.The value of common stock is determined by which of the following expected cash flows?(a)dividends and interest payments(b)dividends and maturity value of stock(c)dividends and net cash flows from operations of the firm(d)interest payments and maturity valueAnswer: (c)4.The ________ is the expected rate of return that investors require in order to be willing toinvest in the stock.(a)market capitalization rate(b)risk-adjusted discount rate(c)cost of debt(d)a and bAnswer: (d)5.The ________ of dividends is the most basic assumption underlying the discounted dividendmodel.(a)industry average(b)non-constant growth(c)constant growth(d)variabilityAnswer: (c)6.BHM stock is expected to pay a dividend of $2.50 a year from now, and its dividends areexpected to grow by 6% per year thereafter. What is the price of a BHM share if the market capitalization rate is 7% per year?(a)$250.00(b)$192.31(c)$25.00(d)$19.23Answer: (c)7.IOU stock is expected to pay a dividend of $1.67 a year from now, and its dividends are notexpected to grow in the foreseeable future. If the market capitalization rate is 7%, what is the current price of a share of IOU stock?(a)$11.69(b)$23.86(c)$116.90(d)$238.60Answer: (b)8.GMATS stock is currently selling for $34.50 a share. The current dividend for this stock is$1.60 and dividends are expected to grow at a constant rate of 10% per year thereafter. What must be the market capitalization rate for a share of GMATS stock?(a)4.90%(b)5.36%(c)14.64%(d)15.10%Answer: (d)9.Avacor stock is expected to pay a dividend of $1.89 a year from now, and its dividends areexpected to grow at a constant rate of 5% per year thereafter. If the market capitalization rate is 14% per year, what is the current price of a share of Avacor stock?(a)$13.50(b)$18.90(c)$21.00(d)$37.80Answer: (c)10.GRITO stock is currently selling for $46.10 a share. If the company is expected to pay adividend of $5.60 a year from now and dividends are not expected to grow thereafter, what is the market capitalization rate for a share of GRITO stock?(a)7.56%(b)8.23%(c)10.50%(d)12.15%Answer: (d)11.In the DDM model, if D1 and k are held constant, what will happen to the price of a stock ifthe constant growth rate gets higher?(a)the price of the stock will be higher(b)the price of the stock will hold constant(c)the price of the stock will be lower(d)it cannot be determined from the information givenAnswer: (a)12.The relation between earnings and dividends in any period is ________.(a)Dividends = Earnings/Net New Investment(b)Dividends = Earnings x Net New Investment(c)Dividends = Earnings + Net New Investment(d)Dividends = Earnings – Net New InvestmentAnswer: (d)13.Consider a firm called Nowhere Corporation, whose earnings per share are $12. The firminvests an amount each year that is just sufficient to replace the production capacity that is wearing out, and so the new investment is zero. The firm pays out all its earnings asdividends. Calculate the price of a share of Nowhere Corporation stock, give that k = 14%.(a)$168.00(b)$166.67(c)$85.71(d)$82.40Answer: (c)14.Consider a firm called SureBet Corporation. SureBet reinvests 55% of its earnings each yearinto new investments that earn a rate of return of 17% per year. Currently, SureBetCorporation has earnings per share of $12 and pays out 45% or $5.40 as dividends. Calculate the growth rate of earnings and dividends.(a)7.65%(b)8.50%(c)9.35%(d)24.75%Answer: (c)15.What adds value to the current price of a share of stock is ________.(a)growth per se(b)tax advantages(c)investment opportunities that earn rates of return > k(d)all of the aboveAnswer: (c)16.In order to evaluate the stock of Beltran Inc., an analyst uses the constant growth discounteddividend model. Expected earnings of $12 per share is assumed, as are an earnings retention rate of 70% and an expected rate of return on future investments of 17% per year. If the market capitalization rate is 14% per year, calculate the price for a share of Beltran stock.(a)$171.43(b)$367.35(c)$400.00(d)$857.14Answer: (a)17.In order to evaluate the stock of The Rendell-Vine Corporation, an analyst uses the constantgrowth discounted dividend model. Expected earnings of $12 per share is assumed, as are an earnings retention rate of 70% and an expected rate of return on future investments of 17% per year. If the market capitalization rate is 14% per year, what is the implied net present value of future investments?(a)$314.29(b)$281.64(c)$171.43(d)$85.72Answer: (d)18.In order to evaluate the stock of Toys’R’Me, an analyst uses the constant growth discounteddividend model. Expected earnings of $14 per share is assumed, as are an earnings retention rate of 60% and an expected rate of return on future investments of 17% per year. If the market capitalization rate is 15% per year, what is the implied net present value of future investments?(a)$23.34(b)$70.00(c)$93.34(d)$116.67Answer: (a)19.Firms with consistently high P/E multiples are interpreted to have either relatively ________market capitalization rates or relatively ________ present value of value-added investments.(a)low; low(b)high; high(c)high; low(d)low; highAnswer: (d)20.In a “frictionless” financial environment, the shareholders wealth is ________ the dividendpolicy the firm adopts.(a)increased by(b)decreased by(c)not affected by(d)determined byAnswer: (c)21.In a ________ the company pays cash to buy shares of its stock in the stock market, therebyreducing the number of shares outstanding.(a)cash dividend(b)share repurchase(c)stock split(d)a and bAnswer: (b)22.Stock splits and stock dividends ________ the number of shares of stock outstanding.(a)decrease(b)do not alter(c)increase(d)a or bAnswer: (c)23.SureBet Corporation has total assets with a market value of $15 million: $3 million in cashand $12 million in other assets. The market value of its debt is $3 million; of its equity $12 million. There are 1,000,000 shares of SureBet common stock outstanding, each with a market price of $12. If SureBet distributes a cash dividend of $1.50 per share, the market value of its assets and of its equity ________ by ________.(a)increases; $1.5 million(b)increases; $10.5 million(c)decreases; $1.5 million(d)decreases; $10.5 millionAnswer: (c)24.SureBet Corporation has total assets with a market value of $15 million: $3 million in cashand $12 million in other assets. The market value of its debt is $3 million; of its equity $12 million. There are 1,000,000 shares of SureBet common stock outstanding, each with amarket price of $12. If SureBet repurchases shares worth $2.4 million, the resulting number of shares outstanding is ________ , with a price per share of ________.(a)200,000; $15(b)200,000; $12(c)800,000; $15(d)800,000; $12Answer: (d)25.“Frictions” that can cause a firm’s dividend policy to have an effect on the wealth ofshareholders include:(a)regulations(b)taxes(c)cost of external finance(d)all of the aboveAnswer: (d)26.Outside investors may interpret an increase in a corporation’s cash dividend as ________ sign.(a)a positive sign(b)a negative sign(c)an indifferent sign(d)b or cAnswer: (a)27.From the perspective of a shareholder with regard to personal taxation, it is always ________for the corporation to pay out cash by ________.(a)better; cash dividends(b)worse; cash dividends(c)worse; share repurchases(d)it varies according to the situationAnswer: (b)28.An increase in a corporation’s cash dividend is most likely to ________.(a)decrease the price of its stock(b)increase the price of its stock(c)have no impact on the price of its stock(d)decrease trading activity of its stockAnswer: (b)29.Raising cash by issuing new stock is ________ to the corporation than raising cash byforegoing the payments of dividends.(a)is less costly(b)is more costly(c)is no different(d)just as costlyAnswer: (b)30.Gough Fraser is considering purchasing the stock of ASIOA Companies, which he plans tohold indefinitely. ASIOA just paid an annual dividend of $2.50 and the price of the stock is $48 per share. The earnings and dividends of the company are expected to grow forever at a rate of 6 percent per year. What annual rate of return does Gough expect on his investment?(a)10.58%(b)11.21%(c)11.52%(d)12.46%Answer: (c)31.Beazley Inc. just paid a dividend of $3.00 per share. This dividend is expected to grow at asupernormal rate of 15 percent per year for the next two years. It is then expected to grow at a rate of 6 percent per year forever. The appropriate discount rate for Beazley’s stock is 17 percent. What is the price of the stock?(a)$17.64(b)$27.27(c)$33.78(d)$46.15Answer: (c)32.Beazley Corporation would like to raise $100,000,000 by issuing preferred stock. Thepreferred stock will have a par value of $1,000 per share and pay a dividend of $72 per year.If the required rate of return for this stock is 16 percent, how many shares of preferred stock must Beazley issue?(a)450(b)16,000(c)222,222(d)265,332Answer: (c)33.If you use the constant dividend growth model to value a stock, which of the following iscertain to cause you to increase your estimate of the current value of the stock?(a)Decreasing the required rate of return for the stock(b)Decreasing the estimate of the amount of next year’s dividend(c)Decreasing the expected dividend growth rate(d)All of the aboveAnswer: (a)34.The constant dividend growth model may be used to find the price of a stock in all of thefollowing situations except when:(a)g < k(b)k < g(c)g = 0(d)k≠ gAnswer: (b)35.CarsonCorp just paid an annual dividend of $3.00. Dividends are expected to grow at aconstant rate forever. The price of the stock is currently $63.00. The required rate of return for this stock is 15 percent. What is the expected grow th rate of CarsonCorp’s dividend?(a)5.00%(b)5.48%(c)6.33%(d)10.00%Answer: (a)36.The common stock of Century Inc. is expected to pay a dividend of $2.00 one year fromtoday. After that the dividend is expected to grow at a rate of 10 percent per year for two years and then at a rate of 5 percent per year forever. If the required rate of return for this stock is 15 percent what is the current price?(a)$12.00(b)$18.29(c)$21.69(d)$25.40Answer: (c)37.A firm’s common stock is trading at $80 per share. In the past the firm has paid a constantdividend of $6 per share. However, the company has just announced new investments that the market did not know about. The market expects that with these new investments, thedividends should grow at 4% per year forever. Assuming that the discount rate remains the same, what will be the price of the stock after the announcement?(a)$94.50(b)$156.00(c)$171.43(d)$178.29Answer: (d)38.If the model below is to give a reasonable valuation of a stock, which of the followingpossible situations must be excluded?P0 = D1/(r–g)(a)There is no growth.(b)The growth rate exceeds the required rate of return.(c)The required rate of return is exceptionally high.(d)Growth is constant.Answer: (b)39.According to the constant growth model of stock valuation, capital appreciation in commonstock is a direct result of ________.(a)growth in future dividends(b)a reduction in the required rate of return(c)growth in corporate assets(d)a growth rate that exceeds the required rate of returnAnswer: (a)Questions 40 through 43 refer to the following information:New competition in Sophco’s market is going to have an impact on the growth in thefirm’s dividends. A current dividend of $1.00 was paid yesterday by Sophco, and thisdividend is expected to increase by 25% in the first year. After that point, the growth individends is expected to “decay” to the firm’s long-run constant growth of 10%. Such a“decay” process is one in which dividend growth declines by 5 percentage points per year up to the point where the expected constant rate of dividend growth is reached. So, year 2 dividend will be 20 percent higher than year 1, year 3 dividends will be 15 percent higher than year 1, and after year 3, dividends will grow by 10 percent forever. For problems 40 – 43, assume investors in Sophco require a rate of return of 15%.40.Calculate Sophco’s dividend in year 2.(a)$1.13(b)$1.25(c)$1.5(d)$1.73Answer: (c)41.Calculate the Sophco’s dividend in year 4.(a)$1.24(b)$1.57(c)$1.73(d)$1.90Answer: (d)42.Determine the price of Sophco’s stock at the en d of year 3 (just after the dividend has beenpaid).(a)$26.12(b)$28.34(c)$38.00(d)$39.73Answer: (c)43.Calculate the current price of Sophco’s stock.(a)$26.12(b)$28.34(c)$38.00(d)$39.73Answer: (b)Questions 44 through 47 refer to the following information:New competition in Acme Unlimited’s market is going to have an impact on the growth of the firm’s dividends. A current dividend of $1.50 was paid yesterday, and thisdividend is expected to increase by 35% in the first year. After that point, the growth in div idends is expected to “decay” to the firm’s long run constant growth of 5%. Such a“decay” process is one in which dividend growth declines by 10 percentage points peryear up to the point where the expected constant rate of dividend growth is reached. So, year 2 dividend will be 25 percent higher than year 1, year 3 dividend will be 15 percent higher, and after year 3, dividends will grow by 5 percent forever. Assume that investors require a rate of return of 17 on Acme Unlimited’s stock.44.Calculate the dividend in year 2.(a)$2.54(b)$2.92(c)$3.21(d)$3.30Answer: (a)45.Calculate the dividend in year 4.(a)$2.35(b)$2.54(c)$3.21(d)$3.53Answer: (c)46.Determine the price of Acme Unlimited’s stock at the end of year 3 (just after the dividendhas been paid).(a)$22.13(b)$26.75(c)$29.67(d)$34.24Answer: (b)47.Calculate the current price of Acme Unlimited’s stock.(a)$22.13(b)$26.75(c)$29.67(d)$34.24Answer: (a)Short Problems1.Discuss the two ways in which a corporation can distribute cash to its shareholders.Answer:There are two ways a corporation can distribute cash to its shareholders: by paying acash dividend or by repurchasing the company’s shares in the stock market. When acompany pays a cash dividend, all shareholders receive cash in amounts proportional to the number of shares they own.In a share repurchase, the company pays cash to buy shares of its stock in the stockmarket, thereby reducing the number of shares outstanding. In this case, onlyshareholders who choose to sell some of their shares will receive cash.2.Does growth “per se” add value to the current price of a share? If not, what does add value toa share’s current price?Answer:Growth per se does not add value. What adds value is the opportunity to invest inprojects that can earn rates of return in excess of the required rate, k. When a firm’sfuture investment opportunities yield a rate of return equal to k, the stock’s value can be estimated using the formula P0 = E1/k.3.In order to evaluate the stock of DippinDonuts, an analyst uses the constant growthdiscounted dividend model. Expected earnings of $15 per share are assumed, as are anearnings retention rate of 70% and an expected rate of return on future investments of 18% per year. If the market capitalization rate is 15% per year, what is the implied net present value of future investments?Answer:g = 0.7 x 0.18= 12.6%Use the constant growth formula to solve for P0:P0 = D1/(k – g)= 4.50/(0.15-0.126)= $187.50Next find P0 with the formula P0 = E1/k:= 15/0.15= $100The NPV of future investments is the difference between these two values: $187.50 –$100 = $87.504.In order to evaluate the stock of EasyStreet Corporation, an analyst uses the constant growthdiscounted dividend model. Expected earnings of $16 per share are assumed, as are anearnings retention rate of 60% and expected rate of return on future investments of 17% per year. If the market capitalization rate is 14% per year, what is the implied net present value of future investments?Answer:g = 0.6 X 0.17= 10.2%Use the constant growth formula to solve for P0:P0 = D1/(k – g)= $6.40/(0.14 – 0.102)= $168.42Next find P0 with the formula P0 = E1/k:= 16/0.14= $114.29The NPV of future investments is the difference between the two values: $168.42 –$114.29 = $54.13.anic Earth stock is expected to pay a dividend of $2.70 per share a year from now, and itsdividends are expected to grow by 7% per year thereafter. If its price is now $30 per share, what must be the market capitalization rate?Answer:Use the constant growth formula to solve for k:P0 = D1/(k – g)30 = 2.70/(k – 0.07)k = 16%6.Walch stock currently sells for $27.62 a share, and is expected to pay a dividend of D1 a yearfrom now. If its dividends are expected to grow by 4.5% per year thereafter and thecapitalization rate is 15% per year, what is the value of D1?Answer:Use the constant growth formula to solve for D1:P0 = D1/(k – g)D1 = P0(k – g)= $27.62(0.15 – 0.045)= $2.907.Discuss how outside investors may interpret an increase in a corporation’s cash dividend asopposed to a decrease.Answer:Investors may interpret an increase in a corporation’s cash dividend as a p ositive sign since it would suggest that management is confident the earnings can be sustained in the future.The result is most likely to be an increase in stock price. A decrease could be viewed as a bad signal that will most likely cause a decline in stock price.8.Consider the balance sheet of SureThing Corporation:Assets Liabilities and Shareholders’ EquityCash: $3 million Debt: $3 millionOther Assets: $11 million Equity: $11 millionTotal: $14 million Total: $14 millionNumber of shares outstanding = 440,000Price per share = $25If SureThing pays a cash dividend of $2.50 per share, what will the balance sheet look like afterward?Answer:Balance sheet after payment of cash dividend:Assets Liabilities and Shareholders’ EquityCash: $1.9 million Debt: $3 millionOther assets: $11 million Equity: $9.9 millionTotal: $12.9 million Total: $12.9 millionNumber of shares outstanding = 440,000Price per share = $22.509.Consider the balance sheet of SureThing Corporation:Assets Liabilities and Shareholders’ EquityCash: $3 million Debt: $3 millionOther assets: $11 million Equity: $11 millionTotal: $14 million Total: $14 millionNumber of shares outstanding = 440,000Price per share = $25If SureThing Corporation repurchases shares worth $2.5 million, what will the new balance sheet for SureThing Corporation look like?Answer:Balance sheet after share repurchase:Assets Liabilities and Shareholders’ Equity Cash: $0.5 million Debt: $3 millionOther assets: $11 million Equity: $8.5 millionTotal: $11.5 million Total: $11.5 million Number of shares outstanding = 340,000Price per share = $2510.Consider the balance sheet of SureThing Corporation:Assets Liabilities and Shareholders’ Equity Cash: $3 million Debt: $3 million Other assets: $11 million Equity: $11 million Total: $14 million Total: $14 million Number of shares outstanding = 440,000Price per share = $25If SureThing is paying a 20% stock dividend, what will the number of shares outstanding be?What will be the price per share?What would be the effect of a two-for-one stock split?Answer:After paying a 20% stock dividend:Number of shares outstanding = 528,000Price per share = $20.83After a two-for-one stock split:Number of shares outstanding = 880,000Price per share = $12.5011.Gough Fraser is considering purchasing the stock of ASIOA Companies, which he plans tohold indefinitely. ASIOA just paid an annual dividend of $3.00 and the price of the stock is $48 per share. The earnings and dividends of the company are expected to grow forever at a rate of 6 percent per year. What annual rate of return does Gough expect on his investment?Answer:D1 is 3.00. Given 6% annual growth, D1 = 3.00 x 1.06 = 4.80.Use the constant growth formula to solve for k:P0 = D1/(k – g)48 = 4.80/(k – 0.06)48k – 2.88 = 4.8048k = 7.68k = 16%12.Halpert Corporation would like to raise $100,000,000 by issuing preferred stock. Thepreferred stock will have a par value of $1,000 per share and pay a dividend of $48 per year.If the required rate of return for this stock is 15 percent, how many shares of preferred stock must Halpert issue?Answer:P0 = D1kP0 = $480.15= $320Number of shares = $100,000,000/$320= 312,500 shares13.Aslan Inc. just paid a dividend of $5.00 per share. This dividend is expected to grow at asupernormal rate of 20 percent per year for the next two years. It is then expected to grow at a rate of 5 percent per year forever. The appropriate discount rate for Aslan’s stock is 17percent. What is the price of the stock?Answer:D0 = $5D1 = $5(1.2)= $6.00D2 = $6.00(1.2)= $7.20D3 = $7.20(1.05) = $7.56P2 = D3/(k – g)= $7.56/(0.17 – 0.05)= $63.00P0 = $6.00/(1.17) + ($7.20 + $63.00)/(1.17)2= $56.4114.Druids Corp. just paid an annual dividend of $2.50. Dividends are expected to grow at aconstant rate forever. The price of the stock is currently $38.40. The required rate of return for this stock is 15 percent. What is the expected growth rate of Druids dividend?Answer:D0 = $2.50D1 = $2.50(1 + g)P0 = $38.40k = 15%Use the constant growth formula to solve for g:P0 = D1/(k – g)38.40 = 2.50(1 + g)/(0.15 – g)5.76 – 38.4g = 2.5 + 2.5g3.26 = 40.9g0.0797 = g15.The common stock of Century Inc. is expected to pay a dividend of $1.80 one year fromtoday. After that the dividend is expected to grow at a rate of 15 percent per year for two years and then at a rate of 5 percent per year forever. If the required rate of return for this stock is 15 percent, what is the current price?Answer:D1 = $1.80D2 = $2.07D3 = $2.38D4 = $2.50P3 = $2.50/(0.15 – 0.05)= $25.00P0 = 1.80/(1.15) + 2.07/ (1.15)2 + (2.38 + 25.00)/(1.15)3= $21.1416.A firm’s common stock is trading at $54 per share. In the past the firm has paid a constantdividend of $4 per share. However, the company has just announced new investments that the market did not know about. The market expects that with these new investments, thedividends should grow at 4% per year forever. Assuming that the discount rate remains the same, what will be the price of the stock after the announcement?Answer:P0 = $54Dividends have been constant, so:P0 = D1kk = $4/$54= 7.4%Now g = 4% and k stays same:P0 = 4(1.04)/(0.074 – 0.04)= $122.3517.Consider a stock that just paid a $3.00 dividend. You expect dividends on this stock to growat 25 percent per year for the next 3 years and 10 percent per year thereafter. If you require an18 percent return, how much are you willing to pay for this stock?Answer:D0 = $3D1 = $3(1.25)= $3.75D2 = 3.75(1.25)= $4.69D3 = 4.69(1.25)= $5.86D4 = $5.86(1.10)= $6.45P3 = $6.45/(0.18 – 0.10)= $80.63P0 = 3.75/(1.18) + $4.69/(1.18)2 + $86.63/(1.18)3= $59.19Longer Problems1.WannaGrow Corporation has expected earnings per share of $8. It has a history of payingcash dividends equal to 30% of earnings. The market capitalization rate for WannaGrow stock is 15% per year, and the expected rate of return on future investments is 18% per year.Using the constant growth rate discounted dividend model:a.What is the expected growth rate of dividends?b.What is the model’s estimate of the present value of the stock?c.What is the expected price of a share a year from now?Answer:a.g = earnings retention rate x ROE= 0.7 x 0.18= 12.6%b.D1 = 0.3 x $8= $2.40Use the constant growth formula to solve for D1:P0 = D1/(k – g)= $2.40/(0.15 – 0.126)= $100c.P1 = P0 (1 + g)= $100(1.126)P1 = $112.602.Dividends’R’Us Corporation is an all equity financed firm with a total market value of $150million. The company holds $20 million in cash and has $130 million in other assets. There are 2,500,000 shares of common stock outstanding for this company, each with a market price of $52. Consider the following decisions and the impact on Dividends’R’UsCorporation’s stock price and on numbe r of shares outstanding.a.The company pays a cash dividend of $5 per share.b.The company repurchases 250,000 shares.c.The company pays a 20% stock dividend.d.The company has a two-for-one stock split.Answer:a.The company pays out a total of $12.5 million in cash dividends. The stock pricefalls to $47 per share. Shareholder wealth may decline because personal taxesmay have to be paid on the cash dividend. The number of shares outstanding isstill 2.5 million shares.b.The stock price is unchanged. The number of shares outstanding is now2,250,000 shares.c.The number of shares outstanding is 1.2 x 2.5 million = 3 million shares.The stock price is $43.34.d.The number of shares doubles to 5,000,000.The stock price halves to $26.3.The stock of WishToGrow Corporation is currently selling for $15 per share. Earnings pershare in the coming year are expected to be $3. The company has a policy of paying out 70% of its earnings each year in dividends. The remaining 30% is retained and invested in projects that earn a 19% rate of return each year. This situation is expected to continue into theforeseeable future.ing the constant growth rate DDM, what rate of return do WannaGrow investorsrequire?b.By how much does its value exceed what it would be if all earnings were paid asdividends and nothing were reinvested?c.If WannaGrow were to cut its dividend payout ratio to 35%, what would happen to itsstock price?Answer:a.P0 = $15, E1 = $3, D1 = 0.7 x $3= $2.10g = 0.3 x 0.19= 5.7%P0 = D1/(k – g)15 = $2.10/(k – 0.057)k = 19.7%b.If all earnings were paid as dividends its price would be:P0 = 3/0.197= $15.23The current price is actually $0.23 less in value than the above model.c. D1 = 0.35 x $3 g = 0.65 x 0.19= $1.05 = 12.35%P0 = 1.05/(0.197 – 0.1235)= $14.29The stock price would drop by $0.71.。
兹维博迪金融学第二版精彩试题库9TB(1)
Chapter NineValuation of Common StocksThis chapter contains 47 multiple choice questions, 17 short problems, and 9 longer problems. Multiple Choice1.In a quote listing of stocks, the ________ is defined as the annualized dollar dividend dividedby the stock’s price, and is usually expressed as a percentage.(a)cash dividend(b)dividend payout(c)dividend coverage(d)dividend yieldAnswer: (d)2.According to the discounted-dividend model, the price of a share of stock is the ________value of all expected ________ dividends per share, discounted at the market capitalization rate.(a)present; current(b)present; future(c)future; future(d)future; currentAnswer: (b)3.The value of common stock is determined by which of the following expected cash flows?(a)dividends and interest payments(b)dividends and maturity value of stock(c)dividends and net cash flows from operations of the firm(d)interest payments and maturity valueAnswer: (c)4.The ________ is the expected rate of return that investors require in order to be willing toinvest in the stock.(a)market capitalization rate(b)risk-adjusted discount rate(c)cost of debt(d)a and bAnswer: (d)5.The ________ of dividends is the most basic assumption underlying the discounted dividendmodel.(a)industry average(b)non-constant growth(c)constant growth(d)variabilityAnswer: (c)6.BHM stock is expected to pay a dividend of $2.50 a year from now, and its dividends areexpected to grow by 6% per year thereafter. What is the price of a BHM share if the market capitalization rate is 7% per year?(a)$250.00(b)$192.31(c)$25.00(d)$19.23Answer: (c)7.IOU stock is expected to pay a dividend of $1.67 a year from now, and its dividends are notexpected to grow in the foreseeable future. If the market capitalization rate is 7%, what is the current price of a share of IOU stock?(a)$11.69(b)$23.86(c)$116.90(d)$238.60Answer: (b)8.GMATS stock is currently selling for $34.50 a share. The current dividend for this stock is$1.60 and dividends are expected to grow at a constant rate of 10% per year thereafter. What must be the market capitalization rate for a share of GMATS stock?(a)4.90%(b)5.36%(c)14.64%(d)15.10%Answer: (d)9.Avacor stock is expected to pay a dividend of $1.89 a year from now, and its dividends areexpected to grow at a constant rate of 5% per year thereafter. If the market capitalization rate is 14% per year, what is the current price of a share of Avacor stock?(a)$13.50(b)$18.90(c)$21.00(d)$37.80Answer: (c)10.GRITO stock is currently selling for $46.10 a share. If the company is expected to pay adividend of $5.60 a year from now and dividends are not expected to grow thereafter, what is the market capitalization rate for a share of GRITO stock?(a)7.56%(b)8.23%(c)10.50%(d)12.15%Answer: (d)11.In the DDM model, if D1 and k are held constant, what will happen to the price of a stock ifthe constant growth rate gets higher?(a)the price of the stock will be higher(b)the price of the stock will hold constant(c)the price of the stock will be lower(d)it cannot be determined from the information givenAnswer: (a)12.The relation between earnings and dividends in any period is ________.(a)Dividends = Earnings/Net New Investment(b)Dividends = Earnings x Net New Investment(c)Dividends = Earnings + Net New Investment(d)Dividends = Earnings – Net New InvestmentAnswer: (d)13.Consider a firm called Nowhere Corporation, whose earnings per share are $12. The firminvests an amount each year that is just sufficient to replace the production capacity that is wearing out, and so the new investment is zero. The firm pays out all its earnings asdividends. Calculate the price of a share of Nowhere Corporation stock, give that k = 14%.(a)$168.00(b)$166.67(c)$85.71(d)$82.40Answer: (c)14.Consider a firm called SureBet Corporation. SureBet reinvests 55% of its earnings each yearinto new investments that earn a rate of return of 17% per year. Currently, SureBetCorporation has earnings per share of $12 and pays out 45% or $5.40 as dividends. Calculate the growth rate of earnings and dividends.(a)7.65%(b)8.50%(c)9.35%(d)24.75%Answer: (c)15.What adds value to the current price of a share of stock is ________.(a)growth per se(b)tax advantages(c)investment opportunities that earn rates of return > k(d)all of the aboveAnswer: (c)16.In order to evaluate the stock of Beltran Inc., an analyst uses the constant growth discounteddividend model. Expected earnings of $12 per share is assumed, as are an earnings retention rate of 70% and an expected rate of return on future investments of 17% per year. If the market capitalization rate is 14% per year, calculate the price for a share of Beltran stock.(a)$171.43(b)$367.35(c)$400.00(d)$857.14Answer: (a)17.In order to evaluate the stock of The Rendell-Vine Corporation, an analyst uses the constantgrowth discounted dividend model. Expected earnings of $12 per share is assumed, as are an earnings retention rate of 70% and an expected rate of return on future investments of 17% per year. If the market capitalization rate is 14% per year, what is the implied net present value of future investments?(a)$314.29(b)$281.64(c)$171.43(d)$85.72Answer: (d)18.In order to evaluate the stock of Toys’R’Me, an analyst uses the constant growthdiscounted dividend model. Expected earnings of $14 per share is assumed, as are anearnings retention rate of 60% and an expected rate of return on future investments of 17% per year. If the market capitalization rate is 15% per year, what is the implied net present value of future investments?(a)$23.34(b)$70.00(c)$93.34(d)$116.67Answer: (a)19.Firms with consistently high P/E multiples are interpreted to have either relatively ________market capitalization rates or relatively ________ present value of value-added investments.(a)low; low(b)high; high(c)high; low(d)low; highAnswer: (d)20.In a “frictionless” financial environment, the shareholders wealth is ________ the dividendpolicy the firm adopts.(a)increased by(b)decreased by(c)not affected by(d)determined byAnswer: (c)21.In a ________ the company pays cash to buy shares of its stock in the stock market, therebyreducing the number of shares outstanding.(a)cash dividend(b)share repurchase(c)stock split(d)a and bAnswer: (b)22.Stock splits and stock dividends ________ the number of shares of stock outstanding.(a)decrease(b)do not alter(c)increase(d)a or bAnswer: (c)23.SureBet Corporation has total assets with a market value of $15 million: $3 million in cashand $12 million in other assets. The market value of its debt is $3 million; of its equity $12 million. There are 1,000,000 shares of SureBet common stock outstanding, each with amarket price of $12. If SureBet distributes a cash dividend of $1.50 per share, the market value of its assets and of its equity ________ by ________.(a)increases; $1.5 million(b)increases; $10.5 million(c)decreases; $1.5 million(d)decreases; $10.5 millionAnswer: (c)24.SureBet Corporation has total assets with a market value of $15 million: $3 million in cashand $12 million in other assets. The market value of its debt is $3 million; of its equity $12 million. There are 1,000,000 shares of SureBet common stock outstanding, each with amarket price of $12. If SureBet repurchases shares worth $2.4 million, the resulting number of shares outstanding is ________ , with a price per share of ________.(a)200,000; $15(b)200,000; $12(c)800,000; $15(d)800,000; $12Answer: (d)25.“Frictions” that can cause a firm’s dividend policy to have an effect on the wealth ofshareholders include:(a)regulations(b)taxes(c)cost of external finance(d)all of the aboveAnswer: (d)26.Outside investors may interpret an increase in a corporation’s cash dividend as ________sign.(a)a positive sign(b)a negative sign(c)an indifferent sign(d)b or cAnswer: (a)27.From the perspective of a shareholder with regard to personal taxation, it is always ________for the corporation to pay out cash by ________.(a)better; cash dividends(b)worse; cash dividends(c)worse; share repurchases(d)it varies according to the situationAnswer: (b)28.An increase in a corporation’s cash dividend is most likely to ________.(a)decrease the price of its stock(b)increase the price of its stock(c)have no impact on the price of its stock(d)decrease trading activity of its stockAnswer: (b)29.Raising cash by issuing new stock is ________ to the corporation than raising cash byforegoing the payments of dividends.(a)is less costly(b)is more costly(c)is no different(d)just as costlyAnswer: (b)30.Gough Fraser is considering purchasing the stock of ASIOA Companies, which he plans tohold indefinitely. ASIOA just paid an annual dividend of $2.50 and the price of the stock is $48 per share. The earnings and dividends of the company are expected to grow forever at a rate of 6 percent per year. What annual rate of return does Gough expect on his investment?(a)10.58%(b)11.21%(c)11.52%(d)12.46%Answer: (c)31.Beazley Inc. just paid a dividend of $3.00 per share. This dividend is expected to grow at asupernormal rate of 15 percent per year for the next two years. It is then expected to grow at a rate of 6 percent per year forever. The appropriate discount rate for Beazley’s stock is 17 percent. What is the price of the stock?(a)$17.64(b)$27.27(c)$33.78(d)$46.15Answer: (c)32.Beazley Corporation would like to raise $100,000,000 by issuing preferred stock. Thepreferred stock will have a par value of $1,000 per share and pay a dividend of $72 per year.If the required rate of return for this stock is 16 percent, how many shares of preferred stock must Beazley issue?(a)450(b)16,000(c)222,222(d)265,332Answer: (c)33.If you use the constant dividend growth model to value a stock, which of the following iscertain to cause you to increase your estimate of the current value of the stock?(a)Decreasing the required rate of return for the stock(b)Decreasing the estimate of the amount of next year’s dividend(c)Decreasing the expected dividend growth rate(d)All of the aboveAnswer: (a)34.The constant dividend growth model may be used to find the price of a stock in all of thefollowing situations except when:(a)g < k(b)k < g(c)g = 0(d)k≠ gAnswer: (b)35.CarsonCorp just paid an annual dividend of $3.00. Dividends are expected to grow at aconstant rate forever. The price of the stock is currently $63.00. The required rate of return for this stock is 15 percent. What is the expected growth rate of CarsonCorp’s dividend?(a)5.00%(b)5.48%(c)6.33%(d)10.00%Answer: (a)36.The common stock of Century Inc. is expected to pay a dividend of $2.00 one year fromtoday. After that the dividend is expected to grow at a rate of 10 percent per year for two years and then at a rate of 5 percent per year forever. If the required rate of return for this stock is 15 percent what is the current price?(a)$12.00(b)$18.29(c)$21.69(d)$25.40Answer: (c)37.A firm’s common stock is trading at $80 per share. In the past the firm has paid a constantdividend of $6 per share. However, the company has just announced new investments that the market did not know about. The market expects that with these new investments, thedividends should grow at 4% per year forever. Assuming that the discount rate remains the same, what will be the price of the stock after the announcement?(a)$94.50(b)$156.00(c)$171.43(d)$178.29Answer: (d)38.If the model below is to give a reasonable valuation of a stock, which of the followingpossible situations must be excluded?P0 = D1/(r – g)(a)There is no growth.(b)The growth rate exceeds the required rate of return.(c)The required rate of return is exceptionally high.(d)Growth is constant.Answer: (b)39.According to the constant growth model of stock valuation, capital appreciation in commonstock is a direct result of ________.(a)growth in future dividends(b)a reduction in the required rate of return(c)growth in corporate assets(d)a growth rate that exceeds the required rate of returnAnswer: (a)Questions 40 through 43 refer to the following information:New competition in Sophco’s market is going to have an impact on the growth in thefirm’s dividends. A current dividend of $1.00 was paid yesterday by Sophco, and thisdividend is expected to increase by 25% in the first year. After that point, the growth individends is expected to “decay” to the firm’s long-run constant growth of 10%. Sucha “decay” process is one in which dividend growth declines by 5 percentage points peryear up to the point where the expected constant rate of dividend growth is reached. So,year 2 dividend will be 20 percent higher than year 1, year 3 dividends will be 15 percent higher than year 1, and after year 3, dividends will grow by 10 percent forever. Forproblems 40 – 43, assume investors in Sophco require a rate of return of 15%.40.Calculate Sophco’s dividend in year 2.(a)$1.13(b)$1.25(c)$1.5(d)$1.73Answer: (c)41.Calculate the Sophco’s dividend in year 4.(a)$1.24(b)$1.57(c)$1.73(d)$1.90Answer: (d)42.Determine the price of Sophco’s stock at the end of year 3 (just after the dividend has beenpaid).(a)$26.12(b)$28.34(c)$38.00(d)$39.73Answer: (c)43.Calculate the current price of Sophco’s stock.(a)$26.12(b)$28.34(c)$38.00(d)$39.73Answer: (b)Questions 44 through 47 refer to the following information:New competition in Acme Unlimited’s market is going to have an impact on the growth of the firm’s dividends. A current dividend of $1.50 was paid yesterday, and thisdividend is expected to increase by 35% in the first year. After that point, the growth individends is expected to “decay” to the firm’s long run constant growth of 5%. Such a “decay” process is one in which dividend growth declines by 10 percentage points per year up to the point where the expected constant rate of dividend growth is reached. So, year 2 dividend will be 25 percent higher than year 1, year 3 dividend will be 15 percent higher, and after year 3, dividends will grow by 5 percent forever. Assume that investors require a rate of return of 17 on Acme Unlimited’s stock.44.Calculate the dividend in year 2.(a)$2.54(b)$2.92(c)$3.21(d)$3.30Answer: (a)45.Calculate the dividend in year 4.(a)$2.35(b)$2.54(c)$3.21(d)$3.53Answer: (c)46.Determine the price of Acme Unlimited’s stock at the end of year 3 (just after the dividendhas been paid).(a)$22.13(b)$26.75(c)$29.67(d)$34.24Answer: (b)47.Calculate the current price of Acme Unlimited’s stock.(a)$22.13(b)$26.75(c)$29.67(d)$34.24Answer: (a)Short Problems1.Discuss the two ways in which a corporation can distribute cash to its shareholders.Answer:There are two ways a corporation can distribute cash to its shareholders: by paying acash dividend or by repurchasing the company’s shares in the stock market. When acompany pays a cash dividend, all shareholders receive cash in amounts proportional to the number of shares they own.In a share repurchase, the company pays cash to buy shares of its stock in the stockmarket, thereby reducing the number of shares outstanding. In this case, onlyshareholders who choose to sell some of their shares will receive cash.2.Does growth “per se” add value to the current price of a share? If not, what does add valueto a share’s current price?Answer:Growth per se does not add value. What adds value is the opportunity to invest inprojects that can earn rates of return in excess of the required rate, k. When a firm’sfuture investment opportunities yield a rate of return equal to k, the stock’s value can be estimated using the formula P0 = E1/k.3.In order to evaluate the stock of DippinDonuts, an analyst uses the constant growthdiscounted dividend model. Expected earnings of $15 per share are assumed, as are anearnings retention rate of 70% and an expected rate of return on future investments of 18% per year. If the market capitalization rate is 15% per year, what is the implied net present value of future investments?Answer:g = 0.7 x 0.18= 12.6%Use the constant growth formula to solve for P0:P0 = D1/(k – g)= 4.50/(0.15-0.126)= $187.50Next find P0 with the formula P0 = E1/k:= 15/0.15= $100The NPV of future investments is the difference between these two values: $187.50 –$100 = $87.504.In order to evaluate the stock of EasyStreet Corporation, an analyst uses the constant growthdiscounted dividend model. Expected earnings of $16 per share are assumed, as are anearnings retention rate of 60% and expected rate of return on future investments of 17% per year. If the market capitalization rate is 14% per year, what is the implied net present value of future investments?Answer:g = 0.6 X 0.17= 10.2%Use the constant growth formula to solve for P0:P0 = D1/(k – g)= $6.40/(0.14 – 0.102)= $168.42Next find P0 with the formula P0 = E1/k:= 16/0.14= $114.29The NPV of future investments is the difference between the two values: $168.42 –$114.29 = $54.13.anic Earth stock is expected to pay a dividend of $2.70 per share a year from now, and itsdividends are expected to grow by 7% per year thereafter. If its price is now $30 per share, what must be the market capitalization rate?Answer:Use the constant growth formula to solve for k:P0 = D1/(k – g)30 = 2.70/(k – 0.07)k = 16%6.Walch stock currently sells for $27.62 a share, and is expected to pay a dividend of D1 a yearfrom now. If its dividends are expected to grow by 4.5% per year thereafter and thecapitalization rate is 15% per year, what is the value of D1?Answer:Use the constant growth formula to solve for D1:P0 = D1/(k – g)D1 = P0(k – g)= $27.62(0.15 – 0.045)= $2.907.Discuss how outside investors may interpret an increase in a corporation’s cash dividend asopposed to a decrease.Answer:Investors may interpret an increase in a corporation’s cash dividend as a positive sign since it would suggest that management is confident the earnings can be sustained in the future.The result is most likely to be an increase in stock price. A decrease could be viewed as a bad signal that will most likely cause a decline in stock price.8.Consider the balance sheet of SureThing Corporation:Assets Liabilities and Shareholders’ EquityCash: $3 million Debt: $3 millionOther Assets: $11 million Equity: $11 millionTotal: $14 million Total: $14 millionNumber of shares outstanding = 440,000Price per share = $25If SureThing pays a cash dividend of $2.50 per share, what will the balance sheet look like afterward?Answer:Balance sheet after payment of cash dividend:Assets Liabilities and Shareholders’ EquityCash: $1.9 million Debt: $3 millionOther assets: $11 million Equity: $9.9 millionTotal: $12.9 million Total: $12.9 millionNumber of shares outstanding = 440,000Price per share = $22.509.Consider the balance sheet of SureThing Corporation:Assets Liabilities and Shareholders’ EquityCash: $3 million Debt: $3 millionOther assets: $11 million Equity: $11 millionTotal: $14 million Total: $14 millionNumber of shares outstanding = 440,000Price per share = $25If SureThing Corporation repurchases shares worth $2.5 million, what will the new balance sheet for SureThing Corporation look like?Answer:Balance sheet after share repurchase:Assets Liabilities and Shareholders’ EquityCash: $0.5 million Debt: $3 millionOther assets: $11 million Equity: $8.5 millionTotal: $11.5 million Total: $11.5 million Number of shares outstanding = 340,000Price per share = $2510.Consider the balance sheet of SureThing Corporation:Assets Liabilities and Shareholders’ Equity Cash: $3 million Debt: $3 million Other assets: $11 million Equity: $11 million Total: $14 million Total: $14 million Number of shares outstanding = 440,000Price per share = $25If SureThing is paying a 20% stock dividend, what will the number of shares outstanding be?What will be the price per share?What would be the effect of a two-for-one stock split?Answer:After paying a 20% stock dividend:Number of shares outstanding = 528,000Price per share = $20.83After a two-for-one stock split:Number of shares outstanding = 880,000Price per share = $12.5011.Gough Fraser is considering purchasing the stock of ASIOA Companies, which he plans tohold indefinitely. ASIOA just paid an annual dividend of $3.00 and the price of the stock is $48 per share. The earnings and dividends of the company are expected to grow forever at a rate of 6 percent per year. What annual rate of return does Gough expect on his investment?Answer:D1 is 3.00. Given 6% annual growth, D1 = 3.00 x 1.06 = 4.80.Use the constant growth formula to solve for k:P0 = D1/(k – g)48 = 4.80/(k – 0.06)48k – 2.88 = 4.8048k = 7.68k = 16%12.Halpert Corporation would like to raise $100,000,000 by issuing preferred stock. Thepreferred stock will have a par value of $1,000 per share and pay a dividend of $48 per year.If the required rate of return for this stock is 15 percent, how many shares of preferred stock must Halpert issue?Answer:P0 = D1kP0 = $480.15= $320Number of shares = $100,000,000/$320= 312,500 shares13.Aslan Inc. just paid a dividend of $5.00 per share. This dividend is expected to grow at asupernormal rate of 20 percent per year for the next two years. It is then expected to grow at a rate of 5 percent per year forever. The appropriate discount rate for Aslan’s stock is 17percent. What is the price of the stock?Answer:D0 = $5D1 = $5(1.2)= $6.00D2 = $6.00(1.2)= $7.20D3 = $7.20(1.05) = $7.56P2 = D3/(k – g)= $7.56/(0.17 – 0.05)= $63.00P0 = $6.00/(1.17) + ($7.20 + $63.00)/(1.17)2= $56.4114.Druids Corp. just paid an annual dividend of $2.50. Dividends are expected to grow at aconstant rate forever. The price of the stock is currently $38.40. The required rate of return for this stock is 15 percent. What is the expected growth rate of Druids dividend?Answer:D0 = $2.50D1 = $2.50(1 + g)P0 = $38.40k = 15%Use the constant growth formula to solve for g:P0 = D1/(k – g)38.40 = 2.50(1 + g)/(0.15 – g)5.76 – 38.4g = 2.5 + 2.5g3.26 = 40.9g0.0797 = g15.The common stock of Century Inc. is expected to pay a dividend of $1.80 one year fromtoday. After that the dividend is expected to grow at a rate of 15 percent per year for two years and then at a rate of 5 percent per year forever. If the required rate of return for this stock is 15 percent, what is the current price?Answer:D1 = $1.80D2 = $2.07D3 = $2.38D4 = $2.50P3 = $2.50/(0.15 – 0.05)= $25.00P0 = 1.80/(1.15) + 2.07/ (1.15)2 + (2.38 + 25.00)/(1.15)3= $21.1416.A firm’s common stock is trading at $54 per share. In the past the firm has paid a constantdividend of $4 per share. However, the company has just announced new investments that the market did not know about. The market expects that with these new investments, thedividends should grow at 4% per year forever. Assuming that the discount rate remains the same, what will be the price of the stock after the announcement?Answer:P0 = $54Dividends have been constant, so:P0 = D1kk = $4/$54= 7.4%Now g = 4% and k stays same:P0 = 4(1.04)/(0.074 – 0.04)= $122.3517.Consider a stock that just paid a $3.00 dividend. You expect dividends on this stock to growat 25 percent per year for the next 3 years and 10 percent per year thereafter. If you require an18 percent return, how much are you willing to pay for this stock?Answer:D0 = $3D1 = $3(1.25)= $3.75D2 = 3.75(1.25)= $4.69D3 = 4.69(1.25)= $5.86D4 = $5.86(1.10)= $6.45P3 = $6.45/(0.18 – 0.10)= $80.63P0 = 3.75/(1.18) + $4.69/(1.18)2 + $86.63/(1.18)3= $59.19Longer Problems1.WannaGrow Corporation has expected earnings per share of $8. It has a history of payingcash dividends equal to 30% of earnings. The market capitalization rate for WannaGrow stock is 15% per year, and the expected rate of return on future investments is 18% per year.Using the constant growth rate discounted dividend model:a.What is the expected growth rate of dividends?b.What is the model’s estimate of the present value of the stock?c.What is the expected price of a share a year from now?Answer:a.g = earnings retention rate x ROE= 0.7 x 0.18= 12.6%b.D1 = 0.3 x $8= $2.40Use the constant growth formula to solve for D1:P0 = D1/(k – g)= $2.40/(0.15 – 0.126)= $100c.P1 = P0 (1 + g)= $100(1.126)P1 = $112.602.Dividends’R’Us Corporation is an all equity financed firm with a total market value of$150 million. The company holds $20 million in cash and has $130 million in other assets.There are 2,500,000 shares of common stock outstanding for this company, each with a market price of $52. Consider the following decisions and the impact on Dividends’R’Us Corporation’s stock price and on number of shares outstanding.a.The company pays a cash dividend of $5 per share.b.The company repurchases 250,000 shares.c.The company pays a 20% stock dividend.d.The company has a two-for-one stock split.Answer:a.The company pays out a total of $12.5 million in cash dividends. The stock pricefalls to $47 per share. Shareholder wealth may decline because personal taxesmay have to be paid on the cash dividend. The number of shares outstanding isstill 2.5 million shares.b.The stock price is unchanged. The number of shares outstanding is now2,250,000 shares.c.The number of shares outstanding is 1.2 x 2.5 million = 3 million shares.The stock price is $43.34.d.The number of shares doubles to 5,000,000.The stock price halves to $26.3.The stock of WishToGrow Corporation is currently selling for $15 per share. Earnings pershare in the coming year are expected to be $3. The company has a policy of paying out 70% of its earnings each year in dividends. The remaining 30% is retained and invested in projects that earn a 19% rate of return each year. This situation is expected to continue into theforeseeable future.ing the constant growth rate DDM, what rate of return do WannaGrow investorsrequire?b.By how much does its value exceed what it would be if all earnings were paid asdividends and nothing were reinvested?c.If WannaGrow were to cut its dividend payout ratio to 35%, what would happen to itsstock price?Answer:a.P0 = $15, E1 = $3, D1 = 0.7 x $3= $2.10g = 0.3 x 0.19= 5.7%P0 = D1/(k – g)15 = $2.10/(k – 0.057)k = 19.7%b.If all earnings were paid as dividends its price would be:P0 = 3/0.197= $15.23The current price is actually $0.23 less in value than the above model.c. D1 = 0.35 x $3 g = 0.65 x 0.19= $1.05 = 12.35%P0 = 1.05/(0.197 – 0.1235)= $14.29The stock price would drop by $0.71.。
兹维博迪金融学第二版试题库13TB(1)
Chapter ThirteenCapital Market EquilibriumThis chapter contains 43 multiple choice questions, 19 short problems, and 9 longer problems. Multiple Choice1.If one holds a diversified portfolio in which securities are held in the same relative proportions as ina broad market index, this is referred to as ________.(a)eliminating(b)discounting risk(c)indexing(d)capitalizingAnswer: (c)2.The CAPM provides a way of estimating ________ for use in a variety of financial applications.(a)actual rates of return(b)expected rates of return(c)expected standard deviation(d)actual standard deviationAnswer: (b)3.The CAPM may be used to provide ________.(a)inputs to DCF valuation model for stocks(b)inputs to DCF valuation model for bonds(c)estimation of a “fair” rate of return on invested capital(d)both (a) and (c)Answer: (d)13-14.A(n) ________ is a portfolio that holds all assets in proportion to their observed market values.(a)market portfolio(b)riskless portfolio(c)efficient riskless portfolio(d)both (b) and (c)Answer: (a)5.Suppose there are three assets: BB stock, REM stock, and a risk-free asset. The total market values ofeach at current prices are $40 million of BB stock, $80 million of REM stock, and $10 million of the risk-free asset. The composition of the market portfolio is ________.(a)61.5% BB stock; 7.7% REM stock; 30.8% risk-free asset(b)33.33% BB stock; 66.67% REM stock; 0 risk-free asset(c)30.8% BB stock; 61.5% REM stock; 7.7% risk-free asset(d)30.8% BB stock; 66.67% REM stock; 7.7% risk-free assetAnswer: (c)6.Suppose there are three assets: BB stock, REM stock, and a risk-free asset. The total market value ofeach at current prices are $40 million of BB stock, $80 million of REM stock, and $10 million of the risk-free asset. The composition of the risky part of any investor's portfolio will be ________(a)30.8% BB stock; 61.5% REM stock(b)33.33% BB stock; 66.67% REM stock(c)30.8% BB stock; 66.67% REM stock(d)66.67% BB stock; 33.33% REM stockAnswer: (b)7.Suppose there are four securities: BB stock, REM stock, ACX stock, and a risk-free asset. The totalmarket values of each at current prices are $50 million of BB stock, $40 million of REM stock, $80 million of ACX stock, and $30 million of the risk-free asset. The composition of the market portfolio is ________.(a)25% BB stock; 20% REM stock; 40% ACX stock; 30% risk-free asset(b)25% BB stock; 40% REM stock; 40% ACX stock; 15% risk-free asset(c)25% BB stock; 20% REM stock; 40% ACX stock; 15% risk-free asset(d)50% BB stock; 40% REM stock; 80% ACX stock; 30% risk-free assetAnswer: (c)13-213-38. Suppose there are four securities: BB stock, REM stock, ACX stock, and a risk-free asset. The totalmarket values of each at current prices are $50 million of BB stock, $40 million of REM stock, $80million of ACX stock, and $30 million of the risk-free asset. Determine the holdings of the threerisky assets of a trader who invests $60,000 of a $300,000 portfolio in the riskless security.(a) $70,000 in BB stock, $50,000 in REM stock, $120,000 in ACX stock(b) $60,000 in BB stock, $48,000 in REM stock, $96,00 in ACX stock(c) $70,588 in BB stock, $56,471 in REM stock, $112,941 in ACX stock(d) $88,235 in BB stock, $70,588 in REM stock, $141,176 in ACX stockAnswer: (c)9. In the CAPM, the trade-off line is called the ________.(a) capital market line(b) portfolio market line(c) asset market line(d) capital asset lineAnswer: (a)10. The correct equation for the Capital Market Line (CML) is ________.(a) ()M f E r r σσ+=(b) ()()M f f M E r r E r r σσ⎡⎤-=+⎢⎥⎢⎥⎣⎦(c) ()()M f ME r r E r σ-= (d) ()M f M E r r σ=+Answer: (b)11.Investors must be offered an expected rate of return that ________ the risk-free rate of interest whenbeing induced to accept a market portfolio.(a)is less than(b)is the same as(c)exceeds(d)minimizesAnswer: (c)12.The ________ the average degree of risk aversion of the population, the ________ the risk premiumrequired.(a)greater; lower(b)greater; greater the insignificance of(c)lower; higher(d)greater; higherAnswer: (d)13.The slope of the Capital Market Line represents the:(a)volatility of interest rates(b)market reward-to-risk ratio(c)individual risk-to-reward ratio(d)individual preferenceAnswer: (b)14.Suppose the standard deviation of the market portfolio is 0.15 and the average degree of risk aversionis 1.5. Then the risk premium on the market portfolio is:(a)0.034(b)0.051(c)0.225(d)0.340Answer: (a)13-413-515. Suppose the standard deviation of the market portfolio is 0.15 and the average degree of risk aversionis 1.5. If the expected return on the market portfolio is 0.15 per year, what is the slope of the CapitalMarket Line?(a) 0.034(b) 0.180(c) 0.225(d) 0.516Answer: (c)16. Suppose the standard deviation of the market portfolio is 0.25 and the average degree of risk aversionis 3. If the expected return on the market portfolio is 0.24, what is the slope of the Capital MarketLine?(a) 0.1875(b) 0.6912(c) 0.7500(d) 0.7813Answer: (d)17. ________ is a measure of a security’s market-related risk and it tells us how much the security’srate of return tends to change when the return on the market portfolio changes.(a) alpha(b) beta(c) delta(d) gammaAnswer: (b)18. The equation for the Security Market Line (SML) is ________.(a) ()()()j f j f j M f E r r E r r E r r ββ⎡⎤=⨯=⨯-⎣⎦ (b) ()()j f j M f E r r E r r β⎡⎤=+-⎣⎦(c) ()()f j j M f r E r E r r β=⎡⎤-⎣⎦(d) ()()j j M f fE r E r r r β⎡⎤=--⎣⎦Answer: (b)19.If a security is more volatile than the market as a whole, it will have a beta ________, whereas if asecurity is less volatile than the market as a whole, it will have a beta ________.(a)equal to 1; less then 1(b)greater than 2; greater than 1(c)less than 1; greater than 1(d)greater than 1; less than 1Answer: (d)20.If you are examining a stock that has a beta of 2, according to the CAPM, what should be itsexpected rate of return? Let the market risk premium = 0.07.(a)the risk-free rate plus 0.035(b)the risk-free rate plus 0.07(c)the risk-free rate plus 0.14(d)the risk-free rate plus 2.00Answer: (c)21.________ refers to the difference between the average rate of return on a security or a portfolio ofsecurities and its SML relation.a. Alphab. Betac. Deltad. GammaAnswer: (a)22.A beta of 1.5 for a security indicates ________.(a)the security has below average market-related risk(b)the security has no market-related risk(c)the security has above average market-related risk(d)the security has average market-related riskAnswer: (c)13-623.The risk-free rate of return for a security is 6%. The expected return on the market is 13%. What isthe required rate of return for the security if it has a beta of 1.25?(a)22.25%(b)16.25%(c)14.75%(d)8.75%Answer: (c)24.Determine the beta of a portfolio consisting of the following stocks:Security % Invested BetaREM 30% 1.1ACX 20% 0.95BGB 40% 1.2CRY 10% 0.7(a)0.92(b)0.99(c)1.07(d)1.17Answer: (c)25.If the Treasury bill rate is currently 4% and the expected return on the market portfolio for the sameperiod is 13%, determine the risk premium on the market.(a)0.52%(b)8.50%(c)9.00%(d)11.00%Answer: (b)13-726.If the Treasury bill rate is currently 4% and the expected return on the market portfolio for the sameperiod is 13%, what is the equation of the CML if the standard deviation is 0.25?(a)E(r) = 0.04 + 0.36σ(b)E(r) = 0.04+ 0.09σ(c)E(r) = 0.09 + 0.36σ(d)E(r) = 0.09 + 0.16σAnswer: (a)27.Peggy has just been informed that the expected return from her portfolio is 15.5%. If 45% of Peggy'ssecurities have an expected return of 10.8% and 25% have an expected return of 16.5%, what is the expected return of the remaining portion of Peggy's portfolio?(a)21.72%(b)19.55%(c)13.64%(d)6.52%Answer: (a)28.ZB Enterprises pays a current dividend of $1.80 and dividends are expected to grow at a rate of 6%annually in the foreseeable future. ZB Enterprises has a beta of 1.1. If the risk-free rate is 8.5 and the market risk premium is 5%, at what price would a share of ZB stock be expected to sell?(a)$20.50(b)$23.85(c)$32.40(d)$32.90Answer: (b)29.Two industrial firms are considering a merger. Drysler has a beta of 0.95 and Bendz has a beta of1.25. Drysler's stock sells for $25 per share and there are 12 million shares outstanding. Bendz has 3million shares outstanding and its stock sells for $50 per share. What will be the merged firm's beta if the merger is carried out?(a)1.05(b)1.10(c)1.54(d)2.20Answer: (a)13-830.Monet Industries currently does not pay a dividend but expects to pay a dividend of $1.70 next year.Thereafter, the dividend is expected to grow at a rate of 5% per year. The risk-free rate is currently 6% and the expected return on the market portfolio is 12%. What is the price you would expect to pay for a share of Monet today if the beta for this stock is 1.05?(a)$12.50(b)$13.13(c)$23.29(d)$24.45Answer: (c)31.Joe Citizen is considering venturing into the sports utility vehicle field. As a result of such a venture,the beta would increase from 1.07 to 1.15 and the expected growth rate in earnings would increase from 10% to 12%. Determine whether this is a worthwhile venture if Joe also has the followinginformation: the risk-free rate is 6%, the current dividend is $0.95, and the expected return on the market portfolio is 13%.(a)No, it is not worthwhile since there is no change in stock price(b)Yes, it is worthwhile since the stock price increases by $21.96(c)Yes, it is worthwhile since the stock price increases by $29.94(d)No, it is not worthwhile - stock price decreases by $19.12Answer: (b)32.Consider a share of Rooble Less. If it has a beta of 0.7, and we also know that the risk-free rate is 7%,and the expected return on the market portfolio is 15%, what is the required rate of return for a share of Rooble Less stock?(a)10.5%(b)11.9%(c)12.6%(d)17.5%Answer: (c)13-933.Determine the beta of a portfolio containing the following stocks ________.Stock Market Value BetaREM $30,000 0.82Rooble $20,000 0.65Drysler $40,000 1.25Fourx $60,000 1.32Wotan $80,000 1.65(a)0.95(b)1.14(c)1.30(d)5.69Answer: (c)34.Kanga Enterprises stock currently sells for $33 a share and its current dividend is $1.90. Kangaenterprise stock is considered to be twice as volatile than the market as a whole. The expected return on the market portfolio is 14% and the risk-free rate is 6%. If dividends are expected to grow at a constant rate, g%, into the foreseeable future, then calculate this growth rate.(a)15.36%(b)16.24%(c)22.00%(d)26.71%Answer: (a)35.LLJ has a beta of 1.02. If the risk-free rate is 8% and the required return on LLJ’s stock is 16%,what is the required rate of return of the market?(a)12.00%(b)15.84%(c)16.16%(d)16.48%Answer: (b)13-1036.Hulot Corp. has a beta of 1.27. If the risk-free rate is 7.5% and the required return on the market is14%, what is the required return on Hulot stock?(a)8.23%(b)14.00%(c)15.76%(d)21.5%Answer: (c)37.Consider a market portfolio that has a standard deviation of 0.25. The average degree of risk aversionis 1.6. If the expected return on the market portfolio is 0.20, what is the equation for the Capital Market Line?(a)E(r) = 0.10 + 0.10σ(b)E(r) = 0.10 + 0.40σ(c)E(r) = 0.13 + 0.10σ(d)E(r) = 0.13 + 0.40σAnswer: (d)38.According to the CAPM, the risk premium on any asset is equal to ________.(a)its beta(b)its beta times the risk premium on the market portfolio(c)its market risk premium times alpha(d)its market risk premium divided by betaAnswer: (b)39.The market portfolio has a standard deviation of return of 0.22 and the expected return on the marketportfolio is 21%. Calculate the market degree of risk aversion if the risk-free rate of return is 10%.(a)0.50(b)1.41(c)2.27(d)6.40Answer: (c)13-1140.If a portfolio manager can consistently produce a positive alpha, then her performance is consideredto be ________.(a)superior(b)average(c)below average(d)indeterminateAnswer: (a)41.Consider the following information: the risk-free rate is 5% and the expected rate of return on themarket portfolio is 12%. If you have a stock with a beta of 1.50 and you expect it to offer a rate of return of 13%, then you(a)consider it fairly priced(b)sell short the stock because it is overpriced(c)sell the stock because it is fairly priced(d)buy the stock because it is underpricedAnswer: (b)Questions 42 and 43 refer to the following information:Consider a portfolio exhibiting an expected return of 21% in an economy in which the riskless interest rate is 8%, the expected return to the market portfolio is 14%, and the standard deviation of the return to the market is 0.30. Assuming this portfolio is efficient, complete the following problems:42.Determine the beta.(a)0.46(b)0.93(c)2.17(d)3.50Answer: (c)43.Determine the standard deviation of its return.(a)0.13(b)0.65(c)0.70(d)1.39Answer: (b)13-12Short Problems1.Explain the importance of the CAPM as a tool in finance.Answer:(1) It provides a theoretical justification for the practice of passive investing known as indexing.(2) The CAPM provides a way of estimating expected rates of return for uses in financialapplications. Such financial applications include the discounted-cash-flow valuation modelfor stocks and in models used in making capital-budgeting decisions.2.List two assumptions of the CAPM model. How is an investor expected or assumed to behave in theworld of the CAPM model?Answer:(1) Investors have the same expectations or agree in their forecasts of expected rates of return,standard deviations, and correlations of the risky securities, and will therefore hold riskyassets in the same relative proportions.(2) Investors will generally behave optimally. In equilibrium, the prices of securities adjust sothat when investors are holding their optimal portfolios, the aggregate demand for eachsecurity is equal to its supply.3.Suppose there are four securities: Oz stock, Xanadu stock, Ragtime stock, and a risk-free asset. Thetotal market values of each at current prices are $30 billion of Oz stock, $50 billion of Xanadu stock, $90 billion of Ragtime stock, and $30 billion of the risk-free asset.a. Determine the composition of the market portfolio.b. If an investor has a $500,000 portfolio with $90,000 invested in the risk-free asset, determinethe holdings of the three risky assets.Answer:(a) The total market value of all assets is $200 billion.The composition of the market portfolio is therefore 15% Oz stock, 25% Xanadu stock, 45%Ragtime stock, and 15% of the risk-free asset.(b) $72,352.94 in Oz stock, $120,588.24 in Xanadu stock and $217,058.82 in Ragtime stock.13-134.Consider a market portfolio that has a standard deviation of 0.30. The average degree of risk aversionis 2. If the expected return on the market portfolio is 0.25, what is the equation for the Capital Market Line?Answer:E(r M) - r f= 2 x (0.3)2= 0.18r f= 0.25 – 0.18= 0.07The equation for CML:E(r) = 0.07 + 0.60σ5.Apart from portfolio selection, discuss other applications of the CAPM in finance.Answer:Risk premiums derived from the CAPM are used in capital-budgeting decisions of the firm and in discounted cash flow valuation models. The CAPM is also used to establish "fair" rates of return on invested capital in regulated firms and in “cost plus” pricing.6.Two industrial firms are considering a merger. Comdat has a beta of 1.15 and BioTech has a beta of1.95. Comdat's stock sells for $60 per share and there are 6 million shares outstanding. BioTech has 4million shares outstanding and its stock sells for $90 per share. If the merger is carried out, what will be the merged firm's beta?Answer:Comdat's market value = $60 x 6 million= $360,000,000BioTech's market value = $90 x 4,000,000= $360,000,000Comdat weight = 0.5BioTech weight = 0.5Merged beta = (0.5)(1.15) + (0.5)(1.95)= 1.5513-147.Consider a portfolio exhibiting an expected return of 22% in an economy where the riskless interestrate is 7%, the expected return on the market portfolio is 14% and the standard deviation of the return to the market portfolio is 0.18. Assuming that the portfolio is efficient, determine:(a) its beta(b) the standard deviation of its returnAnswer:(a) E(r j) – r f= β[E(r M) – r f]0.22 – 0.07 = β[0.14 – 0.07]2.14 = β(b) Use CML:.22 = 0.07 + [(0.17 – 0.07)/0.18]σ0.3 = σ8.During the most recent 3-year period, Tartar Inc. earned an average annualized rate of return of 14%and had an annualized standard deviation of 20%. The average risk-free rate was 4.5% per year. The average rate of return in the market index over that same period was 10% with a standard deviation of 15%. How well did Tartar Inc. perform on a risk adjusted basis?Answer:Compare their reward-to-risk ratios:Tartar Inc. Market(0.14 – 0.45)/0.2 = 0.475 (0.10 – 0.045)/0.15 = 0.367On a risk adjusted basis, Tartar performed better than the market index.13-159.Joe Citizen is considering venturing into the sports accessories field. As a result of this investment,the beta would increase from 1.02 to 1.20 and the expected growth rate in earnings would increase from 6% to 9%. Determine whether this is a worthwhile venture if Joe also has the followinginformation: the risk-free rate is 4.5%, the current dividend is $1.05, and the expected return on the market portfolio is 12%.Answer:βold = 1.02 βnew = 1.20k old= r f+ βold [E(r M) – r f]= 4.5 + 1.02 [12 – 4.5]= 12.15%P old= $18.10Now look at βnew.k new= r f+ βnew [E(r M) – r f]= 4.5 + 1.20 [12 – 4.5]= 13.50%P new= $25.43Yes, it is a worthwhile venture since the stock price increases by $7.33.10.The market portfolio has a variance of return of 0.16 and the expected return on the market portfoliois 21%. Calculate the market degree of risk aversion if the risk-free rate of return is 10%.Answer:E(r M) – r f = Aσ20.18 – 0.10 = A(0.035)23.125 = A13-1611.Consider the following information: the risk-free rate is 5%, and the expected rate of return on themarket portfolio is 18%. If you have a stock with a beta of 1.5, and you expect it to offer a rate of return of 13%, what should you do?Answer:Look at: E(r j) = r f+ β(E(r M) – r f)= 0.05 + 1.5(0.12 – 0.05)= 15.5%You expect the stock to offer 13%. Since this is below the SML, its expected return is too low to support equilibrium.12.If the Treasury bill rate is currently 5%, and the expected return to the market portfolio over the sameperiod is 14%, determine the risk premium on the market. If the standard deviation of the return on the market is 0.25, what is the equation of the Capital Market Line?Answer:Market risk premium = 14% – 5%= 9%CML equation:E(r) = 0.05 + 0.09/0.25σ= 0.05 + 0.36σ13.If the Treasury bill rate is currently 6 %, and the expected return to the market portfolio over thesame period is 15%, determine the risk premium on the market. If the standard deviation of the return on the market is 0.4, what is the equation of the Capital Market Line?Answer:Market risk premium = 15% – 6= 9%CML equation:E(r) = 0.06 + 0.09/0.4σ= 0.06 + 0.225σ13-1714.Consider a portfolio exhibiting an expected return of 20% in an economy in which the risklessinterest rate is 6%, the expected return to the market portfolio is 12%, and the standard deviation of the return to the market is 0.25. Assuming this portfolio is efficient, determine:(i)its beta(ii)the standard deviation of its returnAnswer:(i) E(r j) – r f= β[E(r M) – r f]0.20 – 0.06 = β[0.12 – 0.06]2.33 = β(ii) Use CML:.20 = 0.06 + [(0.12 – 0.06)/0.25]σ0.583 = σ15.Consider a market portfolio that has a standard deviation of 0.35. The average degree of risk aversionis 1.5. If the expected return on the market portfolio is 0.23, what is the equation for the Capital Market Line?Answer:E(r m) - r f= 1.5 x (0.35)2= 0.1838r f= 0.23 – 0.1838= 0.0462E(r) = 0.0462 + 0.1838/0.35σThe equation for the CML is:(r) = 0.0462 + 0.525σ13-1816.Roland Corporation’s stock recently paid a dividend of $2.50 per share (D0 = $2.50). The companyhas a constant growth rate of 5% and a beta equal to 1.5. The rate of return on the market portfolio is 15%, and the risk-free rate is 7%. Roland is considering a change in policy that will increase its beta coefficient to 1.75. If market conditions remain unchanged, what new constant growth rate will cause the price of Roland stock to remain unchanged?Answer:k = r f + β[E(r M) - r f]= 7 + 1.5(15 – 7)= 19%Current stock price, P o = D o (1+g)/(k-g)= 2.50(1.05)/(0.19 – 0.05)= $18.75After policy change, β = 1.75New k = 21%For stock price to be unchanged:$18.75 = $2.50(1+g)/(0.21 – g)solve for g:g = 6.76%17.An all equity firm, Lyrebird Futures Inc. is considering the creation of a new division which willincrease the assets of the firm from $2,000,000 to $4,000,000 (that is, by 100%). Lyrebird currently has a required rate of return of 17%, the risk-free rate is 7%, and the return on the market portfolio is 16%. Lyrebird wants to reduce its required rate of return to 13%. What is the maximum betacoefficient the new division could have?Answer:Solve for current beta:17 = 7 + β(16 – 7)βcurrent = 1.11If the required return is to equal 13%, then recalculate beta.13 = 7 + β(16 – 7)β = 0.67Lyrebird will have created two new divisions of equal weight.0.5(1.11) + 0.5(βnew) = 0.67βnew= 0.2313-1918.An all equity firm, Rush Inc., has been growing at a 15% annual rate and is expected to do so for thenext three years. After year 3, dividend growth is expected to slow to a constant 6% rate. Currently, the firm maintains a 40% payout ratio, and this year’s retained earnings net of dividends was $1.8 million. The market risk premium is 7.5%, the risk-free rate is 8%, the beta is 1.55 and the firm has 1,500,000 shares outstanding. Given this information, what is the market value of the firm’scommon equity?Answer:k = 8 + 1.55(7.5) = 19.625%D o = ($1,800,000/0.6) x 0.4 = $1,200,000D1 = $1,380,000D2 = $1,587,000D3 = $1,825,050D4 = $1,934,553P3 = D4/(0.19625 – 0.06)= $14,198,554P o = $12,935,78013-2019.The returns of TNJ Inc. are displayed below, along with the returns on the market .Year TNJ Market1 –14% –122 16 93 21 154 4 15 –6 –26 2 –1If the risk-free rate is 7.5%, and the required rate of return on TNJ’s stock is 17 %, what is the required rate of return on the market?Answer:To calculate beta, use either a spreadsheet or financial calculator.β = 1.28 (to 2 decimal places)Substitute beta into SML to solve for E(r M)k = r f+ β[E(r M) – r f]17% = 7.5 + 1.28(E(r m) – 7.5)E(r M) = 14.92%13-21Longer Problems1.Wotan Industry stock currently sells for $45 a share and its current dividend is $2.20. Wotan Inc. isconsidered to be 40% more volatile than the market as a whole. The expected return on the market portfolio is 13% and the risk-free rate is 5%. If dividends are expected to grow at a constant rate, g% per year, into the future, then calculate the growth rate.Answer:To solve for g, use the dividend discount valuation model:To solve for k, use the SML formula.k = r f + β [E(r M) – r f]= 5 + 1.40 [13 – 5]k = 16.2%Now substitute k into DDM model.45(0.162 - g) = 2.20(1+g)7.29 – 45g = 2.20 + 2.20g47.2g = 5.09g = 10.8%The growth rate is 10.8%2.Consider a portfolio exhibiting an expected return of 21% in an economy where the riskless interestrate is 6%, the expected return on the market portfolio is 15%, and the corresponding standarddeviation is 0.19. Assuming that the portfolio is efficient, determine:(a) its beta(b) the standard deviation of its returnAnswer:(a) E(r j) – r f = β[E(r M) – r f]0.21 – 0.06 = β[0.15 – 0.06]β= 1.67(b) Use CML:0.21 = 0.06 + [(0.15 – 0.06)/0.19]σσ = 0.3213-223.Lenny's Leftorium (LL) is a store that has no long term debt in its capital structure. However, LL iscurrently considering an expansion project that will yield the following net cash flows:Year NCF0 –$1.2 million1 $700,0002 $810,0003 $860,0004 $920,0005 $940,000If the current risk-free rate is 4.5% and the current market risk premium is 7.2% and its beta is 15% more volatile than the market as a whole, should LL undertake the expansion project?Answer:First of all, compute cost of capital. Since LL is 100% equity financed,k = k e.k = r f + β[E(r M) – r f]= 4.5 + 1.15(7.2)k = 12.78%NPV = $1,740,880Yes, the project is worthwhile.13-234.Kanga Inc. is considering investing $8 million in computer equipment that is expected to have auseful life of 4 years, and is expected to reduce the firm's labor costs by $3 million per year. Assume that Kanga Inc. pays a 35% tax rate on accounting profits and uses the straight-line depreciation method. What is the after tax cash flow from the investment in years 1 through 4? If the firm's beta is1.25 and we also know that the current risk-free interest rate is 5%, the expected return on the marketportfolio is 14%, is the project worthwhile? Also assume Kanga Inc. has no long term debt.Answer:Increase in after tax cash flow = Increase in before tax cash flow –increase in taxes= $3 million – (3 – 2 million)(0.35)= $2.65 millionWe now need k, cost of capital.Use CAPMk = r f+ β[E(r M) – r f]= 5 + 1.25 [14 – 5]k = 16.25%NPV = PV – Initial OutlayUse k = 16.25% in calculations.NPV = –$621,674IRR = 12.29%Based on NPV and IRR, the project does not seem worthwhile.13-245.Barramundi Inc. stock is currently selling at $40 per share (its equilibrium price). The firm’slong-term growth is expected to remain 7% per year forever. Last year’s EPS were $4, and the dividend payout ratio is 50%. The risk-free rate is 8%, and the market risk premium is 6%. If beta increases by 50%, by how much will the stock price change? (Assume all other factors remain constant).Answer:First solve:P o = D o(1 + g)/(k – g)40 = 2.14/(k – 0.07)= 12.35%Solv e SML for β: 12.35 = 8 +β(6)β = 0.725New β = 0.725(1.5)= 1.0875New k = 8 + 1.0875(6)= 14.525New P o = 0.5($4)(1.07)/(0.14525 – 0.07)= $28.44The price would drop by approximately $11.5613-25。
兹维博迪金融学第二版试题库08TB
Chapter EightValuation of Known Cash Flows: BondsThis chapter contains 50 multiple choice questions, 18 short problems and 9 longer problems.Multiple Choice1. A ________ is a quantitative method used to infer an asset's value from market information about theprices of other assets and market interest rates.(a)fixed model(b)perpetual valuation model(c)valuation model(d)variable modelAnswer: (c)2.________ are examples of fixed-income securities.(a)Common stock and pension funds(b)Mortgages and pension annuities(c)Mutual funds and common stock(d)Preferred stock and common stockAnswer: (b)3.Consider a fixed-income security that promises to pay $150 each year for the next five years. Howmuch is this five-year annuity worth if the appropriate discount rate is 7% per year?(a)$534.74(b)$615.03(c)$802.50(d)$867.96Answer: (b)8-14.Consider a fixed-income security that promises to pay $120 each year for the next four years.Calculate the value of this four-year annuity if the appropriate discount rate is 6% per year.(a)$415.81(b)$508.80(c)$531.85(d)$629.06Answer: (a)5.The price of any existing fixed-income security ________ when market interest rates rise becauseinvestors will only be willing to ________ them if they offer a competitive yield.(a)rises; buy(b)rises; sell(c)falls; buy(d)falls; sellAnswer: (c)6. A fall in interest rates causes a ________ in the market value of a fixed-income security.(a)a rise(b)a fall(c)no change(d)it cannot be determined from the information givenAnswer: (a)7. A change in market interest rates causes ________ in the market values of all existing contractspromising fixed payments in the future.(a)a change in the same direction(b)a change in the opposite direction(c)no change(d)an unpredictable variationAnswer: (b)8-28.What happens to the value of a four-year fixed-income security promising $100 per year if the marketinterest rate rises from 5% to 6% per year?(a)A rise of 1% causes a drop of $4.87 in market value.(b)A rise of 1% causes a rise of $4.87 in market value.(c)A rise of 1% causes a drop of $8.09 in market value.(d)A rise of 1% causes a rise of $8.09 in market value.Answer: (c)9.What happens to the value of a four-year fixed-income security promising $100 per year if the marketinterest rate falls from 6% to 5% per year?(a)A fall of 1% causes a drop of $4.87 in market value.(b)A fall of 1% causes a rise of $4.87 in market value.(c)A fall of 1% causes a drop of $8.09 in market value.(d)A fall of 1% causes a rise of $8.09 in market value.Answer: (d)10.A zero-coupon bond is also known as ________.(a)a perpetual bond(b)a pure discount bond(c)a market rebate(d)an infinite bondAnswer: (b)11.The promised cash payment on a pure discount bond is called its ________.(a)face value(b)par value(c)fixed interest(d)both a and bAnswer: (d)8-312.What is the yield of a 1-year pure discount bond with a price of $850 and a face value of $1,000?(a)8.50%(b)9.09%(c)15.00%(d)17.65%Answer: (d)13.What is the yield of a 1-year pure discount bond with a price of $900 and a face value of $1,000?(a)5.26%(b)10.00%(c)11.11%(d)15.79%Answer: (c)14.Consider a four-year pure discount bond with a face value of $1,000. If its current price is $850,compute its annualized yield.(a)1.17%(b)4.15%(c)5.57%(d)17.60%Answer: (b)15.Consider a three-year pure discount bond with a face value of $1,000. If its current price is $900,compute its annualized yield.(a)1.036%(b)1.111%(c)3.57%(d)5.41%Answer: (c)8-416.Consider a five-year pure discount bond with a face value of $1,000. If its current price is $780, whatis its annualized yield?(a)5.09%(b)2.82%(c)1.28%(d)1.05%Answer: (a)17.A ________ obligates the issuer to make periodic payments of interest to the bondholder for the lifeof the bond and then to pay the face value of the bond when the bond matures.(a)pure discount(b)zero-coupon(c)perpetual bond(d)coupon bondAnswer: (d)18.The ________ of the bond is interest rate applied to the ________ of the bond to compute theperiodic payment.(a)coupon rate; face value(b)maturity rate; face value(c)coupon rate; price(d)maturity rate; priceAnswer: (a)19.For a bond with a face value of $1,000 and coupon rate of 11%, what is the annual coupon payment?(a)$100(b)$110(c)$1,000(d)$1,100Answer: (b)8-520.For a bond with a face value of $1,000 and a coupon rate of 9%, what is the annual coupon payment?(a)$90(b)$99(c)$1,000(d)$1,190Answer: (a)21.If the market price of a coupon bond equals its face value, it is also termed a ________.(a)par bond(b)premium bond(c)discount bond(d)zero-discount bondAnswer: (a)22.If the bond’s market price is higher than its face value, it is termed a ________.(a)par bond(b)premium bond(c)discount bond(d)zero-discount bondAnswer: (b)23.If the bond’s market price is lower than its face value, it is termed a ________.(a)par bond(b)premium bond(c)discount bond(d)zero-par bondAnswer: (c)8-624.If a bond selling for $850 has an annual coupon payment of $80 and a face value of $1,000, what isits current yield?(a)8.00%(b)9.41%(c)17.65%(d)27.05%Answer: (b)25.If a bond selling for $1,120 has an annual coupon payment of $110 and a face value of $1,000, whatis its current yield?(a)8.90%(b)9.82%(c)10.71%(d)11.00%Answer: (b)26.If a bond selling for $900 has an annual coupon payment of $80 and a face value of $1,000, what isits current yield?(a)8.00%(b)8.89%(c)11.00%(d)20.00%Answer: (b)27.The ________ is the discount rate that makes the present value of the bond’s stream of promised cashpayments equal to its price.(a)compound rate(b)yield to maturity(c)coupon rate(d)current yieldAnswer: (b)8-728.Suppose you are considering buying a one-year 11% coupon bond with a face value of $1,000 and acurrent price of $1,020. What is its yield to maturity?(a)8.82%(b)9.00%(c)10.78%(d)11.00%Answer: (a)29.Suppose you are considering buying a one-year 11% coupon bond with a face value of $1,000 and acurrent price of $1,050. What is its yield to maturity?(a)4.76%(b)5.71%(c)6.00%(d)10.48%Answer: (b)30.Suppose you are considering buying a five-year 11% coupon bond with a face value of $1,000 and acurrent price of $950. What is its yield to maturity?(a)5.62%(b)9.63%(c)11.58%(d)12.40%Answer: (d)31.Suppose you are considering buying a five-year 11% coupon bond with a face value of $1,000 and acurrent price of $1,100. What is its yield to maturity?(a)3.87%(b)8.47%(c)10.00%(d)13.62%Answer: (b)8-832.Suppose you are considering buying a six-year 10% coupon bond with a face value of $1,000 and acurrent price of $1,100. What are the current yield and yield to maturity of this bond?(a)CY = 11.00%; YTM = 12.23%(b)CY = 12.23%; YTM = 11.00%(c)CY = 7.85%; YTM = 9.09%(d)CY = 9.09%; YTM = 7.85%Answer (d)33.Suppose you are considering buying a seven-year 11% coupon bond with a face value of $1,000 and acurrent price of $950. What are the current yield and yield to maturity of this coupon bond?(a)CY = 12.10%; YTM = 11.58%(b)CY = 11.58%; YTM = 12.10%(c)CY = 9.92%; YTM = 10.45%(d)CY = 10.45%; YTM = 9.92%Answer: (b)34.Over time bond prices ________ their face value. Before maturity, bond prices can ________ a greatdeal as a result of changes in market interest rates.(a)diverge from; fluctuate(b)converge toward; flatten out(c)converge toward; fluctuate(d)diverge from; flatten outAnswer: (c)35.When the yield curve is not flat, bonds of the same ________ with different coupon rates have________ yields to maturity.(a)maturity, different(b)maturity, identical(c)callability, different(d)callability, identicalAnswer: (a)8-936.Bonds offering the same future stream of promised payments can differ in a number of ways, but thetwo most important are ________ and ________.(a)taxability, issue origin(b)type of issuer, default risk(c)type of issuer, taxability(d)taxability, default riskAnswer: (d)37.A ________ is one that gives the holder of a bond issued by a corporation the right to convert thebond into a pre-specified number of shares of common stock.(a)callable bond(b)convertible bond(c)stock bond(d)preferred bondAnswer: (b)38.A ________ is one that gives the issuer of the bond the right to redeem it before the final maturitydate.(a)callable bond(b)convertible bond(c)stock bond(d)preferred bondAnswer: (a)39.Five years ago, English and Co. issued 25-year coupon bonds with par value $1,000. At the time ofissuance, the yield to maturity was 6 percent and the bonds sold at par. The bonds are currently selling at 110 percent of their par value. Assuming that the coupon is paid annually, what is the current yield to maturity?(a)3.77%(b)5.18%(c)5.27%(d)5.46%Answer: (b)8-1040.Potemkin Corporation plans to raise $10,000,000 in funds by issuing zero coupon $1,000 par valuebonds with a 25 year maturity. Potemkin Corporation is able to issue these bonds at an after tax cost of debt of 12%. To the nearest whole number, how many bonds must Potemkin Corporation issue?(a)10,000 bonds(b)42,919 bonds(c)125,837 bonds(d)170,000 bondsAnswer: (d)41.Calculate the years to maturity for a bond based on the following information. The bond trades at$950, it has a par value of $1,000, a coupon rate of 11%, and a required rate of return of 12%.(a)8 years(b)12 years(c)15 years(d)16 yearsAnswer: (a)pute the current price of Walsingham bonds based on the following information. Walsinghambonds have a $1,000 par value, have 20 years remaining until maturity, a 12 percent coupon rate, anda yield to maturity of 10.5 percent.(a)$858.42(b)$982.47(c)$1,119.52(d)$1,124.41Answer: (d)pute the yield to maturity of Arundel bonds based on the following information. Arundel bondshave a $1,000 par value, 25 years remaining until maturity, an 11% coupon rate, and a current market price of $1,187.(a)4.55%(b)9.08%(c)9.27%(d)13.17%Answer: (b)8-1144.When prices of U.S Treasury strips are listed, principal from a Treasury bond is denoted by the letters________.(a)ci(b)tb(c)bp(d)npAnswer: (c)45.The ________ is the price at which dealers in Treasury bonds are willing to sell.(a)bid price(b)asked yield(c)ask price(d)maturity priceAnswer: (c)46.The ________ is the price at which dealers are willing to buy.(a)bid price(b)ask price(c)asked yield(d)maturity priceAnswer: (a)47.The bid price of a bond is always ________ the ask price.(a)greater than(b)less than(c)identical to(d)it varies from case to caseAnswer: (b)8-1248.The ________ of a bond price measures the sensitivity of the bond price to a change in the yield tomaturity.(a)callability(b)convertibility(c)immutability(d)elasticityAnswer: (d)49.Suppose you buy a 25-year pure discount bond with a face value of $1,000 and a yield of 6% per year.A day later market interest rates drop to 5% and so does the yield on your bond. What is theproportional change in the price of your bond?(a)a decrease of 26.74%(b)a decrease of 21.10%(c)an increase of 26.74(d)an increase of 21.20Answer: (c)50.Suppose you buy a 25-year pure discount bond with a face value of $1,000 and a yield of 6% per year.A day later market interest rates rise to 5% and so does the yield on your bond. What is the elasticityof the bond price to the change in the yield?(a)–0.62%(b)–1.27%(c)–1.60%(d)–2.67%Answer: (c)8-13Short Problems1.Consider a five-year fixed-income security which promises $120 per year. Calculate the value of thesecurity if the market interest rate rises from 5% to 6% per year.Answer:n i PV PMT Result5 5 ? $120 PV = $519.54n i PV PMT Result5 6 ? $120 PV = $505.48The price drops by $14.06.2.Consider a four-year fixed-income security which promises $120 per year. Calculate the value of thesecurity if the market interest rate falls from 7% to 6% per year.Answer:n i PV PMT Result4 7 ? $120 PV = $406.47n i PV PMT Result4 6 ? $120 PV = $415.81The price increases by $9.34.3.Discuss the general principles about the relation between prices and yields of coupon bonds.Answer:Principle #1: Par Bonds.If a bond's price equals its face value, then its yield equals its coupon rate.Principle #2: Premium Bonds.If a coupon bond has a price higher than its face value, its yield to maturity is less than its current yield, which is in turn less than its coupon rate.Principle #3: Discount Bonds.If a coupon bond has a price lower than its face value, its yield to maturity is greater than its current yield, which is in turn greater than its coupon rate.8-144.List some reasons why differences in the prices of fixed-income securities of a given maturity mayarise.Answer:Differences in the prices of fixed-income securities of a given maturity may arise due to differences in coupon rates, default risk, tax treatment, callability and convertibility.5.Explain why it is important to have a method for valuation of fixed-income contracts.Answer:(1) The parties to the contracts need to have an agreed-upon valuation procedure insetting the terms of the contracts at the outset.(2) Since market factors determining the value of fixed-income contracts change overtime, both buyers and sellers have to reevaluate them each time they are traded.6.Consider a five-year pure discount bond with a face value of $1,000. If its current price is $775,compute its annualized yield.Answer:n i PV FV Result5 ? –$775 $1,000 i = 5.23%7. A four-year bond has a coupon rate of 6% per year, a price of $950, and a face value of $1,000.Calculate its current yield and yield to maturity.Answer:Current yield = coupon/price= 60/950= 6.32%To calculate yield to maturity:n i = YTM PV FV PMT Result4 ? –$950 $1,000 $60 YTM = 7.49%8-158.What is the current price of a bond that has a coupon rate of 7%, a return rate of 8%, and a face valueof $1,000? Assume that this bond will mature in five years. Compare the current price of the bond against its face value.Answer:n i = YTM PV FV PMT Result5 8 ? $1,000 $70 PV = $960.07Because the price of the bond is below its face value, it is a discount bond.9. A five-year coupon bond has a coupon rate of 5%, a return rate of 6%, and a face value of $1,000.What is its current price and how does it compare to its face value?Answer:n i = YTM PV FV PMT Result5 6 ? $1,000 $50 PV = $957.88Because the price of the bond is below its face value, it is a discount bond.10.What is the yield to maturity of a five-year coupon bond with a current price of $850, a face value of$1,000, and coupon rate of 7%?Answer:n i = YTM PV FV PMT Result5 ? –$850 $1,000 $70 YTM = 11.07%11.Five years ago, English and Co. issued 30 year coupon bonds with a par value of $1,000. At the timeof issuance, the yield to maturity was 6 percent per year and the bonds sold at par. The bonds are currently selling at 85 percent of their par value. Assuming that the coupon is paid annually, what is the current yield to maturity?Answer:Five years ago, the bonds were issued at par, which means at the time yield to maturity equaled coupon rate. So the annual coupon is 0.06 x $1,000 = $60.For the current yield to maturity:n i = YTM PV FV PMT Result25 ? –850 1,000 60 YTM = 7.33%8-1612.Eisenstein Corporation plans to raise $100,000,000 in funds by issuing zero-coupon $1,000 par valuebonds with a 30-year maturity. Assuming that Eisenstein Corporation is able to issue these bonds at an after-tax cost of debt of 11%, how many bonds must Eisenstein Corporation issue?Answer:First, calculate the price of an Eisenstein bond:n i = YTM PV FV PMT Result30 11 ? 1,000 0 PV = $43.68The corporation wants to raise $100,000,000, so it must issue the following number of bonds:$100,000,000/$43.68 = 2,289,377 bonds13.Currently, an Eisenstein bond trades at $1,050 per bond and has a coupon rate of 10%. Assuming thebond matures at a $1,000 value, and the required rate of return is 9.5%, in how many years does an Eisenstein bond mature?Answer:n i = YTM PV FV PMT Result? 9.5 –1,050 1,000 0 n = 33pute the current price of Walsingham bonds based on the following information. Walsinghambonds have a $1,000 par value, 26 years remaining until maturity, a 13 percent coupon rate, and a current yield to maturity of 11 percent per year.Answer:n i = YTM PV FV PMT Result26 11 ? 1,000 0 PV = $1,169.6915.Health & US Corporation is a major pharmaceutical firm that has recently experienced a marketreevaluation. Currently, the firm has a bond issue outstanding with 18 years to maturity and a coupon rate of 9 percent, with interest paid annually. The required rate of return of this debt issue has risen to15 percent. Calculate the current price of this bond.Answer:n i = YTM PV FV PMT Result18 15 ? 1,000 90 PV = $632.328-1716.Calculate the coupon rate, current yield, and the yield to maturity for a bond that has $1,000 par value,pays a coupon of $85 annually, matures in 20 years, and has a current price of $985.25.Answer:Coupon rate = 85/1,000= 8.5% per yearCurrent yield = coupon/price= 85/985.25= 8.63%For yield to maturity:n i = YTM PV FV PMT Result20 ? –985.25 1,000 85 YTM = 8.66%17.Suppose you buy a 20-year pure discount bond with a face value of $1,000 and a yield of 7% per year.A day later, market interest rates rise to 8% and so does the yield of your bond. What is theproportional change in the price of your bond? What is the elasticity of the bond price to the change in the yield?Answer:n i = YTM PV FV PMT Result20 7 ? 1,000 0 PV = $258.42n i = YTM PV FV PMT Result20 8 ? 1,000 0 PV = $214.55The price of the bond decreased by $43.87, so the proportional decline in price is $43.87/$258.42 = 16.98%.Elasticity is % change in price over % change in YTM, or –16.98%/14.29% = –1.19.18.As of today, January 1, 2009, Flanders Corporation is holding $10,000,000 in long-term debt at parbonds. The bonds have a par value of $1,000, mature on January 1, 2019, and pay a 5 percent coupon.Calculate the current market value of Flanders’ debt, if the yield to maturity is 7 percent.Answer:Total number of bonds = $10,000,000/$1,000 = 10,000 bondsn i PV FV PMT Result10 7 ? 1,000 50 PV = $859.50The current market value = $859.50 x 10,000= $8,578,8008-18Longer Problems1.Consider the purchase of a 30-year pure discount bond with a face value of $1,000 and a yield of 7%per year. A week later the market interest rate rises to 8% and o does the yield on your bond.Calculate the proportional change in the price of the bond. What basic principle in valuation of known cash flows does this illustrate?Answer:n i PV FV Result30 7 ? $1,000 PV = $131.37n i PV FV Result30 8 ? $1,000 PV = $99.38The price drops by $31.99, so a rise of 1% in market interest rates results in a $31.99/$131.37 =24.35% drop in the price of the bond. The general principle illustrates is that a change in marketinterest rates causes a change in the opposite direction in the market value of the bonds.2.Suppose our want to know the price of a 15-year 8% coupon bond which pays interest annually. Theface value of the bond is $1,000.(a) You have been told the yield to maturity is 9%. What is the price? Assume coupons arepaid annually.(b) What is the price if coupons are paid semi-annually and the yield to maturity is 9% peryear?Answer:(a) If coupons are paid annually:n i PV FV PMT Result15 9 ? $1,000 $80 PV = $919.39(b) If coupons are paid semi-annually:n i PV FV PMT Result30 4.5 ? $1,000 $40 PV = $918.563. A media report recently stated that prices of 30-year treasury bonds increased substantially becauseinflation was falling and the Federal Reserve was not expected to increase interest rates. How would you describe this interpretation using discounted cash flow techniques?Answer:Inflation is a component of i, the required return on bonds, so when inflation decreases, idecreases and bond prices rise.8-194.Suppose you want to know the price of a 10-year 7% coupon bond which pays interest annually. Theface value of the bond is $1,000.(a) What is the price of this bond if the yield to maturity is 8%?(b) What is the current yield of this coupon bond?(c) What is the price of this bond if coupons are paid semi-annually and the yield to maturityis 8%?Answer:a. n i PV FV PMT Result10 8 ? $1,000 $70 PV = $932.90b. Current yield = coupon/price= 70/932.9= 7.5%c. n i PV FV PMT Result20 4 ? $1,000 $35 PV = $932.055.Suppose you buy a 30-year pure discount bond with a face value of $1,000 and a yield of 9% per year.A day later, market interest rates fall to 8% and so does the yield of your bond. What is theproportional change in the price of your bond? What is the elasticity of the bond price to the change in the yield?Answer:n i = YTM PV FV PMT Result30 9 ? 1,000 0 PV = $75.37n i = YTM PV FV PMT Result30 8 ? 1,000 0 PV = $99.38The price of the bond decreased by $24.01, so the proportional increase in price is $24.01/$75.37 = 31.86%.Elasticity is % change in price over % change in YTM, or 31.86%/–11.11% = –2.87.8-206.As part of a reorganization plan, a bankruptcy court has permitted a new indenture on an outstandingbond issue to be put into effect for Leicester Corporation, which recently filed for bankruptcy. It is known that the issue has $1,000 par value per bond, 15 years to maturity, and a coupon rate of 11 percent paid annually. The reorganization plan allows the following arrangement: In years 1 through 7, there will be no coupon paid (that is, coupon = $0). In years 8 through 15, regular couponpayments will resume. At maturity in year 15, the par value plus the sum of all coupon payments that were not paid during years 1 through 7 must be paid. However, no interest will be paid on thedeferred coupon payments. If the required rate of return is 18 percent, calculate the current price the Leicester bonds would sell for in the market.Answer:Coupon = 0.11 x 1000= $110 per yearThe present value of this cash flow stream, using a discount rate of 18%, is $288.62 per bond.8-217.The Dharma Corporation has recently experienced a market reevaluation. Currently, the firm has abond issue outstanding with 18 years to maturity, a face value of $1,000, and a coupon rate of 10 percent paid annually. The required rate of return on this debt issue has risen to 16 percent. Calculate the current price of this bond.Answer:n i = YTM PV FV PMT Result18 16 ? 1,000 100 PV = $650.928.Calculate the coupon rate, current yield, and the yield to maturity for a bond that has $1,000 par value,pays $95 interest annually, matures in 25 years, and has a current price of $1,087.75.Answer:Coupon rate = 95/1,000= 9.5% per yearCurrent yield = coupon/price= 95/1,087.75= 8.73%To calculate yield to maturity:n i = YTM PV FV PMT Result25 ? –1,087.75 1,000 95 YTM = 8.63%9.As of today, January 1, 2009, Gala Worldwide is holding $1,000,000 in long-term debt at par bonds.The bonds have a par value of $1,000, mature on January 1, 2029, and pay a 7 percent coupon.Cal culate the current market value of Flanders’ debt, if the yield to maturity is 8 percent.Answer:Total number of bonds = $100,000,000/$1,000 = 100,000 bondsn i PV FV PMT Result20 8 ? 1,000 70 PV = $901.85The current market value = $901.85 x 100,000= $90,185,0008-22。
兹维博迪金融学第二版试题库4TB(1)
兹维博迪金融学第二版试题库4T B(1)-CAL-FENGHAI.-(YICAI)-Company One1Chapter FourAllocating Resources Over TimeThis chapter contains 46 multiple-choice questions, 18 short problems and 9 longer problems. Multiple Choice1.________ is the process of going from present value to future value, whereas ________ isfinding the present value of some future amount.(a)Discounting; compounding(b)Compounding; annualizing(c)Compounding; discounting(d)Discounting; leasingAnswer: (c)2.________ refers to the interest rate at which money received before the end of the planninghorizon can be reinvested.(a)Internal rate(b)Reinvestment rate(c)Cost of equity(d)Compound interestAnswer: (b)3.The difference between an immediate annuity and an ordinary annuity is ________.(a)the number of periods(b)the amount of the payments(c)the interest rate(d)the timing of the paymentsAnswer: (d)4.The preferred stock of Tavistock Realty offers a cash dividend of $2.28 per year and it isselling at a price of $110 per share. What is the yield of Tavistock Realty preferred stock?(a)2.07%(b)2.12%(c) 2.28%(d)48.25%Answer: (a)5.Consider the situation where you have won a $10 million lottery to be received in 25 annualequal payments of $400,000. What will happen to the present value of these winnings if the interest rate increases during the next 25 years?(a)it will not change(b)it will be worth more(c)it will be worth less(d)it cannot be determinedAnswer: (c)6.What is the effective annual rate on a bank account that has APR of 8 percent with interestcompounded quarterly?(a)6.12%(b)8.24%(c)8.48%(d)17.17%Answer: (b)7.You take out a loan with an APR of 10% with monthly compounding. What is the effectiveannual rate on your loan?(a)23.87%(b)21.6%(c)19.56%(d)18%Answer: (a)8.The CFO of CyberHelp Inc. has $250,000 in cash today that he wants to invest. How muchwill this investment be worth in four years if the current interest rate is 8%(a)$270,000(b)$330,000(c)$340,125(d)$342,150Answer: (c)9.If you purchase a $12,000 certificate of deposit today with an APR of 14%, with quarterlycompounding, what will the CD be worth when it matures in 5 years?(a)$20,846.99(b)$20,865.60(c)$23,104.97(d)$23,877.47Answer: (d)10.The CFO of CyberChain Inc. plans to unleash a media campaign that is expected to cost $15million four years from today. How much cash should she set aside to pay for this if the current interest rate is 13%(a)$9.2 million(b)$13.3 million(c)$14.4 million(d)$16.9 millionAnswer: (a)11.The NPV is a measure of how much your ________ wealth changes as a result of your choiceand if the NPV is ________it does not pay to undertake that choice.(a)future; negative(b)current; negative(c)current; positive(d)future; positiveAnswer: (b)12.The ________ is the rate that one can earn somewhere else if one did not invest in theproject under evaluation.(a)opportunity cost of capital(b)cost of debt(c)cost of equity(d)weighted average cost of capitalAnswer: (a)13.You are trying to decide whether or not to buy a bond for $990 that will make one paymentfor $1,050 four years from today. What is the internal rate of return on the bond’s cash flows?(a)1.06%(b)1.48%(c)10.6%(d)14.8%Answer: (b)14.Calculate the NPV of the following cash flows: you invest $3,000 today and receive $300 oneyear from now, $700 two years from now, and $1,100 starting four years from now. Assume that the interest rate is 7%.(a)–$1,962.62(b)–$1,269.04(c)$1,269.04(d)$1,962.62Answer: (b)15.After each payment of an amortized loan, the outstanding balance is reduced by the amountof principal repaid. Therefore, the portion of the payment that goes toward the payment of interest is ________ than the previous period’s interest payment and the portion going toward repayment of principal is ________ than the previous period’s.(a)greater; lower(b)lower; lower(c)greater; greater(d)lower; greaterAnswer: (d)16.The present value of a future amount can be calculated with the equation ________.(a) PV = FV(1 + i)n(b) PV = FV(1 + i)(n)(c) PV = FV/(1 + i)n[NOTE: this should be formatted as a stacked fraction](d) PV = FV/(1 + i)(n) [NOTE: this should be formatted as a stacked fraction]Answer: (c)17.To compute the future value of a present amount use the compound amount factor definedas ________.(a) FV = PV(1 + i)n(b) FV = PV(1 + i)(n)(c) FV = PV/(1 + i)n [NOTE: this should be formatted as a stacked fraction](d) FV = PV/(1 + i)(n) [NOTE: this should be formatted as a stacked fraction]Answer: (a)18.The earnings of BGB Computers have grown from $3.20 to $6.90 in 6 years. Determine theannual compound rate.(a)1.14%(b)13.7%(c)15.6%(d)115.6%Answer: (b)19.In five years you intend to go to graduate school. For each of your four years in graduateschool, you need to have a fund that will provide $25,000 per year at the beginning of each year. If the interest rate is 9% throughout, how much must you put in the fund today?(a)$64,996(b)$57,379(c)$50,184(d)$16,249Answer: (b)20.As part of your new job at CyberInc. the company is providing you with a new Jeep. Yourfirm will lease this $34,000 Jeep for you. The terms of the lease are seven annual payments at an interest rate of 10%, which will fully amortize the cost of the car. What is the annual lease payment?(a)$6,984.39(b)$5,342.86(c)$4,857.14(d)$3,584.00Answer: (a)21.A rule of thumb with using the internal rate of return is to invest in a project if the IRR is________ the opportunity cost of capital.(a)greater than(b)less than(c)less than or equal to(d)one-half ofAnswer: (a)22.When considering the timeframe of an investment, a rule followed by some is to choose theinvestment with ______ payback period.(a)the longest(b)the shortest(c)no(d)an infiniteAnswer: (b)23.A major problem with using the internal rate of return rule is ________.(a)there may be multiple cash outflows and multiple cash inflows(b)the internal rate of return may not exist(c)the internal rate of return may not be unique(d)all of the aboveAnswer: (d)24.The NPV is the difference between the ________ value of all ________ cash inflowsminus the ________ value of all current and future cash outflows.(a)future; present; present(b)present; future; present(c)present; present; future(d)present; future; futureAnswer: (b)25.When considering effective interest rates, as the compounding frequency increases, theeffective annual rate gets ________ and ________ but approaches ________.(a)larger; larger; a limit(b)smaller; smaller; a limit(c)larger; larger; infinity(d)smaller; smaller; infinityAnswer: (a)26.In 10 years you wish to own your business. How much will you have in your bankaccount at the end of 10 years if you deposit $300 each quarter (assume end of the period deposits) Assume the account is paying an interest rate of 12% compounded quarterly.(a)$20,220(b)$21,060(c)$21,626(d)$22,620Answer: (d)27.The director of marketing for CyberProducts Inc. plans to unleash a media blitz that isexpected to cost $4.7 million three years from today. How much cash should she set aside today to pay for this if the current interest rate is 11%(a) $6.43 million(b) $4.23 million(c) $3.62 million(d) $3.44 millionAnswer: (d)28.If you purchased a $10,000 certificate of deposit today with an APR of 12%, with monthlycompounding, what would be the CD worth when it matures in 6 years?(a) $56,340(b) $20,468(c) $19,738(d) $5,066Answer: (b)29.The manufacturing manager of CyberProducts Inc. estimates that she can save the company$16,000 cash per year over the next 8 years by implementing a recycling plan. What is the value of the savings today if the appropriate interest rate for the firm is 9% Assume cash flows occur at the end of the year.(a) $64,240(b) $88,557(c) $96,527(d) $128,000Answer: (b)30.If the exchange rate between the U.S. dollar and the French Franc is $0.17 per French Franc,the dollar interest rate is 5.5% per year, and the French Franc interest rate is 4.5% per year, what is the "break-even" value of the future dollar/French Franc exchange rate one year from now?a)$0.172 per FFb)$0.179 per FFc)$5.827 per FFd)$5.882 per FFAnswer: (a)31.In any time value of money calculation, the cash flows and the interest rate must bedenominated ________.a)in the same currencyb)in different currenciesc)in terms of a third currencyd)in terms of the ECUAnswer: (a)32.If the exchange rate between the U.S. dollar and the Japanese yen is $0.00745 per yen, thedollar interest rate is 6% per year, and the Japanese interest rate is 7% per year, what is the “break-even” value of the future dollar/yen exchange rate one year from now?a)$135.49 per yenb)$134.23 per yenc)$0.00752 per yend)$0.00738 per yenAnswer: (d)33.Consider the situation where you are trying to decide if you should invest in a Swiss projector an American project. Both projects require an initial outlay of $15,000. The Swiss project will pay you 17,100 Swiss Francs per year for 6 years, whereas the American one will pay you $11,000 per year for 6 years. The dollar interest rate is 5% per year, the Swiss Franc interest rate is 6% per year, and the current dollar price of a Swiss Franc is $0.68 per Swiss Franc. Which project has the higher NPVa)the U.S. project; its NPV is $55,832b)the U.S. project; its NPV is $40,833c)the Swiss project; its NPV is $42,179d)the Swiss project; its NPV is $57,178Answer: (c)34.The ________ is the rate denominated in dollars or in some other currency, and the________ is denominated in units of consumer goods.a)nominal interest rate; inflation interest rateb)nominal interest rate; real interest ratec)real interest rate; inflation interest rated)real interest rate; nominal interest rateAnswer: (b)35.Consider the situation where you are trying to decide if you should invest in a British projector U.S. project. Both projects require an initial outlay of $55,000. The British project will pay you 30,000 pounds per year for 6 years, whereas the American one will generate $40,000 per year for 6 years. The British interest rate is 5% per year, and the American interest rate is 6% per year; the current dollar price of a pound sterling is $1.6320 per pound sterling.Which project has the higher NPV?a)choose the U.S. one, it has a NPV of $196,693b)choose the U.S. one, it has a NPV of $141,693c)choose the British one, it has a NPV of $248,506d)choose the British one, it has a NPV of $193,506Answer: (d)36.What is the real interest rate if the nominal interest rate is 9% per year and the rate ofinflation is 6% per year?a) 1.5%b) 2.75%c) 2.83%d)7.5%Answer: (c)37.What is the nominal interest rate if the real rate of interest is 4.5% and the rate of inflationis 6% per year?a)10.5%b)10.77%c)10.86%d)14.5%Answer: (b)38.What is the real rate of interest if the inflation rate is 6% per year and the nominal interestrate per year is 12.5%a) 1.32%b) 6.13%c) 5.78%d)11.79%Answer: (b)pute the real future value, to the nearest dollar, of $2,000 in 35 years time. The realinterest rate is 3.2%, the nominal interest rate is 8.36%, and the rate of inflation is 5%.a)$6,023b)$6,853c)$33,223d)$11,032Answer: (a)40.The real interest rate is 3.2%, the nominal interest rate is 8.36% and the rate of inflation is5%. We are interested in determining the future value of $200 in 35 years time. What is the future price level?a) 2.91b) 3.012c) 5.516d)16.61Answer: (c)41.Suppose your child is 9 years old and you are planning to open a fund to provide for thechild’s college education. Currently, tuition for one year of college is $22,000. How much must you invest now in order to pay enough for the first year of college nine years from now, if you think you can earn a rate of interest that is 4% more than the inflation rate?a)$21,154b)$16,988c)$15,585d)$15,457Answer: (d)42.Suppose you have a child who is 10 years old and you are planning to open a fund to providefor the child’s college education. Currently, tuition for one year is $22,000. Your child is planning to travel for two years before starting college. How much must you invest now in order to pay enough for the first year of college ten years from now, if you think you can earn a rate of interest that is 5% more than the inflation rate?a)$10,190b)$13,506c)$13,660d)$20,952Answer: (b)43.When considering a plan for long run savings, if one does not have an explicit forecast ofinflation, then one can make plans in terms of:a)constant real payments and a real rate of interestb)constant nominal payments and a nominal rate of interestc)constant real payments and a nominal rate of interestd)constant nominal payments and a real rate of interestAnswer: (a)44.If the real rate is 4% and the rate of inflation is 6%, what is the nominal rate?a)8.16%b)10.16%c)10.24%d)10.36%Answer: (c)45.You have an investment opportunity with a nominal rate of 6% compounded daily. If youwant to have $100,000 in your investment account in 15 years, how much should you deposit today, to the nearest dollar?a.$43,233b.$41,727c.$40,930d.$40,660Answer: (d)46.You have determined the present value of an expected cash inflow stream. Which of thefollowing would cause the stream to have a higher present value?a)The discount rate increases.b)The cash flows are paid over a shorter period of time.c)The discount rate decreases.d)Statements (b) and (c) are both correct.Answer: (d)Short Problems1.CyberNow is opening an office in the U.S. CyberNow expects cash flows to be $500,000 forthe first year, $530,000 for the second year, $560,000 in the third year. If CyberNow uses 12 percent as its discount rate, what is the present value of the cash flows Assume cash flows are made at the end of the year.Answer: PV = FV/(1 + i)n= 500,000/(1.12)1 + 530,000/(1.12)2 + 560,000/(1.12)3= 446,429 + 422,513 + 398,597= $1,267,5392. GeorgiaSun Inc. has preferred stock that pays an annual dividend of $10.50. If the securityhas no maturity (an “infinite” life), what is its value to an investor who wishes to obtain an8.5 percent rate of return?Answer: PV of a level Perpetuity = $10.50/0.085= $123.533.Let us suppose you have a choice between investing in a bank savings account that pays 9%compounded annually (Bank Yearly) and one that pays 8.5% compounded daily (Bank Daily).(Assume this is based on 365 days). Using only effective annual rates, which bank would you prefer?Answer: Effective annual rate: Bank Yearly = 9%Effective annual rate: Bank Daily = [1 + 0.085/365]365 – 1= 8.87%You would prefer Bank Yearly because you will earn more money.4.Steptoe’s bank account has a floating interest rate on certain deposits. That is, every yearthe interest rate is adjusted. Four years ago Steptoe deposited $35,000 into the bank account, when interest rates were 6%. The following year the rate was 6.5%, last year the rate was 8% and this year the rate fell to 7.5%. How much will be in his account at the end of the year Assume annual compounding.Answer: Amount = $35,000 x 1.06 x 1.065 x 1.08 x 1.075= $45,872.855.Calculate the net present value of the following cash flows: you invest $4,000 today andreceive $400 one year from now, $900 two years from now and $2000 three years from now.Assume the interest rate is 9%.Answer: NPV = $400/(1.09) +$900/(1.09)2 + $2,000(1.09)3 –$4,000= $366.97 + $757.51 + $1,544.37 – $4,000= $ -1,331.156.The manufacturing manager of CyberNow Inc. estimates that she can save the company$20,000 cash per year over the next 5 years by implementing a recycling plan. What is the value of the savings today if the appropriate interest rate for the firm is 8%. Assume that cash flows occur at the end of the year.Answer:n i PV FV PMT Result5 8 ? 0 $20,000 PV = $79,854.207.Stroll Inc. has been offered a $2,000,000 jet under a 10 year loan agreement. The loanrequires Stroll Inc. to make equal, annual, end-of-year payments that include both principal and interest on the outstanding balance. The interest rate on the loan is 11%. Calculate the amount of these annual payments.Answer:n i PV FV PMT Result10 11 –$2,000,000 0 ? PMT = $339,602.858.Herb Flint decides to put $2,000 a year into an IRA fund over his 35 year working life andthen retire. Assume the deposits are made at the end of the year. If the account earns 11% compounded annually, what will Herb have in the account when he retiresAnswer:n i PV FV PMT Result35 11 0 ? $2,000 FV = $683,179.119.Regarding retirement funds, there is some debate as to whether investors should invest atthe beginning of the year rather than at the end of the year. If an investor invests $2,000 per year at 12% over a 35 year period, what is the difference between the two funds?Answer: End of Year Fund:n i PV FV PMT Result35 12 0 ? $2,000 PV = $863,326.99Under an immediate annuity the entire amount earns interest for an additional year. So the FV for the immediate annuity is $863,326.99 X 1.12 = $996,926.23.Therefore the difference between the funds is: $996,926.23 – $863,326.99 = $103,599.24 10.You have the chance to buy a bond for $900 that will make one payment of $1,100 six yearsfrom today. What is the internal rate of return in the bond’s cash flows?Answer: 900(1 + i)6 = 1,100(1 + i)6 = 1.222i = (1.222)1/6 - 1i= 3.40%11.Consider the situation where you are trying to decide if you should invest in an Australianproject or an American project. Both projects require an initial outlay of $20,000. TheAustralian project will pay you Aust $40,000 per year for 6 years, whereas the American one will generate $25,000 per year for 6 years. The Australian dollar interest rate is 6% per year and the American interest rate is 5% per year; the current dollar price of an Australian dollar is $0.65 per Australian dollar. Which project has the higher NPV?Answer:American Project:n i PV FV PMT PV Result6 5 ? 0 $25,000 $126,892Australian Project:n i PV FV PMT PV Result6 6 ? 0 $40,000 $196,693 (Aust)NPV US project = $126,892 - $20,000 = $106,892Today the Australian project is worth A$196,693 x $0.65 per Aust= $127,850.45 (in U.S. dollars)NPV Aust project = $127,850.45 - $20,000 = $107,850.45Choose the Australian project since it has a higher NPV.12.If the exchange rate between the U.S. dollar and the Dutch Guilder is $0.49903 per Guilder,the dollar interest rate is 7% per year and the Dutch interest rate is 8% per year, what is the “break-even” value of the future dollar/Guilder exchange rate one year from now?Answer:Today One Year From Now$1 @7% $1.072.00389 Guilders @8% 2.16420 Guilders“Break-even” point = $1.07/2.16420 Guilders= $0.49441 per Guilder13.What is the real rate of interest if the nominal rate is 11.5% per year and the rate of inflationis 7% per year?14.Answer:Real interest rate = Nominal interest rate – rate of inflation1 + rate of inflation= 0.115 – 0.071.07= 0.04206Real interest rate = 4.21%15.I have $200 today and am interested in finding out what its equivalent real future value willbe in 40 years. What are the two ways I have available to me in computing the real future value?Answer:pute the future value using the real rate of interest.pute the nominal future value using the nominal rate, and then deflate it tofind the real future value.16.The real rate of interest is 3.756%, the nominal rate of interest is 10.5% and the rate ofinflation is 6.5%. What is the real future value of $2,000 in 40 years time Show bothmethods.Answer:Method One:Real future value = $,2000 x 1.0375640= $8,741Method Two:Nominal future value = $2,000 x 1.10540= $108,522.83Future price level = 1.06540= 12.16Real FV = nominal future valuefuture price level= $108,522.83 12.416 = $8,74117.As part of your new job at CyberInc. the company is providing you with a new Jeep. Yourfirm will lease this $34,000 Jeep for you. The terms of the lease are seven annual payments at an interest rate of 10%, which will fully amortize the cost of the car. Assuming that all payments are made on time and no additional money is paid towards the lease in any year, what percent of the 5th payment will go towards repayment of principal?18.Answer:n i PV FV PMT Result7 10 –$34,000 0 ? PMT = $6,984.39The monthly payment = $6,984.39Of the monthly payment, principal = $5,247% principal repayment in 5th payment =$5,247/$6,984.39= 75.12%19.You have decided to buy a car that costs $35,000. The dealer offers you a 5 year loan withmonthly payments of $814 per month. What is the annual interest rate on the loan?Answer:n i PV FV PMT Result60 ? –$35,000 0 $814 i = 1.165The annual nominal interest rate = 1.165 * 12= 13.98% per year20.A subscription to the magazine “National Tattler” states that you can purchase a one yearsubscription for $45 today, which can be renewed after a year at this rate. Alternately, you can purchase a two year subscription for $80 today. If you wish to subscribe to the magazine for two years and your required rate of return is 9% per year, which subscription offershould you choose?Answer:PV of the two year subscription = $80PV of one year subscription and renewal = $45 + 45/1.09= $86.28The two year subscription is the cheaper alternative.Longer Problems1.Heathcliff is currently 25 years old and expects to retire at age 65. Suppose that Heathclifftakes a job immediately and can earn $35,000 for the remainder of his working life. What is the present value of his future earnings?Answer:n i PV FV PMT Result40 5 ? 0 $35,000 PV = $600,5682.In order to finance your dream home, you are considering borrowing $120,000. The annualpercentage rate is 9% and payments are made annually over 5 years. Construct the loan-amortization schedule for the annual paymentsAnswer:n i PV FV PMT Result5 9 –$120,000 0 ? PMT = $30,856Loan Amortization Schedule is as follows:3.You are 60 years old and are considering whether it pays to buy an annuity from aninsurance company. For a cost of $25,000, the insurance company will pay you $3,000 per year for the rest of your life. If you can earn 8% per year on your money in a bank account and expect to live until age 80, is it worth buying the annuity What implied interest rate is the insurance company paying you4.Answer: First compute the present value of the annuity.n i PV FV PMT Result20 8 ? 0 $3,000 PV = $29,454.44Now compute the NPV of the investment of the annuity:NPV = $29,454.44 - $25,000= $4,454.44So the annuity looks worth buying.To compute the implied interest rate on the annuity, we need to find thediscount rate that makes the NPV zero. On a financial calculator, we find theanswer to be 10.32% per year.4. Gemma Peel is 30 years today and she wishes to accumulate enough money over the next 35 years to provide for a 20 year retirement annuity of $100,000 at the beginning of each year, starting with her 65th birthday. Assume the rate of the return over the entire period will be 11%. What is the present value of this annuity?Answer:n i PV FV PMT Result20 11 ? 0 $100,000 PV = $883,9295. The exchange rate between the Canadian dollar and the U.S. dollar is currently $0.69190 perCanadian dollar, the dollar interest rate is 6% per year, and the Canadian dollar interest rate is 7% per year. You have $100,000 in a one-year account that allows you to choose between either currency and it pays the corresponding interest rate. What is the “break-even” value of the dollar/Canadian dollar exchange rate one year from now?Answer:U.S. today One year from now $1 @6% $1.06Canadian today One year from now$1.44530(Cdn) @7% $1.54647“Break-even” point = $1.06/1.54647 (Cdn dollar)= $0.68543 per Canadian dollar6.Assume that you have just taken out a $300,000 30 year mortgage with monthly paymentsat an annual 8 percent rate. At the end of the 3rd year (after 36 payments), you begin paying an additional $100 each month towards the mortgage. That is, for months 37 onward you make the scheduled payment plus an extra $100 each month. To the nearest whole number, how many additional payments (payments in addition to the first 36) must you make before the mortgage is paid off?7.Answer:First compute the monthly payment-PV FV Interest N Result________-300,000 0 0.67 360 360 PMT = $2,201.29Initially, you made $2,201.29 for the first three years. After 36 payments, theremaining balance = $291,840.45. After period 37, compute number of additional payments now that your monthly payment is $2,301.29.PV FV Interest PMT Result__-$291,840.45 0 0.67 $2,301.29 N = 281You must make 281 additional payments before the mortgage is paid off.8.The company you work for has been experiencing financial difficulties and has just filed areorganization plan. Three years ago, one of the firm’s creditors lent the firm $80,000 on a ten year annual payment loan at a 15% interest rate. Immediately after the firm made the third payment, as a result of the court settlement, the creditor agreed to decrease thecurrent outstanding balance of the loan by 20%, to lower the interest rate to 10%, and to increase the remaining term of the loan to 15 years. What will be the new annual payments on the firm’s loan, assuming all these changes take place?Answer:Under the original plan, your firm had annual payment obligations of:n i PV FV PMT Result10 15 –$80,000 0 ? PMT = $15,940Originally, your firm had to pay $15,940 per year to its creditors.After the third balance, the remaining balance = $66,318Under the new arrangement, new outstanding balance = $66,318 X 0.80= $53,054Under the new payment arrangement, annual payments are:n i PV FV PMT Result15 10 –$53,054 0 ? PMT = $6,975.219.Five banks offer CDs at the following stated annual percentage rates:Bank A: 10% APR compounded annuallyBank B: 9.8% APR compounded semiannuallyBank C: 9.6% APR compounded quarterlyBank D: 9.5% APR compounded monthlyBank E: 9.4% APR compounded dailyAnton has inherited $150,000 and decides to invest the money in a 20 year CD. He decides to invest the money with Bank E. If Anton had invested his money in the CD offering the best rate instead of Bank E, how much more money would he have had after 20 years?Answer:First determine the effective annual rates at each bank.Bank A: Effective Annual Rate = 10% per yearBank B: Effective Annual Rate = 10.04% per yearBank C: Effective Annual Rate = 9.95% per yearBank D: Effective Annual Rate = 9.92% per yearBank E: Effective Annual Rate = 9.85% per yearBest Account = Bank BAfter 20 years, the FV at Bank B:n i PV FV PMT Result20 10.04 –$150,000 ? 0 FV = $1,016,489.49Compare the above with the FV at Bank E after 20 years:n i PV FV PMT Result20 9.85 –$150,000 ? 0 FV = $981,957.03If Anton had invested with Bank B, he would have earned $1,016,489.49 - $981,957.03 = $34,532.46 more.。
(完整word版)兹维博迪金融学第二版试题库2TB
Chapter TwoFinancial Markets and InstitutionsThis chapter contains 49 multiple-choice questions, 20 short problems and 10 longer problems。
Multiple Choice1. A market that has no one specific location is termed a(n) ________ market.(a)over—the—counter(b)geographic location(c)intermediary(d)conceptualAnswer: （a)2. ________ problems arise because parties to contracts often cannot easily monitor or control one another。
(a)Payment(b)Counter(c)Incentive(d)ExchangeAnswer: （c）3. Incentive problems take a variety of forms and include：(a)moral hazard(b)adverse selection(c)principal-agent(d)all of the aboveAnswer: (d）4. The ________ problem exists when having insurance against some risk causes the insured party to take greater risk or to take less care in preventing the event that gives rise to the loss.(a)moral hazard(b)adverse selection(c)principal—agent(d)all of the aboveAnswer： (a）5。
兹维博迪金融学第二版试题库10TB(1)
兹维博迪金融学第二版试题库10T B(1)-CAL-FENGHAI.-(YICAI)-Company One1Chapter TenPrinciples of Risk ManagementThis chapter contains 30 multiple choice questions, 10 short problems, and 5 longer problems. Multiple Choice1.________ that “matters” because if affects people's welfare. ________ exists whenever one doesnot know for sure what will occur in the future.(a)Uncertainty is risk; Uncertainty(b)Risk is uncertainty; Uncertainty(c)Risk is uncertainty; Risk(d)Uncertainty is risk; RiskAnswer: (b)2.________ is a measure of willingness to pay to reduce one's exposure to risk.(a)Risk aversion(b)Risk avariciousness(c)Risk predilection(d)Risk inflationAnswer: (a)3.When choosing among investment alternatives with the same expected rate of return, a risk averseindividual chooses the one with the ________ risk.(a)surest(b)most uncertain(c)lowest(d)highestAnswer: (c)14.________ is a particular type of risk people face because of the nature of their business or pattern ofconsumption.(a)Operational efficiency exposure(b)Opportunity exposure(c)Risk exposure(d)Risk reductionAnswer: (c)5.________ are investors who take positions that increase their exposure to certain risks in the hope ofincreasing their wealth.(a)Operations insurers(b)Foreign exporters(c)Hedgers(d)SpeculatorsAnswer: (d)6.The riskiness of an asset or a transaction ________ be assessed in isolation or in the abstract.(a)can(b)cannot(c)must(d)it varies according to the situationAnswer: (b)7.By definition, ________ are investors who take positions to reduce their exposures.(a)operations insurers(b)foreign exporters(c)hedgers(d)speculatorsAnswer: (c)28.The risk of loss arising from obsolescence due to technological change or changes in consumer tasteis an example of ________.(a)unemployment risk(b)liability risk(c)financial-asset risk(d)d consumer-durable asset riskAnswer: (d)9.The risk arising from holding different kinds of financial assets such as equities or fixed incomesecurities denominated in one or more currencies is an example of ________.(a)unemployment risk(b)liability risk(c)financial-asset risk(d)consumer-durable asset riskAnswer: (c)10.Business risks of the firm are borne by its ________.(a)shareholders(b)creditors(c)employees(d)all of the aboveAnswer: (d)11.________ consists of figuring out what the most important risk exposures are for the unit of analysis.(a)Risk assessment(b)Selection of risk management techniques(c)Implementation(d)Risk identificationAnswer: (d)312.Which of the following is most likely to need a lot of life insurance?(a)a single person with no dependents(b)a divorced person with no dependents(c) a double-income couple with no kids(d)married person with childrenAnswer: (d)13.________ is the quantification of the costs associated with the risks that have been identified in thefirst step of risk management.(a)Risk assessment(b)Selection of risk management techniques(c)Implementation(d)ReviewAnswer: (a)14.Selling a risky asset to someone else and buying insurance are examples of ________.(a)risk avoidance(b)loss prevention and control(c)risk transfer(d)risk retentionAnswer: (c)15.One is said to ________ a risk when the action taken to reduce one’s exposure to a loss also causesone to give up the possibility of a gain.(a)insure(b)diversify(c)hedge(d)pay a premium withAnswer: (c)416.When you ________ you pay a premium to eliminate the risk of loss and retain the potential for gain.(a)insure(b)diversify(c)hedge(d)speculateAnswer: (a)17.In order for diversification to reduce your risk exposure, the risks must be ________(a)less than perfectly correlated with each other(b)more than perfectly correlated with each other(c)uncorrelated(d)none of the aboveAnswer: (a)18.The demand for ways to manage risk has been increased by ________.(a)increased volatility of exchange rates(b)increased volatility of interest rates(c)increased volatility of commodity prices(d)all of the aboveAnswer: (d)19.Moral hazard and adverse selection are examples of ________.(a)transactions costs(b)incentive problems(c)transference costs(d)both a and bAnswer: (b)520.________ is defined as quantitative analysis for optimal risk management.(a)Portfolio theory(b)Corporate theory(c)Diversification theory(d)Probability theoryAnswer: (a)21.An asset portfolio's expected return is identified with the ________ of the distribution, and its riskwith the ________.(a)variance; average(b)mean; standard deviation(c)standard deviation; average(d)median; normal distributionAnswer: (b)22.Suppose you buy shares of RayFran stock at a price of $110 per share and intend to hold them for ayear. Suppose RayFran pays a dividend of $3.50 per share over that year. Compute the total rate of return on a share of RayFran stock if at the end of the year you sell it for $122.50 per share.(a)10.20%(b)11.36%(c)13.06%(d)14.55%Answer: (d)23.The ________ a stock's volatility, the ________ the range of possible outcomes and the ________ theprobabilities of those returns at the extremes of the range.(a)larger; narrower; larger(b)larger; narrower; smaller(c)larger; wider; larger(d)larger; wider; smallerAnswer: (c)624.Consider the probability distribution of rate of return on RayFran stock:Rate of Return Probability40% 0.2515% 0.55–8% 0.20Compute the expected rate of return on RayFran stock.(a)9.75%(b)15.60%(c)16.65%(d)19.85%Answer: (c)25.Refer to question 24. Now compute the standard deviation of RayFran stock.(a)12.95%(b)13.10%(c)16.10%(d)25.90%Answer: (c)26.Consider a stock with an expected return of 15% and a standard deviation of 8% that is normallydistributed. What is the 0.95 confidence interval for this stock's rate of return?(a)(7%, 23%)(b)(–9%, 39%)(c)(–1%, 39%)(d)(–1%, 31%)Answer: (d)7For questions 27 through 30, use the following table:27.What are the mean returns for Toys’R’Me and S.A.O. Rouge, respectively?(a)Toys R Me: 12.4%; S.A.O. Rouge: 10.2%(b)Toys R Me: 10.4%; S.A.O. Rouge: 7.4%(c)Toys R Me: 10.4%; S.A.O. Rouge: 10.2%(d)Toys R Me: 7.4%; S.A.O. Rouge: 10.4%Answer: (b)28.What is the standard deviation of returns for Toys R Me For S.A.O. Rouge29.(a)Toys R Me: 8.4%; S.A.O. Rouge: 7.4%(b)Toys R Me: 8.40%; S.A.O. Rouge: 8.16%(c)Toys R Me: 10.4%; S.A.O. Rouge: 7.4%(d)Toys R Me: 10.4%; S.A.O. Rouge: 8.16%Answer: (b)30.Suppose the returns for Toys R Me and S.A.O. Rouge are normally distributed. Determine the 0.68confidence interval for Toys R. Me.(a)(8.4%, 10.4%)(b)(–14.8%, 35.6%)(c)(–6.4%, 27.2%)(d)(2.00%; 18.80%)Answer: (d)831.Determine the 0.95 confidence interval for S.A.O. Rouge.(a)(7.14%, 8.16%)(b)(–0.76, 15.56%)(c)(-8.92, 23.72%)(d)(–17.08, 31.88%)Answer: (c)Short Problems1.Briefly distinguish between the three methods available to transfer risk: hedging, insuring anddiversifying.Answer:Hedging: One is said to hedge a risk when the action taken to reduce one’s exposure toa loss also causes one to give up the possibility of a gain.Insuring: Insuring means paying a premium to eliminate the risk of loss and retain thepotential for gain.Diversifying: Diversifying means holding similar amounts of many risky assets instead ofconcentrating all of your investment in only one. Diversification thereby limits yourexposure to the risk of any single asset.2.Outline the steps in the risk-management process.Answer:The risk management process can be broken down into five steps:1. Risk identification2. Risk assessment3. Selection of risk management techniques4. Implementation5. Review93.Think of a bookstore. What risks is such a business exposed to, and who bears them?4.Answer:Major risks:Risk that inventory will not arrive on timeRisk that employees will be late or absentRisk that computers/registers will break downRisk of new competition in the area (especially - the “superstores”)Risk that distributors' prices will increase dramaticallyThese risks are borne by shareholders, owners, employees, creditors, customers,suppliers.5.Explain why the sale/purchase of a house is similar to a forward contract in nature.Answer:Both parties eliminate the uncertainty associated with price volatility in the housingmarket during the months of settling the contract between them. Even though the transferof ownership for the house won't happen for many months, the buyer and seller of ahouse can contractually settle on a transaction price for the house.6.Explain the difference between insuring and hedging.Answer:When you hedge, you eliminate the risk of loss by giving up the potential for gain.However, when you insure, you pay a premium to eliminate the risk of loss and retain thepotential for gain.7.Discuss the two factors limiting the efficient allocation of risks.Answer:Transactions costs and incentive problems are the two key factors limiting the efficientallocation of risks. Transactions costs include the costs of establishing and runninginstitutions such as insurance companies or securities exchanges and the costs of writingand enforcing contracts.Moral hazard and adverse selection are examples of incentive problems, which stand inthe way of the development of institutions for efficient risk sharing. Moral hazard existswhen having insurance against some risk causes the insured party to take greater risk orto take less care in preventing the event that gives rise to the loss.The problem with adverse selection relates to the fact that those who purchase insuranceagainst risk are more likely than the general population to be at risk.108.In the case of insuring a ship, explain how the moral hazard problem can lead to unwillingness on thepart of the insurance company to insure against certain types of risk.Answer:If a ship owner buys insurance for his vessel, the existence of insurance may reduce theowner's incentive to spend money on the upkeep of the vessel. Failure to take suchprecautions makes a safety hazard a more likely occurrence. In an extreme case, theowner may be tempted to sabotage the ship in order to collect the insurance money, if thecoverage exceeds the market value of the ship.Due to this potential moral hazard, companies may limit the amount they will insure orsimply refuse to insure under certain circumstances or require rigid inspections of avessel to make sure its meets minimum safety standards.Consider the following table to answer questions 8 through 10:9.What is the mean share for OutDell For MiniMoo10.Answer:OutDell:E(r) = [–10% + (–2%) + 5% + 10% + 18%]/5= 4.2%MiniMoo:E(r) = [5% + 15% +(– 7%) + 12% + 22%]/5= 9.4%MiniMoo has the higher expected return.1111.What is the standard deviation of returns for OutDell For MiniMoo12.Answer:OutDell:SD=15[(-10%-4.2%2)+(-2%-4.2%2)+(5%-4.2%2)+(10%-4.2%2)+(18%-4.2%2)]SD=15(464.80%)SD=9.64%MiniMoo:SD=15[(5%-9.4%2)+(15%-9.42%)+(-7%-9.4%2)+(12%-9.4%2)+(22%-9.4%2)]SD=15(485.20%)SD=9.85%13.Suppose the returns for OutDell and MiniMoo have normally distributed returns with means andstandard deviations calculated in questions 8 and 9. For each stock, determine the range of returns within two standard deviations of the mean.Answer:OutDell:0.95 confidence interval = 4.2 ± (2 x 9.64)= 4.2 ± 19.28= (–15.08%, 23.48%)MiniMoo:0.95 confidence interval = 9.4 ± (2 x 9.85)= 9.4 ± 19.70= (–10.30%, 29.10%)12Challenging Questions1.Consider the following investment opportunity. You have the opportunity to open a restaurant in yourtown for $180,000. If business is healthy and strong, you could net $100,000 in after-tax cash flows each year over the next six years.a) Would you consider hedging or insuring Whyb) What risk is such a business exposed to:Answer:a) You would be more likely to consider insuring. You would insure the restaurantagainst fire or other disasters, take all necessary safety precautions. You wouldalso want to retain the potential for gain in operating your business.b) Risk that employees will be late or absent.Risk that inventory will not arrive on time.Risk that equipment will break down.Risk that fire may occur.Risk that restaurant may be robbed.Risk that the restaurant may be vandalized.Risk that raw material prices will increase unpredictability.Risk of new competition in the area.2.Consider a person's life cycle - that is, at various ages say, mid-twenties, late thirties to early forties,mid-fifties and late sixties and beyond. What risks is a person likely to face in each of these age groups and how would cash, bonds and stocks be perceived at these various stages of life?Answer:Mid-twenties: A person may tend to be more aggressive in terms of risk tolerance. Stocksare more likely to be the choice of investment, followed by bonds and cash.Late thirties to early forties: For “DINK,” the capacity for risk is still quite high.However, those who are parents may be faced with college tuition, life insurance, etc. sosome risk options diminish. A person in this group would perhaps be a little lessaggressive with stocks.Mid-fifties: People in this group need to start thinking more about retirement and incomeprotection. Major health costs may also be a consideration as it is for people in the sixtiesand beyond group. There tends to be little or no capacity for risk and the securities orinvestments sought at this stage tend to be very conservative.13e the following table:a) Compute the mean return on DinkiDi stock.b) Compute the standard deviation on DinkiDi stock.c) Comment on value you obtained in (b).Answer:a. E(r) = (0.20)(60%) + (0.60)(12%) + (0.20)(–20%)E(r) = 12% + 7.2% + (–4%)E(r) = 15.2%b.SD=0.20(60%-15.2%2)+0.60(12%-15.2%2)+0.20(-20%-15.2%2)SD=401.408%+6.144%+247.808%SD=25.6%c. On its own, the value obtained in (b) does not mean as much as it would were itcompared relative to another number or some industry standard.4.Suppose you are a U.K. citizen who has won a writer’s 30,000 pound scholarship to study in France.How can you hedge your foreign exchange risk How can you insure against it5.Answer:To hedge the risk you would enter into a contract now to sell your 30,000 pounds at afixed per euro.To insure against a decline in the euro price of the pound, you could pay a premium nofor a put option that would give you the right to sell your 30,000 pound scholarship at afixed euro price per pound.14e the table below:a) What is the mean return for DinkiDi For SirPassb) What is the standard deviation for DinkiDi For SirPassc) Suppose the returns for DinkiDi and SirPass have normally distributed returns withmeans and standard deviations calculated in both a and b. Calculate the range of returnswithin two expected deviations of the mean.Answer:a. DinkiDi:E(r) = 1/6 (11 + 16 – 5 – 3 + 15 + 8)= 7%SirPass:E(r) = 1/6 (8 + 17 – 7 – 4 + 17 + 11)= 7%Both stocks have the same mean return.b. DinkiDi:σ= 16 (406%)= 8.23% SirPass:σ= 16 (534%)= 9.43%SirPass has a wider dispersion or higher volatility.c. 0.95 confidence intervals:DinkiDi: 0.95 Confidence Intervals = 7 ± (2 x 8.23)= (–9.46%, 23.46%)SirPass: 0.95 Confidence Intervals =7 ± (2 x 9.43)= (–11.86%, 25.86%)15。
兹维博迪金融学第二版试题库08TB
Chapter EightValuation of Known Cash Flows: BondsThis chapter contains 50 multiple choice questions, 18 short problems and 9 longer problems.Multiple Choice1. A ________ is a quantitative method used to infer an asset's value from market information about theprices of other assets and market interest rates.(a)fixed model(b)perpetual valuation model(c)valuation model(d)variable modelAnswer: (c)2.________ are examples of fixed-income securities.(a)Common stock and pension funds(b)Mortgages and pension annuities(c)Mutual funds and common stock(d)Preferred stock and common stockAnswer: (b)3.Consider a fixed-income security that promises to pay $150 each year for the next five years. Howmuch is this five-year annuity worth if the appropriate discount rate is 7% per year?(a)$534.74(b)$615.03(c)$802.50(d)$867.96Answer: (b)8-14.Consider a fixed-income security that promises to pay $120 each year for the next four years.Calculate the value of this four-year annuity if the appropriate discount rate is 6% per year.(a)$415.81(b)$508.80(c)$531.85(d)$629.06Answer: (a)5.The price of any existing fixed-income security ________ when market interest rates rise becauseinvestors will only be willing to ________ them if they offer a competitive yield.(a)rises; buy(b)rises; sell(c)falls; buy(d)falls; sellAnswer: (c)6. A fall in interest rates causes a ________ in the market value of a fixed-income security.(a)a rise(b)a fall(c)no change(d)it cannot be determined from the information givenAnswer: (a)7. A change in market interest rates causes ________ in the market values of all existing contractspromising fixed payments in the future.(a)a change in the same direction(b)a change in the opposite direction(c)no change(d)an unpredictable variationAnswer: (b)8-28.What happens to the value of a four-year fixed-income security promising $100 per year if the marketinterest rate rises from 5% to 6% per year?(a)A rise of 1% causes a drop of $4.87 in market value.(b)A rise of 1% causes a rise of $4.87 in market value.(c)A rise of 1% causes a drop of $8.09 in market value.(d)A rise of 1% causes a rise of $8.09 in market value.Answer: (c)9.What happens to the value of a four-year fixed-income security promising $100 per year if the marketinterest rate falls from 6% to 5% per year?(a)A fall of 1% causes a drop of $4.87 in market value.(b)A fall of 1% causes a rise of $4.87 in market value.(c)A fall of 1% causes a drop of $8.09 in market value.(d)A fall of 1% causes a rise of $8.09 in market value.Answer: (d)10.A zero-coupon bond is also known as ________.(a)a perpetual bond(b)a pure discount bond(c)a market rebate(d)an infinite bondAnswer: (b)11.The promised cash payment on a pure discount bond is called its ________.(a)face value(b)par value(c)fixed interest(d)both a and bAnswer: (d)8-312.What is the yield of a 1-year pure discount bond with a price of $850 and a face value of $1,000?(a)8.50%(b)9.09%(c)15.00%(d)17.65%Answer: (d)13.What is the yield of a 1-year pure discount bond with a price of $900 and a face value of $1,000?(a)5.26%(b)10.00%(c)11.11%(d)15.79%Answer: (c)14.Consider a four-year pure discount bond with a face value of $1,000. If its current price is $850,compute its annualized yield.(a)1.17%(b)4.15%(c)5.57%(d)17.60%Answer: (b)15.Consider a three-year pure discount bond with a face value of $1,000. If its current price is $900,compute its annualized yield.(a)1.036%(b)1.111%(c)3.57%(d)5.41%Answer: (c)8-416.Consider a five-year pure discount bond with a face value of $1,000. If its current price is $780, whatis its annualized yield?(a)5.09%(b)2.82%(c)1.28%(d)1.05%Answer: (a)17.A ________ obligates the issuer to make periodic payments of interest to the bondholder for the lifeof the bond and then to pay the face value of the bond when the bond matures.(a)pure discount(b)zero-coupon(c)perpetual bond(d)coupon bondAnswer: (d)18.The ________ of the bond is interest rate applied to the ________ of the bond to compute theperiodic payment.(a)coupon rate; face value(b)maturity rate; face value(c)coupon rate; price(d)maturity rate; priceAnswer: (a)19.For a bond with a face value of $1,000 and coupon rate of 11%, what is the annual coupon payment?(a)$100(b)$110(c)$1,000(d)$1,100Answer: (b)8-520.For a bond with a face value of $1,000 and a coupon rate of 9%, what is the annual coupon payment?(a)$90(b)$99(c)$1,000(d)$1,190Answer: (a)21.If the market price of a coupon bond equals its face value, it is also termed a ________.(a)par bond(b)premium bond(c)discount bond(d)zero-discount bondAnswer: (a)22.If the bond’s market price is higher than its face value, it is termed a ________.(a)par bond(b)premium bond(c)discount bond(d)zero-discount bondAnswer: (b)23.If the bond’s market price is lower than its face value, it is termed a ________.(a)par bond(b)premium bond(c)discount bond(d)zero-par bondAnswer: (c)8-624.If a bond selling for $850 has an annual coupon payment of $80 and a face value of $1,000, what isits current yield?(a)8.00%(b)9.41%(c)17.65%(d)27.05%Answer: (b)25.If a bond selling for $1,120 has an annual coupon payment of $110 and a face value of $1,000, whatis its current yield?(a)8.90%(b)9.82%(c)10.71%(d)11.00%Answer: (b)26.If a bond selling for $900 has an annual coupon payment of $80 and a face value of $1,000, what isits current yield?(a)8.00%(b)8.89%(c)11.00%(d)20.00%Answer: (b)27.The ________ is the discount rate that makes the present value of the bond’s stream of promised cashpayments equal to its price.(a)compound rate(b)yield to maturity(c)coupon rate(d)current yieldAnswer: (b)8-728.Suppose you are considering buying a one-year 11% coupon bond with a face value of $1,000 and acurrent price of $1,020. What is its yield to maturity?(a)8.82%(b)9.00%(c)10.78%(d)11.00%Answer: (a)29.Suppose you are considering buying a one-year 11% coupon bond with a face value of $1,000 and acurrent price of $1,050. What is its yield to maturity?(a)4.76%(b)5.71%(c)6.00%(d)10.48%Answer: (b)30.Suppose you are considering buying a five-year 11% coupon bond with a face value of $1,000 and acurrent price of $950. What is its yield to maturity?(a)5.62%(b)9.63%(c)11.58%(d)12.40%Answer: (d)31.Suppose you are considering buying a five-year 11% coupon bond with a face value of $1,000 and acurrent price of $1,100. What is its yield to maturity?(a)3.87%(b)8.47%(c)10.00%(d)13.62%Answer: (b)8-832.Suppose you are considering buying a six-year 10% coupon bond with a face value of $1,000 and acurrent price of $1,100. What are the current yield and yield to maturity of this bond?(a)CY = 11.00%; YTM = 12.23%(b)CY = 12.23%; YTM = 11.00%(c)CY = 7.85%; YTM = 9.09%(d)CY = 9.09%; YTM = 7.85%Answer (d)33.Suppose you are considering buying a seven-year 11% coupon bond with a face value of $1,000 and acurrent price of $950. What are the current yield and yield to maturity of this coupon bond?(a)CY = 12.10%; YTM = 11.58%(b)CY = 11.58%; YTM = 12.10%(c)CY = 9.92%; YTM = 10.45%(d)CY = 10.45%; YTM = 9.92%Answer: (b)34.Over time bond prices ________ their face value. Before maturity, bond prices can ________ a greatdeal as a result of changes in market interest rates.(a)diverge from; fluctuate(b)converge toward; flatten out(c)converge toward; fluctuate(d)diverge from; flatten outAnswer: (c)35.When the yield curve is not flat, bonds of the same ________ with different coupon rates have________ yields to maturity.(a)maturity, different(b)maturity, identical(c)callability, different(d)callability, identicalAnswer: (a)8-936.Bonds offering the same future stream of promised payments can differ in a number of ways, but thetwo most important are ________ and ________.(a)taxability, issue origin(b)type of issuer, default risk(c)type of issuer, taxability(d)taxability, default riskAnswer: (d)37.A ________ is one that gives the holder of a bond issued by a corporation the right to convert thebond into a pre-specified number of shares of common stock.(a)callable bond(b)convertible bond(c)stock bond(d)preferred bondAnswer: (b)38.A ________ is one that gives the issuer of the bond the right to redeem it before the final maturitydate.(a)callable bond(b)convertible bond(c)stock bond(d)preferred bondAnswer: (a)39.Five years ago, English and Co. issued 25-year coupon bonds with par value $1,000. At the time ofissuance, the yield to maturity was 6 percent and the bonds sold at par. The bonds are currently selling at 110 percent of their par value. Assuming that the coupon is paid annually, what is the current yield to maturity?(a)3.77%(b)5.18%(c)5.27%(d)5.46%Answer: (b)8-1040.Potemkin Corporation plans to raise $10,000,000 in funds by issuing zero coupon $1,000 par valuebonds with a 25 year maturity. Potemkin Corporation is able to issue these bonds at an after tax cost of debt of 12%. To the nearest whole number, how many bonds must Potemkin Corporation issue?(a)10,000 bonds(b)42,919 bonds(c)125,837 bonds(d)170,000 bondsAnswer: (d)41.Calculate the years to maturity for a bond based on the following information. The bond trades at$950, it has a par value of $1,000, a coupon rate of 11%, and a required rate of return of 12%.(a)8 years(b)12 years(c)15 years(d)16 yearsAnswer: (a)pute the current price of Walsingham bonds based on the following information. Walsinghambonds have a $1,000 par value, have 20 years remaining until maturity, a 12 percent coupon rate, anda yield to maturity of 10.5 percent.(a)$858.42(b)$982.47(c)$1,119.52(d)$1,124.41Answer: (d)pute the yield to maturity of Arundel bonds based on the following information. Arundel bondshave a $1,000 par value, 25 years remaining until maturity, an 11% coupon rate, and a current market price of $1,187.(a)4.55%(b)9.08%(c)9.27%(d)13.17%Answer: (b)8-1144.When prices of U.S Treasury strips are listed, principal from a Treasury bond is denoted by the letters________.(a)ci(b)tb(c)bp(d)npAnswer: (c)45.The ________ is the price at which dealers in Treasury bonds are willing to sell.(a)bid price(b)asked yield(c)ask price(d)maturity priceAnswer: (c)46.The ________ is the price at which dealers are willing to buy.(a)bid price(b)ask price(c)asked yield(d)maturity priceAnswer: (a)47.The bid price of a bond is always ________ the ask price.(a)greater than(b)less than(c)identical to(d)it varies from case to caseAnswer: (b)8-1248.The ________ of a bond price measures the sensitivity of the bond price to a change in the yield tomaturity.(a)callability(b)convertibility(c)immutability(d)elasticityAnswer: (d)49.Suppose you buy a 25-year pure discount bond with a face value of $1,000 and a yield of 6% per year.A day later market interest rates drop to 5% and so does the yield on your bond. What is theproportional change in the price of your bond?(a)a decrease of 26.74%(b)a decrease of 21.10%(c)an increase of 26.74(d)an increase of 21.20Answer: (c)50.Suppose you buy a 25-year pure discount bond with a face value of $1,000 and a yield of 6% per year.A day later market interest rates rise to 5% and so does the yield on your bond. What is the elasticityof the bond price to the change in the yield?(a)–0.62%(b)–1.27%(c)–1.60%(d)–2.67%Answer: (c)8-13Short Problems1.Consider a five-year fixed-income security which promises $120 per year. Calculate the value of thesecurity if the market interest rate rises from 5% to 6% per year.Answer:n i PV PMT Result5 5 ? $120 PV = $519.54n i PV PMT Result5 6 ? $120 PV = $505.48The price drops by $14.06.2.Consider a four-year fixed-income security which promises $120 per year. Calculate the value of thesecurity if the market interest rate falls from 7% to 6% per year.Answer:n i PV PMT Result4 7 ? $120 PV = $406.47n i PV PMT Result4 6 ? $120 PV = $415.81The price increases by $9.34.3.Discuss the general principles about the relation between prices and yields of coupon bonds.Answer:Principle #1: Par Bonds.If a bond's price equals its face value, then its yield equals its coupon rate.Principle #2: Premium Bonds.If a coupon bond has a price higher than its face value, its yield to maturity is less than its current yield, which is in turn less than its coupon rate.Principle #3: Discount Bonds.If a coupon bond has a price lower than its face value, its yield to maturity is greater than its current yield, which is in turn greater than its coupon rate.8-144.List some reasons why differences in the prices of fixed-income securities of a given maturity mayarise.Answer:Differences in the prices of fixed-income securities of a given maturity may arise due to differences in coupon rates, default risk, tax treatment, callability and convertibility.5.Explain why it is important to have a method for valuation of fixed-income contracts.Answer:(1) The parties to the contracts need to have an agreed-upon valuation procedure insetting the terms of the contracts at the outset.(2) Since market factors determining the value of fixed-income contracts change overtime, both buyers and sellers have to reevaluate them each time they are traded.6.Consider a five-year pure discount bond with a face value of $1,000. If its current price is $775,compute its annualized yield.Answer:n i PV FV Result5 ? –$775 $1,000 i = 5.23%7. A four-year bond has a coupon rate of 6% per year, a price of $950, and a face value of $1,000.Calculate its current yield and yield to maturity.Answer:Current yield = coupon/price= 60/950= 6.32%To calculate yield to maturity:n i = YTM PV FV PMT Result4 ? –$950 $1,000 $60 YTM = 7.49%8-158.What is the current price of a bond that has a coupon rate of 7%, a return rate of 8%, and a face valueof $1,000? Assume that this bond will mature in five years. Compare the current price of the bond against its face value.Answer:n i = YTM PV FV PMT Result5 8 ? $1,000 $70 PV = $960.07Because the price of the bond is below its face value, it is a discount bond.9. A five-year coupon bond has a coupon rate of 5%, a return rate of 6%, and a face value of $1,000.What is its current price and how does it compare to its face value?Answer:n i = YTM PV FV PMT Result5 6 ? $1,000 $50 PV = $957.88Because the price of the bond is below its face value, it is a discount bond.10.What is the yield to maturity of a five-year coupon bond with a current price of $850, a face value of$1,000, and coupon rate of 7%?Answer:n i = YTM PV FV PMT Result5 ? –$850 $1,000 $70 YTM = 11.07%11.Five years ago, English and Co. issued 30 year coupon bonds with a par value of $1,000. At the timeof issuance, the yield to maturity was 6 percent per year and the bonds sold at par. The bonds are currently selling at 85 percent of their par value. Assuming that the coupon is paid annually, what is the current yield to maturity?Answer:Five years ago, the bonds were issued at par, which means at the time yield to maturity equaled coupon rate. So the annual coupon is 0.06 x $1,000 = $60.For the current yield to maturity:n i = YTM PV FV PMT Result25 ? –850 1,000 60 YTM = 7.33%8-1612.Eisenstein Corporation plans to raise $100,000,000 in funds by issuing zero-coupon $1,000 par valuebonds with a 30-year maturity. Assuming that Eisenstein Corporation is able to issue these bonds at an after-tax cost of debt of 11%, how many bonds must Eisenstein Corporation issue?Answer:First, calculate the price of an Eisenstein bond:n i = YTM PV FV PMT Result30 11 ? 1,000 0 PV = $43.68The corporation wants to raise $100,000,000, so it must issue the following number of bonds:$100,000,000/$43.68 = 2,289,377 bonds13.Currently, an Eisenstein bond trades at $1,050 per bond and has a coupon rate of 10%. Assuming thebond matures at a $1,000 value, and the required rate of return is 9.5%, in how many years does an Eisenstein bond mature?Answer:n i = YTM PV FV PMT Result? 9.5 –1,050 1,000 0 n = 33pute the current price of Walsingham bonds based on the following information. Walsinghambonds have a $1,000 par value, 26 years remaining until maturity, a 13 percent coupon rate, and a current yield to maturity of 11 percent per year.Answer:n i = YTM PV FV PMT Result26 11 ? 1,000 0 PV = $1,169.6915.Health & US Corporation is a major pharmaceutical firm that has recently experienced a marketreevaluation. Currently, the firm has a bond issue outstanding with 18 years to maturity and a coupon rate of 9 percent, with interest paid annually. The required rate of return of this debt issue has risen to15 percent. Calculate the current price of this bond.Answer:n i = YTM PV FV PMT Result18 15 ? 1,000 90 PV = $632.328-1716.Calculate the coupon rate, current yield, and the yield to maturity for a bond that has $1,000 par value,pays a coupon of $85 annually, matures in 20 years, and has a current price of $985.25.Answer:Coupon rate = 85/1,000= 8.5% per yearCurrent yield = coupon/price= 85/985.25= 8.63%For yield to maturity:n i = YTM PV FV PMT Result20 ? –985.25 1,000 85 YTM = 8.66%17.Suppose you buy a 20-year pure discount bond with a face value of $1,000 and a yield of 7% per year.A day later, market interest rates rise to 8% and so does the yield of your bond. What is theproportional change in the price of your bond? What is the elasticity of the bond price to the change in the yield?Answer:n i = YTM PV FV PMT Result20 7 ? 1,000 0 PV = $258.42n i = YTM PV FV PMT Result20 8 ? 1,000 0 PV = $214.55The price of the bond decreased by $43.87, so the proportional decline in price is $43.87/$258.42 = 16.98%.Elasticity is % change in price over % change in YTM, or –16.98%/14.29% = –1.19.18.As of today, January 1, 2009, Flanders Corporation is holding $10,000,000 in long-term debt at parbonds. The bonds have a par value of $1,000, mature on January 1, 2019, and pay a 5 percent coupon.Calculate the current market value of Flanders’ debt, if the yield to maturity is 7 percent.Answer:Total number of bonds = $10,000,000/$1,000 = 10,000 bondsn i PV FV PMT Result10 7 ? 1,000 50 PV = $859.50The current market value = $859.50 x 10,000= $8,578,8008-18Longer Problems1.Consider the purchase of a 30-year pure discount bond with a face value of $1,000 and a yield of 7%per year. A week later the market interest rate rises to 8% and o does the yield on your bond.Calculate the proportional change in the price of the bond. What basic principle in valuation of known cash flows does this illustrate?Answer:n i PV FV Result30 7 ? $1,000 PV = $131.37n i PV FV Result30 8 ? $1,000 PV = $99.38The price drops by $31.99, so a rise of 1% in market interest rates results in a $31.99/$131.37 =24.35% drop in the price of the bond. The general principle illustrates is that a change in marketinterest rates causes a change in the opposite direction in the market value of the bonds.2.Suppose our want to know the price of a 15-year 8% coupon bond which pays interest annually. Theface value of the bond is $1,000.(a) You have been told the yield to maturity is 9%. What is the price? Assume coupons arepaid annually.(b) What is the price if coupons are paid semi-annually and the yield to maturity is 9% peryear?Answer:(a) If coupons are paid annually:n i PV FV PMT Result15 9 ? $1,000 $80 PV = $919.39(b) If coupons are paid semi-annually:n i PV FV PMT Result30 4.5 ? $1,000 $40 PV = $918.563. A media report recently stated that prices of 30-year treasury bonds increased substantially becauseinflation was falling and the Federal Reserve was not expected to increase interest rates. How would you describe this interpretation using discounted cash flow techniques?Answer:Inflation is a component of i, the required return on bonds, so when inflation decreases, idecreases and bond prices rise.8-194.Suppose you want to know the price of a 10-year 7% coupon bond which pays interest annually. Theface value of the bond is $1,000.(a) What is the price of this bond if the yield to maturity is 8%?(b) What is the current yield of this coupon bond?(c) What is the price of this bond if coupons are paid semi-annually and the yield to maturityis 8%?Answer:a. n i PV FV PMT Result10 8 ? $1,000 $70 PV = $932.90b. Current yield = coupon/price= 70/932.9= 7.5%c. n i PV FV PMT Result20 4 ? $1,000 $35 PV = $932.055.Suppose you buy a 30-year pure discount bond with a face value of $1,000 and a yield of 9% per year.A day later, market interest rates fall to 8% and so does the yield of your bond. What is theproportional change in the price of your bond? What is the elasticity of the bond price to the change in the yield?Answer:n i = YTM PV FV PMT Result30 9 ? 1,000 0 PV = $75.37n i = YTM PV FV PMT Result30 8 ? 1,000 0 PV = $99.38The price of the bond decreased by $24.01, so the proportional increase in price is $24.01/$75.37 = 31.86%.Elasticity is % change in price over % change in YTM, or 31.86%/–11.11% = –2.87.8-206.As part of a reorganization plan, a bankruptcy court has permitted a new indenture on an outstandingbond issue to be put into effect for Leicester Corporation, which recently filed for bankruptcy. It is known that the issue has $1,000 par value per bond, 15 years to maturity, and a coupon rate of 11 percent paid annually. The reorganization plan allows the following arrangement: In years 1 through 7, there will be no coupon paid (that is, coupon = $0). In years 8 through 15, regular couponpayments will resume. At maturity in year 15, the par value plus the sum of all coupon payments that were not paid during years 1 through 7 must be paid. However, no interest will be paid on thedeferred coupon payments. If the required rate of return is 18 percent, calculate the current price the Leicester bonds would sell for in the market.Answer:Coupon = 0.11 x 1000= $110 per yearThe present value of this cash flow stream, using a discount rate of 18%, is $288.62 per bond.8-217.The Dharma Corporation has recently experienced a market reevaluation. Currently, the firm has abond issue outstanding with 18 years to maturity, a face value of $1,000, and a coupon rate of 10 percent paid annually. The required rate of return on this debt issue has risen to 16 percent. Calculate the current price of this bond.Answer:n i = YTM PV FV PMT Result18 16 ? 1,000 100 PV = $650.928.Calculate the coupon rate, current yield, and the yield to maturity for a bond that has $1,000 par value,pays $95 interest annually, matures in 25 years, and has a current price of $1,087.75.Answer:Coupon rate = 95/1,000= 9.5% per yearCurrent yield = coupon/price= 95/1,087.75= 8.73%To calculate yield to maturity:n i = YTM PV FV PMT Result25 ? –1,087.75 1,000 95 YTM = 8.63%9.As of today, January 1, 2009, Gala Worldwide is holding $1,000,000 in long-term debt at par bonds.The bonds have a par value of $1,000, mature on January 1, 2029, and pay a 7 percent coupon.Cal culate the current market value of Flanders’ debt, if the yield to maturity is 8 percent.Answer:Total number of bonds = $100,000,000/$1,000 = 100,000 bondsn i PV FV PMT Result20 8 ? 1,000 70 PV = $901.85The current market value = $901.85 x 100,000= $90,185,0008-22。
兹维博迪金融学第二版试题库1TB(1)
Chapter OneFinancial EconomicsThis chapter contains 48 multiple choice questions, 20 short problems and 5 longer problems.Multiple Choice1.The primary goal of corporate management is to ________ shareholder wealth.(a)minimize(b)maximize(c)leverage(d)mitigateAnswer: (b)2. A ________ stock market imposes ________ discipline on managers to take actions to maximize themarket value of the firm’s shares.(a)competitive, strong(b)dispersed, weak(c)mature, no(d)dispersed, strongAnswer: (a)3. The ________ form is especially well suited to the separation of ownership and management of firms because it allows relatively frequent changes in owners by share transfer without affecting the operations of the firm.(a)corporate(b)sole proprietorship(c)partnership(d)householdAnswer: (a)4. ________ is anything that has economic value.(a)A partnership(b)An asset(c)A balance sheet(d)An income statementAnswer: (b)5. A household’s wealth or net worth is measured by the value of its ________ minus its ________.(a)liabilities; assets(b)assets; liabilities(c)stocks; bonds(d)bonds; liabilitiesAnswer: (b)6. The branch of finance dealing with financial decisions of firms is called ________ or ________.(a)investments; international finance(b)markets; institutions(c)business finance; institutions(d)business finance; corporate financeAnswer: (d)7. Bonds promise ________ cash payments, while stocks pay the ________ value left over after all other claimants have been paid.(a)variable; residual(b)residual; fixed(c)fixed; residual(d)fixed; variableAnswer: (c)8. The day-to-day financial affairs of the firm are usually referred to as ________.(a)working capital management(b)capital structure(c)capital budgeting(d)strategic planningAnswer: (a)9. A disadvantage of the sole proprietorship is the fact that the sole proprietor has ________.(a)limited liability for the debts of the firm(b)unlimited liability for the debts of the firm(c)expensive costs to establish the firm(d)limited authority over the day-to-day business decisions of the firmAnswer: (b)10. In the U.S. corporations with concentrated ownership are called ________ and corporations with broadly dispersed ownership are called ________.(a)private corporations; public corporations(b)public corporations; private corporations(c)public corporations; monopolies(d)private corporations; state owned corporationsAnswer: (a)11. Billy owns a house worth $350,000 and has a $55,000 bank account. Billy owes $270,000 to the bank on a home mortgage loan and has a $12,000 credit card debt outstanding. Calculate Billy’s net worth.(a)$135,000(b)$123,000(c)$497,000(d)$37,000Answer: (b)12. Marlowe owns a house worth $150,000, a car worth $25,000 and has an $18,000 bank account. Marlowe owes $135,000 to the bank on a home mortgage loan, $18,000 on the car loan and has an $18,000 credit card debt outstanding. Calculate Marlowe’s net worth.(a)$58,000(b)$123,000(c)$22,000(d)$37,000Answer: (c)13. An advantage of the corporate form of ownership is ________.(a)no liability(b)unlimited liability(c)limited liability(d)CEO liabilityAnswer: (c)14. In the corporate form, the separated structure creates the potential for ________ between owners and managers.(a)a conflict of interest(b)increased transactional costs(c)stability in relations(d)none of the aboveAnswer: (a)15. All of the following are reasons for having a separation of management and ownership of the firm except:(a)the “going concern” effect favors the separated structure(b)professional managers may be found who possess a superior ability to run the business(c)it prevents the possibility of a conflict of interest between the owners and management(d)it allows for savings in the cost of information gatheringAnswer: (c)16. ________ involves the evaluation of costs and benefits spread out over time, and it is largely a financial decision-making process.(a)Stock valuation(b)Bond valuation(c)Inventory costing(d)Strategic planningAnswer: (d)17. Shareholder wealth maximization depends on all of the following except:(a)production technology(b)market interest rates(c)risk aversion(d)market risk premiumsAnswer: (c)18. A problem with using the profit maximization criterion is ________.(a)deciding which period’s profit is to be maximized(b)the definition of “maximize profits” is ambiguous(c)the failure to consider risk(d)all of the aboveAnswer: (d)19. The existence of a well functioning stock market facilitates the efficient separation of the ownership and management of firms, since stock prices can be substituted for external information about ________.(a)the firm’s production technology(b)the wealth, preferences, and other investment opportunities of the owners(c)the historic costs of the firm’s infrastructure(d)the firm’s ability to meet its projected goalsAnswer: (b)20. One place to look for a statement of the goals of a corporation’s top managers is the ________.(a)balance sheet(b)income statement(c)annual report(d)bankruptcy filingAnswer: (c)21. In the absence of a stock market, managers would require information that is ________ to obtain.(a)costly if not impossible(b)costless(c)readily available(d)time-consuming but inexpensiveAnswer: (a)22. Management’s task is made much easier when it can observe the ________ of its own and other firms’ shares.(a)book prices(b)market prices(c)historical prices(d)security pricesAnswer: (b)23. ________ are entitled to a share of any of the distributions from the corporation such as cash dividends.(a)Sole proprietors(b)General partners(c)Professional managers(d)ShareholdersAnswer: (d)24. ________ is the founder of modern portfolio theory.(a)Harry Markowitz(b)Merton Miller(c)William Sharpe(d)Bill GatesAnswer: (a)25. In Germany, public corporations are identifiable by ________ after the company name, whereas private companies are denoted by ________.(a)PLC, Inc.(b)GmbH, AG(c)AG, GmbH(d)SpA, GmbHAnswer: (c)26. In the United Kingdom, public corporations are identifiable by ________ after the company name, whereas private companies are denoted by ________.(a)Inc, PLC(b)LTD, PLC(c)AG, GmbH(d)PLC, LTDAnswer: (d)27. Shareholders elect ________ who in turn select ________ to run the business.(a)a board of directors; a treasurer(b)a board of directors; managers(c)managers; a board of directors(d)a board of directors; accountantsAnswer: (b)28. In a competitive stock market, ________ offer(s) another important mechanism for aligning the incentives of managers with those of shareholders.(a)takeovers(b)increased taxes(c)liquidation(d)increased liabilityAnswer: (a)29. If a raider is interested in making a profit through the takeover of a prospective firm, the only expenses that need be incurred are ________.(a)the cost of identifying a mismanaged firm(b)the cost of acquiring the firm’s shares(c)physical capital(d)both (a) and (b)Answer: (d)30. The cost of identifying a mismanaged firm can be low if the raider is which of the following:(a)a supplier(b)a customer(c)a competitor(d)all of the aboveAnswer: (d)31. Takeover mechanisms can most effectively be reduced by ________.(a)directives from the board of directors(b)media intervention(c)government policies(d)public disapprovalAnswer: (c)32. The chief financial officer (CFO) of a corporation normally reports to the ________ of the company.(a)controller(b)treasurer(c)chief executive officer(d)chairman of the board of directorsAnswer: (c)33. All of the following departments typically report to the chief financial officer (CFO) except:(a)marketing(b)financial planning(c)treasury(d)controlAnswer: (a)34. The treasurer’s job includes managing all of the following except:(a)the firm’s exposure to currency and interest rate risks(b)the tax department(c)relations with the external investment community(d)the analysis of proposed mergers and acquisitionsAnswer: (d)35. The activities of the vice president for financial planning include all of the following except:(a)analyzing proposed mergers(b)analyzing proposed spin-offs(c)preparing internal reports comparing planned and actual costs(d)analyzing major capital expendituresAnswer: (c)36.Which of the following statements is most correct?(a)The shareholders of a corporation elect managers who in turn select a board of directors torun the business.(b)Partnerships do not pay corporate tax.(c) A disadvantage of the corporation is unlimited liability.(d)The government is powerless to discourage corporate takeovers.Answer: (b)37.For a typical firm, which of the following statements is most correct?(a)The CFO has three departments reporting to him: financial planning, treasury and control.(b)The treasurer oversees the accounting and auditing activities of the firm.(c)The controller has responsibility for managing the financing activities of the firm and forworking capital management.(d)The CEO is a senior vice president with responsibility for all the financial functions in thefirm.Answer: (a)38.Which of the following are financial decisions a firm has to make?(a)financing decisions(b)capital budgeting decisions(c)working capital decisions(d)all of the aboveAnswer: (d)39.The controller’s job includes responsibility for ________.(a)relations with the external investment community(b)preparation of financial statements for use by shareholders, creditors and regulatoryauthorities(c)analysis of proposed mergers, acquisitions and spin-offs(d)all of the aboveAnswer: (b)40.The basic unit of analysis in capital budgeting is the ________.(a)financing project(b)investment project(c)strategic project(d)variable projectAnswer: (b)41.The steps involved in any capital budgeting process include:(a)evaluating projects(b)deciding which projects to undertake(c)identifying ideas for new investment projects(d)all of the aboveAnswer: (d)42.Preferred stock, bonds, and convertible securities are also known as ________.(a)nonmarketable claims(b)standardized securities(c)variable securities(d)covenantsAnswer: (b)43.The basic unit of analysis in capital structure decisions is the ________.(a)firm as a whole(b)investment project(c)firm’s personnel(d)financial systemAnswer: (a)44.Which one of the following correctly orders the steps involved in capital structure decisions?(a)determining a feasible financing plan; identifying new ideas for investment projects(b)determining the optimal financing mix; determining a feasible financing plan(c)identifying ideas for investment projects; determining the optimal financing mix(d)determining a feasible financing plan; determining the optimal financing mixAnswer: (d)45.Which of the following is not a financial function of a corporation?(a)investor relations(b)tax administration(c)provision of capital(d)regulatory legislationAnswer: (d)46.Which of the following functions may be categorized as administration of funds?(a)custodial responsibilities(b)tax administration(c)internal auditing(d)all of the aboveAnswer: (a)47.Investor relations includes:(a)government reporting(b)establishment and maintenance of communications with company stockholders(c)relations with taxing agencies(d)consultation with and advice to other corporate executivesAnswer: (b)48.Oscar owns a boat worth $2 million, a house worth $lion and has $900,000 in a bank account.Oscar owes $1.1 million to the bank on the boat loan, $2 million on the home loan and has $20,000 credit card debt. Calculate Oscar’s net worth.(a)$3.12 million(b)$5.28 million(c)$7.28 million(d)$8.4 millionAnswer: (b)Short Problems1.Give a brief definition of the financial system.Answer: A financial system is defined as the set of markets and other institutions used for financial contracting and the exchange of assets and risks.2.List the markets that the financial system likely includes.Answer: A financial system includes the markets for stocks, bonds and other financial instruments, financial intermediaries, financial service firms and the regulatory bodies that govern all of these institutions.3.Briefly describe the distinction between physical capital and financial capital.Answer: Physical capital includes items such as buildings, machinery and other intermediate products used in the production process. Financial capital, however, includes stocks, bonds and loans used to finance the acquisition of physical capital.4. Give a brief description of the wide range of financial instruments and claims a firm can issue. Answer: These include common stock, preferred stock, bonds and convertible securities (standardized securities that can be traded in organized markets). Financial instruments and claims can also include nonmarketable claims such as bank loans, employee stock options, leases and pension liabilities.5.Siggy owns a house worth $200,000, a car worth $25,000 and has an $18,000 bank account. He alsohas furniture worth $4,000 and jewelry worth $10,000. However, Siggy owes $145,000 to the bank on a home mortgage loan, $17,000 on the car loan, $40,000 on student loans and has an $16,000 credit card debt outstanding. Calculate Siggy’s net worth.Answer: Net Worth = Total Assets – Total Liabilities= ($200,000 + $25,000 + $18,000 + $4,000 + $10,000) –($145,000 + $17,000 + $40,000 + $16,000)= $39,0006.Briefly list the problems associated with profit maximization as the chief goal of corporate managers. Answer: The profit-maximization criterion has two problems associated with it. The first is that it is difficult to determine which period’s profit is to be maximized if the production process requires many periods. Secondly, if either future revenues or expenses are uncertain, then what exactly is the meaning of “maximize profits” if profits are described by a probability distribution?7.Kecia owns a house worth $220,000, a car worth $20,000 and has a $13,000 bank account. She alsohas furniture worth $8,000. However, Kecia owes $165,000 to the bank on a home mortgage loan, $17,000 on the car loan, $50,000 on student loans and has an $18,000 credit card debt outstanding.Calculate Kecia's net worth.Answer: Net Worth = Total Assets – Total Liabilities= ($220,000 + $20,000 + $13,000 + $8,000) –($165,000 + $17,000 + $50,000 + $18,000)= $261,000 - $250,000= $11,0008.Give an example of a potential conflict of interest that can arise between owners and managers of afirm.Answer: Managers being concerned with their own personal welfare may lead to concern about job security in the long run. This concern about long run survival may cause managers to limit the risk incurred by the firm and make other decisions not with the objective of shareholder wealth maximization.9.What use does the existence of a stock market serve to the manager of a firm?Answer: Observing its own and other firms’ market price of shares helps it make decisions about maximizing the firm’s value to its shareholders. If there was not a stock market, then managers would be required to obtain information that is costly, if not impossible, to obtain. This includes the wealth, preferences and other investment opportunities of the owners.10.Outline the role of the takeover in aligning the incentives of managers with those of shareholders. Answer: The threat of a takeover provides a strong incentive for current managers to act in the interests of the firm’s current shareholders by maximizing market value. If managers fail to maximize the market value of the firm’s shares, the firm will be vulnerable to a takeover in which the managers may lose their jobs.11.Outline the role of the chief financial officer (CFO) in a corporation.Answer: The CFO is a senior vice president with responsibility for all the financial functions in the firm and reports directly to the CEO. Three departments report to the CFO: financial planning, treasury, and control.12.Discuss the role of the treasurer in a corporation.Answer: The treasurer has responsibility for managing the financing activities of the firm and for working capital management. The treasurer is responsible for managing relations with the external investor community, managing the firm’s exposure to currency and interest rate risks, and managing the tax department.13. Discuss the tasks performed by the controller of a corporation.Answer: The controller oversees the accounting and auditing tasks of the firm. The controller is responsible for the preparation of internal reports comparing planned and actual costs, revenues, and profits from the corporation’s various business units. The controller will also be involved with preparation of financial statements for use by shareholders, creditors and regulatory authorities.14. Discuss why voting rights for shareholders are not adequate to compel managers to act in the bestinterests of the shareholders.Answer: Because a major benefit of the separated structure is that the owners can remain relatively uninformed about the operations of the firm, it is not apparent how these owners could know whether their firm is being mismanaged. The value of voting rights is further cast into doubt if ownership of the firm is widely dispersed. If that is the situation, then the holdings of any single owner are likely to be so small that he or she would not incur the expense to become informed and to convey this information to the other owners.15.Is it possible for government to reduce the effectiveness of the takeover mechanism?Answer: Yes. It is possible for government policy to prevent the formation of monopolies in various product markets – as in the case of the United States Department of Justice, which can take legal action under the antitrust laws to prevent mergers and acquisitions that might reduce competition.16.In terms of the financial functions of a corporation, what responsibilities do administration of fundsentail?Answer: Management of cash; maintenance of banking arrangements; receipt, custody and disbursementof the company’s monies and securities; credit and collection management; management of pensionfunds; management of investments and custodial responsibilities.17.Discuss the liability a partnership faces.Answer: Unless otherwise specified, all partners have unlimited liability as in the sole proprietorship.However, it is possible to limit the liability for some partners called “limited partners”. At least one ofthe partners, called the general partner, has unlimited liability for the debts of the firm.18.Describe the advantages of the corporate form of business organization.Answer: The corporate form of ownership has the advantage that ownership shares can usually betransferred without disrupting the business. Limited liability is also another advantage of the corporateform. In this case, if the corporation fails to pay its debts, the creditors can seize the assets of thecorporation but have no recourse to the personal assets of the shareholders.19.Briefly outline the process of capital budgeting.Answer: The process of capital budgeting includes identifying ideas for new investment projects,evaluating them, deciding which ones to undertake, and then implementing them.20.Briefly discuss the process of working capital management.Answer: Working capital management refers to the day-to-day financial affairs of the business, such aswhether to extend credit to customers or demand cash on delivery or managing cash flow.Longer Problems1.Describe the four basic types of financial decisions faced by householders.Answer: Investment decisions – whether to invest in stocks or bondsConsumption/Savings Decisions – how much to save for one’s retirement or a child’s educationRisk management decisions – whether to buy disability insuranceFinancing decisions – what type of loan to adopt in order to finance the purchase of a homeorcar.2.Give a brief description of each of the four main areas of financial decision-making in a business.Answer: Strategic Planning: Evaluating the costs and benefits associated with the firm’sbusiness line, which may change over time.Capital Budgeting: Identifying ideas for new investment projects, evaluating them,deciding which ones to undertake, and then implementing them.Capital Structure: The initial step is deciding upon a feasible financing plan for the firm.The next decision involves the optimal debt/equity mix to use.Working Capital Management: The day-to-day affairs of the business. This includespaying bills as they come due, collecting from customers, managing the firm’s cashflows to ensure that operating cash flows deficits are financed and that cash flowsurpluses are efficiently invested to earn a good return.3.Explain the five basic reasons for separating the management from the ownership of an enterprise.Answer:•Professional managers may be found who have a superior ability to run the business.•To achieve the efficient scale of a business the resources of many households may have to be pooled.•In an uncertain economic environment, owners will want to diversify their risks across many firms.•The separated structure allows for savings in the costs of information gathering.•There is a “learning curve” or “going concern” effect, which favors to separated structure.4.Discuss the types of decisions that firms must make.Answer: Capital budgeting decisions – whether to build a new plant or produce a new product.Financing decisions – how much equity and how much debt a firm should adopt in its capital structure.Working Capital decisions – whether credit should be extended to a customer or cashdemanded on delivery.5.Outline the roles of the three departments that report to the Chief Financial Officer.Answer: Treasury: This department is responsible for managing the financing activitiesof the firm and for working capital management. This includes managing relations with theexternal investment community, managing the firm’s exposure to currency and interest raterisks, and managing the tax department.Financial Planning: This department is responsible for analyzing major capitalexpenditures such as proposals to enter new lines of business or to exit existing businesses.This includes analyzing proposed mergers, acquisitions and spin-offs.Controller: This department oversees the accounting and auditing activities of the firm.Activities include preparation of financial statements for use by shareholders, creditors andregulatory authorities, as well as the preparation of internal reports comparing planned andactual costs, revenues, and profits from the corporation’s various business units.。
兹维博迪金融学第二版试题库12TB
Chapter TwelvePortfolio Opportunities and ChoiceThis chapter contains 30 multiple choice questions, 10 short problems, and 5 longer problems.Multiple Choice1. A person's wealth portfolio consists of all one’s ________ and ________.(a)retained earnings; credit(b)stocks; bonds(c)assets; liabilities(d)student loans; mortgagesAnswer: (c)2.The principle of diversification usually applies to all ________.(a)risk averse people(b)risk neutral people(c)risk tolerant people(d)b and cAnswer: (a)3.Which of the following decisions can be considered part of portfolio selection?(a)Whether to buy or rent one’s house(b)What kind of life insurance to purchase(c)Whether to invest in stocks or bonds(d)All of the aboveAnswer: (d)12-14.An insurance policy that guarantees a person an income for as long as one lives is termed a ________.(a)lump sum payment(b)life annuity(c)perpetual annuity(d)life perpetuityAnswer: (b)5.The ________ is the length of time between decisions to revise portfolios, whereas the ________ isthe total length of time for which one plans.(a)trading horizon; decision horizon(b)planning horizon; decision horizon(c)decision horizon; trading horizon(d)decision horizon; planning horizonAnswer: (d)6.In making portfolio-selection decisions, people can in general achieve a ________ expected rate ofreturn by exposing themselves to ________ risk.(a)higher; no(b)higher; greater(c)higher; lower(d)lower; greaterAnswer: (b)7.The ________ the assets that make up the portfolio is found to be a very important factor whenconsidering the ability of diversification to reduce the riskiness of an investor's portfolio.(a)expected return of(b)variance of(c)correlation among(d)skewness amongAnswer: (c)12-28.Risk tolerance can be influenced by which of the following characteristics?(a)job status(b)age(c)wealth(d)all of the aboveAnswer: (d)9.The ________ is defined as a security that offers a perfectly predictable rate of return in terms of theunit of account and the length of the investor's decision horizon.(a)riskless asset(b)risky asset(c)30-day bond(d)30-day debentureAnswer: (a)10.A portfolio contains one risky asset and one riskless asset. The expected rate of return on the riskyasset is 0.13 and the riskless rate is 0.05. The standard deviation of the risky asset is 0.2, and the standard deviation of the portfolio is 0.075. What is the expected rate of return on the portfolio using the trade-off line?(a)0.0490(b)0.0800(c)0.0980(d)0.1175Answer: (b)11.An investor has a $100,000 investment to allocate between a risky asset and a riskless asset. Theequation for the trade-off line is determined to be E(r) = 0.05 + 0.09w. If the investor is requiring a portfolio composition corresponding to an expected rate of return of 0.11, how much should be invested in the risky asset?(a)$18,181(b)$33,333(c)$66,667(d)$81,819Answer: (c)12-312.An investor has a $100,000 investment to allocate between a risky asset and a riskless asset. Theequation for the trade-off line is determined to be E(r) = 0.07 + 0.12w. If the investor is requiring a portfolio composition corresponding to an expected rate of return of 0.17, how much should beinvested in the riskless asset?(a)$16,667(b)$29,412(c)$70,588(d)$83,333Answer: (a)13.An investor has a $100,000 investment to allocate between a risky asset and a riskless asset. Theequation for the trade-off line is determined to be E(r) = 0.07 + 0.12w. If the investor requires aportfolio composition corresponding to an expected rate of return of 0.17, what is the corresponding standard deviation of the portfolio? The standard deviation of risky asset is 0.3.(a)0.05(b)0.25(c)0.49(d)0.83Answer: (b)14.The expected rate of return on a risky asset is 0.13 and the riskless rate is 0.06. The standard deviationof the risky asset is 0.25. What happens to the slope of the trade-off line if the riskless rate changes to0.05 per year and the expected return on the risky asset changes to 0.14?(a)No change(b)The slope of the line falls from 36% to 28%(c)The slope of the line rises from 28% to 36%(d)The slope of the line rises from 52% to 56%Answer: (c)15.The formula for the trade-off line between risk and expected return is ________.(a)E(r) = r f+ w[E(r s) –r f](b)E(r) = r f+ [E(r s) –r f](c)E(r) = r f+ w[E(r s) + r f](d)all of the aboveAnswer: (a)12-416.In the trade-off line, the risk premium depends on ________(a)the risk premium of the risky asset(b)the proportion of the portfolio invested in the risky asset(c)the risk premium of the riskless asset(d)both a and bAnswer: (d)17.When one of the two assets in a portfolio is riskless, the standard deviation of its rate of return and itscorrelation with other asset are________.(a)greater than zero but less than positive one(b)less than zero but greater than negative one(c)zero(d)none of the aboveAnswer: (c)18.The expected rate of return on a risky asset is 0.16 and the riskless rate is 0.07. The standard deviationof the risky asset is 0.2. What happens to the slope of the trade-off line if the riskless rate changes to .06 per year and the expected return on the risky asset changes to 0.15?(a)no change(b)the slope rises from 0.45 to 0.5(c)the slope falls from 0.5 to 0.45(d)the slope falls from 0.45 to 0.4Answer: (a)19.A portfolio contains a riskless asset with an expected rate of return of 0.06 and a risky asset with anexpected rate of return of 0.15. The standard deviation of the risky asset is 0.25. If the expected rate of return of this portfolio is 0.10, what is its standard deviation?(a)0.11(b)0.14(c)0.22(d)0.44Answer: (a)12-5Consider a portfolio of two risky assets with the following distribution of rates of return on risky assets for questions 20 and 21. The portfolio is 55% Risky Asset 1 and 45% Risky Asset 2, and the correlation coefficient is 0.4.Risky Asset 1 Risky Asset 2MeanStandard Deviation 0.160.250.090.1820.What is the mean of this portfolio?(a)0.1215(b)0.1285(c)0.2005(d)0.2185Answer: (b)21.What is the standard deviation of this portfolio?(a)0.15958(b)0.18541(c)0.25467(d)0.34378Answer: (b)Consider a portfolio of two risky assets with the following distribution of rates of return on risky assets for questions 22 and 23. The portfolio is 70% Risky Asset 1 and 30% Risky Asset 2, and the correlation coefficient is 0.3.Risky Asset 1 Risky Asset 2MeanStandard Deviation 0.120.160.200.3022.What is the mean of this portfolio?(a)0.1716(b)0.1600(c)0.1414(d)0.1320Answer: (c)12-623.What is the standard deviation of this portfolio?(a)0.16338(b)0.14368(c)0.02669(d)0.02064Answer: (a)24.In practice, the vast majority of assets are positively correlated with each other because they are allaffected by ________.(a)common economic factors(b)firm specific factors(c)potential lawsuits(d)managerial inefficienciesAnswer: (a)25.A mutual fund company offers a safe money market fund whose current rate is 0.04. The samecompany also offers an equity fund with an aggressive growth objective, which historically has exhibited an expected return of 0.25 and a standard deviation of 0.30. Derive the equation for the risk-reward trade-off line.(a)E(r) = 0.04 + 0.25σ(b)E(r) = 0.04 + 0.7σ(c)E(r) = 0.04 + 0.21σ(d)E(r) = 0.04 + 0.83σAnswer: (b)26.The ________ refers to the set of portfolios of risky assets offering the highest possible expected rateof return for any given standard deviation.(a)minimum portfolio frontier(b)effective portfolio frontier(c)expected portfolio frontier(d)efficient portfolio frontierAnswer: (d)12-727.The optimal combination of risky assets is found as ________ between a straight line representing theriskless asset and the efficient frontier of risky assets.(a)the point of bisection(b)the point of intersection(c)the point of tangency(d)the point of highest returnAnswer: (c)28.The power of diversification to reduce the riskiness of an investor’s portfolio depends on the________ among the assets that make up the portfolio.(a)expected returns(b)variances(c)correlations(d)none of the aboveAnswer: (c)29.In the context of the optimal combination of risky assets, in order to decide on the menu of assetchoices to offer its customers a financial intermediary should consider:(a)investor preferences(b)the expected returns and standard deviations of the risky assets(c)both a and b(d)neither a nor bAnswer: (b)30.An investor has $100,000 invested in a portfolio that is composed of a tangency portfolio and ariskless asset, such that 35% is in the tangency portfolio and 65% is in the riskless asset. If thetangency portfolio is composed of 43.75% Risky Asset A and 56.25% Risky Asset B, which of the following accurately displays the amount of money invested in each component of the portfolio?(a)$35,000 in Riskless Asset; $43,750 in Risky Asset A; $56,250 in Risky Asset B(b)$65,000 in Riskless Asset; $43,750 in Risky Asset A; $56,250 in Risky Asset B(c)$35,000 in Riskless Asset; $28,437.50 in Risky Asset A; $36,562.50 in Risky Asset B(d)$65,000 in Riskless Asset; $15,312.50 in Risky Asset A; $19,687.50 in Risky Asset BAnswer: (d)12-8Short Problems1.Discuss the time horizons as they relate to portfolio planning.Answer:In formulating a plan for portfolio selection you begin by determining our goals and timehorizons. The planning horizon is the total length of time for which one plans. Thelongest time horizon would typically correspond to the retirement goal and would be thebalance of one’s lifetime. There are also shorter planning horizons that correspond tospecific financial goals, such as paying for a child’s education. The decision horizon isthe length of time between decisions to revise the portfolio. The length of the decisionhorizon is controlled by the individual, within certain limits. The shortest possibledecision horizon is the trading horizon, defined as the minimum time interval over whichinvestors can revise their portfolios.2.What is the riskless asset if the unit of account is the Japanese Yen and the length of the decisionhorizon is a month?Answer:The Japanese Yen one-month zero-coupon bond.3.Describe the steps involved in the portfolio optimization process.Answer:(1) Find the optimal combination of risky assets.(2) Mix this optimal risk-asset portfolio with the riskless asset.12-94.Who would you expect to be more risk tolerant, a young investor or an elderly one? An investor ormoderate means or a wealthy one?Answer:A young person with a secure job can look forward to a long period of earning a salarythat will probably increase with the rate of inflation. For her, investment in stocks wouldnot be as risky as for an older person who needs to ensure a steady source of income forthe rest of his life. A wealthier individual may be willing to take more risks (than a poorerperson) because his capacity to take bigger gambles and lose is higher. That is, he maystill be quite wealthy after his losses.5.An investor has a $100,000 investment to allocate between a risky asset and a riskless asset. Theequation for the trade-off line is determined to be E(r) = 0.05 + 0.07w. If the investor requires aportfolio composition corresponding to an expected rate of return of 0.10, how much should beinvested in the risky asset? In the riskless asset?Answer:E(r) = 0.05 + 0.07w0.10 = 0.05 + 0.07w0.05 = 0.07w0.71429 = wThe investor should invest $71,429 in the risky asset and $28,571 in the riskless asset. 6.An investor has $75,000 to allocate between a risky asset and a riskless asset. The equation for thetrade-off line is determined to be E(r) = 0.06 + 0.1w. If the investor requires a portfolio composition with an expected rate of return of 0.12, how much should be invested in each asset?Answer:E(r) = 0.06 + 0.1w0.12 = 0.06 + 0.1w0.06 = 0.1w0.6 = w0.6($75,000) = $45,000 should be invested in the risky asset0.4($75,000 = $30,000 should be invested in the riskless assetThere would have to be 16 million uncorrelated drugs in the portfolio.12-107.Consider the portfolio of two risky assets with the following distribution of rates of return on riskassets.Risky Asset 1 Risky Asset 2MeanStandard Deviation 0.170.230.100.19What are the mean and standard deviation of a portfolio that is 60% Risky Asset 1 and 40% Risky Asset 2 if the correlation coefficient is 0.3?Answer:E(r) = wE(r1) + (1 - w)E(r2)= 0.6(0.17) + 0.4(0.10)= 0.142The mean is 14.2%σ2= w2σ12 + (1 - w)2σ22 + 2w(1-w)ρ1,2σ1σ2= (0.6)2(0.23)2 + (0.4)2(0.19)2 + 2(0.6)(0.4)(0.3)(0.23)(0.19)σ2= 0.03111σ= 0.17639The standard deviation is 17.6%8.An investor has a $150,000 investment to allocate between a risky asset and a riskless asset. Theexpected rate of return for the risky asset is 0.18 and the expected rate of return for the riskless asset is 0.07. The standard deviation of the risky asset is 0.2. If the investor requires a portfoliocomposition corresponding to an expected rate of return of 0.15, what is the standard deviation of the portfolio?Answer:Use the trade-off line to find w:E(r) = r f + w[E(r s) – r f)0.15 = 0.07 + w[0.18 – 0.07]0.15 = 0.07 + 0.11w0.08 = 0.11w0.7272 = wSo the standard deviation of the portfolio is 0.2(0.7272) = 0.1455.12-119.Discuss how to create efficient portfolios when the raw materials are two risky assets and a risklessasset.Answer:Let us now summarize what we have learned about creating efficient portfolios when the rawmaterials are two risky assets and a riskless asset. There is a single portfolio of the two riskyassets that it is best to combine with the riskless asset. We call this particular risky portfolio the optimal combination of risky assets. The preferred portfolio is always some combination of thistangency portfolio and the riskless asset10.The expected rate of return on a risky asset is 0.19 and the riskless rate is 0.05. The standard deviationof the risky asset is 0.3.a. What happens to the slope of the trade-off line if the riskless rate decreases to 0.04 and theexpected return on the risky asset increases to 0.2?b. What happens to the slope of the trade-off line if the riskless rate increases to 0.06 and theexpected return on the risky assets increases to 0.2?Answer:a. Slope = (E(r s) – r f)/σsSlope of original scenario: (0.19 – 0.05)/0.3 = 0.14/0.3 = 0.467Slope in revised scenario: (0.20 – 0.04)/0.3 = 0.16/0.3 = 0.533The slope rises from 0.467 to 0.533.b.Slope of original scenario: (0.19 – 0.05)/0.3 = 0.14/0.3 = 0.467Slope in revised scenario: (0.20 – 0.06)/0.3 = 0.14/0.3 = 0.467The slope is unchanged.12-12Longer Problems1. A mutual fund advertises a money market fund whose current rate is 0.06, and is deemed “safe.” Inaddition, the mutual fund also offers an equity fund that is considered very aggressive in terms of growth. Historical expected returns are 0.30 with a standard deviation of 0.25.(a) Derive the risk-reward trade-off line.(b) For each unit of extra risk that an investor bears, how much extra expected return willresult?(c) What allocation should be placed in the money market fund if an investor desires anexpected return of 18%?Answer:(a) E(r) = r f + w[E(r s) – r f)= 0.06 + w[0.3 – 0.06]= 0.06 +0 .24w= 0.06 +0 .24(σ/0.25)= 0.06 + 0.96σ(b) For each unit of extra risk that an investor bears, the extra expected return will be 0.96(the slope of the risk-reward line)(c) 0.18 = 0.06 + w[0.30 - 0.06]0.18 = 0.06 + 0.24w0.12 = 0.24w0.5 = wInvest 50% in the money market fund and 50% in the equity fund.12-132.Suppose you are the manager of a mutual fund and a client comes to you wanting to invest 65% of aportfolio into your mutual fund and the remaining 35% into a “safe” money market fund. The mutual fund that you manage has an expected rate of return of 0.18 and a standard deviation of 0.25. The money market fund rate is 0.065.(a) If your client invests as described above, what is the expected return and standarddeviation of his portfolio?(b) The fund that you manage has the following stocks and their corresponding proportions:Stock X: 30%, Stock Y: 35%, and Stock Z: 35%If we include the position in the riskless asset, what are the investment proportions ofyour client’s portfolio?Answer:(a) E(r) = r f + w[E(r s) – r f)= 0.065 +0 .65[0.18 – 0.065]= 0.065 + 0.65[0.115]= 0.13975σ= 0.65 (0.25)= 0.1625(b) Stock X: (0.65 x 30%) = 19.50%Stock Y: (0.65 x 35%) = 22.75%Stock Z: (0.65 x 35%) = 22.75%Riskless Asset: = 35.00%Total = 100.00%12-143.If we have many risky assets to choose from, how do we determine the optimal combination of riskyassets?Answer:When there are many risky assets we use a two-step method of portfolio constructionsimilar to the one used in the previous section. In the first step, we consider portfoliosconstructed from the risky assets only, and in the second step we find the tangencyportfolio of risky assets to combine with the riskless asset. Because the computationinvolves a lot of number crunching, it is best done using computers. The efficientportfolio frontier is defined as the set of portfolios of risky assets offering the highestpossible expected rate of return for any given standard deviation. The reason theindividual basic assets lie inside the efficient frontier is that there is usually somecombination of two or more basic securities that has a higher expected rate of returnthan the basic security for the same standard deviation.The optimal combination of risky assets is found as the point of tangency between astraight line from the point representing the riskless asset and the efficient frontier ofrisky assets. The straight line connecting the riskless asset and the tangency pointrepresenting the optimal combination or risky assets is the best feasible risk rewardtradeoff line.4.Suppose you have the following two stocks:Risky Asset A Risky Asset BMean 0.10 0.18Standard Deviation 0.12 0.25_____________________________________________________The minimum-variance portfolio of these assets requires investment proportions of 83.92% ofRisky Asset A and 16.08% of Risky Asset B. The correlation between the two stocks is 0.1?What is the corresponding expected return and standard deviation of the portfolio?Answer:The corresponding E(r) = w1 E(r1) + (1 - w1) E(r2)= 0.8392 (0.1) + 0.1608 (0.18)= 0.113The corresponding σ2= w12σ12 + (1 - w1)2σ22 + 2w(1 - w1) ρ1,2σ1σ2σ2= 0.01257So σ= 0.11212-155.Is it true that investing in stocks is less risky in the long run than the short run? Why or why not?Answer:There is a widespread—but mistaken—belief that stocks are less risky in the long run than in the short run. Based on this belief, it is generally inferred that you should invest more of your money in stocks the longer your planned holding period. Two propositions have been used to persuadeskeptics that this so-called time diversification effect is valid:• The longer the investor’s holding period, the smaller the standard deviation of the annualized rate of return on stocks.• The longer the investor’s holding period, the lower the probability that stocks will earn a rate of return less than the corresponding risk-free interest rate on bonds.Although they are true, these propositions do not support the validity of the claim that stocks are less risky in the long run than in the short run or that you should invest more in stocks because you have a longer planned holding period. Let us explain why. First, the fact that the standarddeviation of the annualized rate of return on an investment in stocks declines as the length of the holding period increases is merely an artifact of expressing investment performance in terms of the annualized rate of return. There is no genuine diversification in this situation. You care about the amount of wealth that you will have at the end of the holding period, and there is no decline in its standard deviation. For example, compare the results of investing all of your money in stocksversus risk-free bonds for one year and for 25 years. Even though the standard deviation of your annualized rate of return for the 25-year period is approximately one-fifth of the one-year result, the standard deviation of your ending wealth for the 25-year holding period is five times greater than the one-year standard deviation. Second, it is true that the longer the holding period, thelower the probability of a shortfall, defined as the stock portfolio’s earning less than the risk-free interest rate over that same period. However, the risk of a shortfall depends on its severity when it happens as well as its probability of happening. If we consider measures of risk that take account of both the severity and the probability of a shortfall, there is no decline in risk as the holdingperiod lengthens. For example, consider as a measure of risk the price of insuring a stock portfolio against a shortfall. It actually increases with the length of the holding period.12-16。
兹维博迪金融学第二版试题库5TB（1）
兹维博迪金融学第二版试题库5TB（1）Chapter FiveHousehold Savings and Investment DecisionsThis chapter contains 28 multiple choice questions, 10 short problems, and 9 longer problems.Multiple Choice1.Getting a professional degree can be evaluated as ________.a) a social security decisionb)an investment in human capitalc)an investment in a consumer durabled) a tax exempt decisionAnswer: (b)2.Suppose you will face a tax rate of 20% before and after retirement. The interest rate is 8%.You are 30 years before your retirement date and invest $10,000 to a tax deferred retirement plan. If you choose to withdraw the total accumulated amount at retirement, what will you be left with after paying taxes?a)$51,445b)$64,000c)$80,501d)$100,627Answer: (c)3.Suppose you will face a tax rate of 20% before and after retirement. The interest rate is 8%.You are 30 years before your retirement date and have $10,000 to invest. If you invest this in an ordinary savings plan instead of a tax deferred retirement plan, what amount will you have accumulated at retirement?a)$51,445b)$64,000c)$80,501d)$100,627Answer: (a)4.When your tax rate remains unchanged, the benefit of tax deferral can be summarized in therule, “deferral earns you ________.”a)the after-tax rate of return before taxb)the pretax rate of return after taxc)the after-tax rate of return after taxd)the pretax rate of return before taxAnswer: (b)5.From an economic perspective, professional training should be undertaken if the ________exceeds the ________.a)future value of the benefit; present value of the costsb)present value of the benefits; future value of the costsc)future value of the benefits; future value of the costsd)present value of the benefits; future value of the costsAnswer: (d)6.Suppose you will face a tax rate of 30% before and after retirement. The interest rate is 6%.You are 35 years before your retirement date and $2,000 to a tax deferred retirement plan. If you choose to withdraw the total accumulated amount at retirement, what will you be left with after paying taxes?a)$7,532b)$10,760c)$12,298d)$15,372Answer: (b)7.Kecia is currently thirty years old and she plans to retire at age sixty. She is expected to liveto age eighty-five. Her labor income is $45,000 per year and she intends to maintain aconstant level of real consumption spending over the next fifty-five years. Assuming a real interest rate of 4% per year, no taxes, and no growth in real labor income, what is the value of Kecia’s human capital?a)$31,797b)$35,196c)$778,141d)$994,888Answer: (c)8.Kecia is currently thirty years old and she plans to retire at age sixty. She is expected to liveto age eighty-five. Her labor income is $45,000 per year and she intends to maintain aconstant level of real consumption spending over the next fifty-five years. Assuming a real interest rate of 4% per year, no taxes, and no growth in real labor income, what is the value of Kecia’s permanent income?a)$31,797b)$35,196c)$778,141d)$994,888Answer: (b)9.Oscar is currently thirty-five year old, plans to retire at age sixty-five, and to live to ageeighty-five. His labor income is $40,000 per year, and he intends to maintain a constant level of real consumption spending over the next fifty years. Assuming a real interest rate of 4% per year, no taxes, and no growth in real labor income, what is the value of Oscar’s human capital?a)$884,344b)$691,681c)$39,999d)$32,198Answer: (b)10.Oscar is currently thirty-five year old, plans to retire at age sixty-five, and to live to ageeighty-five. His labor income is $40,000 per year, and he intends to maintain a constant level of real consumption spending over the next fifty years. Assuming a real interest rate of 4% per year, no taxes, and no growth in real labor income, what is the value of Oscar’spermanent income?a)$884,344b)$691,681c)$39,999d)$32,198Answer: (d)11.You are currently renting a house for $12,000 per year, and you also have an option to buy itfor $240,000. Maintenance and property taxes are estimated to be $4,320, and these costs are included in your rent. Property taxes ($2,880 of the $4,320) are deductible for income tax purposes. Your tax rate is 35%. You wish to provide yourself with housing at the lowest present value of cost. If the real after-taxrate is 2.52%, should you rent or buy?a)rent the house; the PV cost of renting is $476,190b)rent the house; the PV cost of renting is $309,524c)buy the house; the PV cost of owning is $442,198d)buy the house; the PV cost of owning is $371,429Answer: (d)12.You are currently renting a house for $12,000 per year and you also have an option to buy itfor $240,000. Maintenance and property taxes are estimated to be $4,320, and these costs are included in your rent. Property taxes ($2,880 of the $4,320) are deductible for income tax purposes. Your tax rate is 35%. You wish to provide yourself with housing at the lowest present value of cost. The real after-tax rate is 2.52%. What is the break-even rent?a)$6,048b)$9,360c)$10,128d)$12,302Answer: (b)13.As one gets older, the ________ declines, so ________ falls steadily until it reaches zero atage 65.a)future value of remaining labor income; human capitalb)future value of remaining labor income; initial wealthc)present value of remaining labor income; human capitald)present value of initial wealth; optimizationAnswer: (c)14.Any lifetime consumption spending plan that satisfies your budget constraint is:a)an optimal modelb) a feasible planc) a model benefitd) a target replacementAnswer: (b)15.There is an advantage to tax deferred retirement savings plans for those ________ when themoney is withdrawn.a)who will be in a lower tax bracketb)who will be in the same tax bracketc)both (a) and (b)d)neither (a) nor (b)Answer: (c)16.In the United States, individual retirement accounts (IRAs) are called ________ rather than________ because any amounts withdrawn from the plan are taxed at the time of withdrawal.a)tax advantaged; tax deferredb)tax deferred; tax exemptc)tax advantaged; tax loopholesd)tax exempt; tax deferredAnswer: (b)17.The present value of one’s future labor income is called ________ and the constant level ofconsumption spending that has a present value equal to one’s huma n capital is called________.a)human income; taxable incomeb)human capital; permanent incomec)permanent capital; taxable incomed)permanent income; human capitalAnswer: (b)18.The ________ the interest rate, the ________ the value of human capital, but the higher thelevel of permanent income.a)lower; lowerb)higher; lowerc)higher; higherd)lower; higherAnswer: (b)19.The ________ states that the present value of one’s lifetime consumption spending andbequests equals the present value of one’s initi al wealth and future labor income.a)consumption budget constraintb)spending constraintc)intertemporal budget constraintd)income and spending constraintAnswer: (c)20.According to the text, many experts recommend that in making a savings plan one should aimfor a replacement rate of ________ of pre-retirement income.a)100%b)25%c)50%d)75%Answer: (d)21.Economic costs that are said to be explicit costs include items such as ________.a)tuitionb)foregone rentc)foregone earningsd)all of the aboveAnswer: (a)22.Economic costs that are said to be implicit costs include items such as ________.a)tuitionb)administrative fees while undertaking a professional degreec)foregone earningsd)all of the aboveAnswer: (c)23.In making lifetime saving/consumption decisions it is considered simpler to do the analysis________.a)in nominal termsb)in inflationary termsc)in perpetual termsd)in real termsAnswer: (d)24.In terms of a lifetime saving/consumption decision such as buying or renting an apartment ora consumer durable, the alternative you should choose is ________.a)the one with the lower present value of benefitsb)the one with the lower present value of costsc)the one with the higher present value of costsd)the one with the lower present value of benefits and the higher present costsAnswer: (b)25.Among the approaches you can use for saving for yourretirement is/are ________.a)aiming to maintain the same level of consumption spending before and afterretirementb)aiming for a target replacement rate of incomec)bypassing graduate school and continuing to consume at the same leveld)(a) and (b)Answer: (d)26.In the equation known as the intertemporal budget constraint, ________.a)the present value of lifetime consumption spending equals the present value ofbequestsb)the present value of lifetime consumption spending and bequests equals the presentvalue of lifetime resourcesc)the present value of lifetime consumption spending equals the future value of laborincomed)the future value of lifetime consumption spending equals the present value of laborincomeAnswer: (b)27.Salman is currently twenty-five years old and plans to live to age eighty. His labor income is$75,000 per year and he plans to maintain a constant level of real consumption spending over the next fifty-five years. Salman plans to retire at age 60. Assume the real interest rate is 5% per year and there are no taxes and no growth in real labor income.What is the value ofSalman’s permanent income?a)$75,000b)$65,906c)$85,348d)$1,228,064Answer: (b)28.You are currently renting a house for $25,800 a year and you have an option to buy it for$350,000. Maintenance and property taxes are $6,150 per year and these costs are included in your rent. Property taxes ($4,150 of the $6,150) are deductible for income tax purposes. Your tax rate is 35%. The real after-tax rate is 3.5%. What is the break-even rent?a)$16,770.00b)$16,947.50c)$21,102.46d)$24,927.54Answer: (b)Short Problems1.You are currently renting a house for $17,000 a year and you also have an option to buy it for$300,000. Maintenance and property taxes are $5,040 per year and these costs are included in your rent. Property taxes ($3,360 of the $5,040) are deductible for income tax purposes.Your tax rate is 40%. You wish to provide yourself with housing at the lowest present value of cost. The real after-tax rate is 3.1% per year. Should you rent or buy? What is the break-even rent?Answer:After-tax outflow for property taxes each year is 0.6 x $3,360 = $2,016Cash outflow in year t = $1,680 + $2,016= $3,696PV cost of owning = $300,000 + $3,696/i= $300,000 + $3696/0.031= $419,226PV cost of renting = $17,000/i= $17,000/0.031= $548,387You would be better off buying the house.Break-even rent: X/0.031 = $300,000 +$3,696/0.031X = $12,996The break-even rent is $12,996.So if the rent is less than $12,996 per year, you would prefer to keep renting.2.You are currently renting a house for $16,000 a year and you also have an option to buy it for$250,000. Property taxes and maintenance care is $5,000 per year, and these costs areincluded in your rent. Property taxes ($3,200 of the $5,000) are deductible for income tax purposes. Your tax rate is 40%. You wish to provide yourself with housing at the lowest present value of cost. The real before-tax discount rate is 3.5% per year. Should you rent or buy? What is the break-even rate?Answer:Real after-tax rate = 0.6 x 0.035= 0.021After-tax cash outflow for property taxes each year is 0.6 x $3,200 = $1,920Cash outflow for year t = $1,800 + $1,920= $3,720PV cost of owning = $250,000 + $3,720/i= $250,000 + $3,720/0.021= $427,143PV cost of renting = $16,000/i= $16,000/0.021= $761,905You would be better off buying the house.To find the break-even rent:X/0.021 = $250,000 + $3,720/0.021X = $8,970So if the rent is less than $8,970 per year, you would be better off renting.3.Kieran is currently twenty-five years old, plans to retire at age sixty, and to live to age eighty.His labor income is $45,000 per year, and he intends to maintain a constant level of real consumption spending over the next fifty-five years. Assuming a real interest rate of 3%, no taxes, and no growth in real labor income, what is the value of Kieran’s human capital?What is th e value of Kieran’s permanent income?Answer:n i PV FV PMT Result35 3 ? 0 45,000 PV = $966,925n i PV FV PMT Result55 3 $966,925 0 ? PMT = $36,114The value of Kieran’s human capital is $966,925.The value of Kieran’s permanent income is $36,114.4.Mariana is currently thirty years old, plans to retire at ageseventy and to live to age ninety.Her labor income is $60,000 per year, and she intends to maintain a constant level of real consumption spending over the next sixty years. Assuming a real interest rate of 4% per year, no taxes and no growth in real labor income, what is the value of Mariana’s human capital?What is the value of Mariana’s permanent income?Answer:n i PV FV PMT Result40 4 ? 0 60,000 PV = $1,187,566n I PV FV PMT Result60 4 $1,187,566 0 ? PMT = $52,493The value of Mariana’s human capital is $1,187,566.The value of Mariana’s permanent income is $52,493.5.Your employer, Novocastrian Films, has agreed to make 60 quarterly payments of $1,000each into a trust account to fund your early retirement. The first payment will be made 3months from now. At the end of 15 years (60 payments), you will be paid 15 equal annual payments, with the first receipt to be made at the beginning of Year 16 (or the end of Year15). The funds will be invested at a nominal rate of 10.0%, quarterly compounding, duringboth the accumulation and the distribution periods. How large will each of your 15 receipts be?Answer:First determine the effective annual rate:EFF = (1 + 0.10/4)4 –1= 10.38%Next, determine amount at end of year 15N I PMT Result_____________15 10.38 $4000 FV = $130,983.39At the end of year 15, there will be $130,983.39 in your retirement account.Since you will be making withdrawals at the beginning of each year, PV = $130,983/(1 +i), or $118,625.10.N I PV Result___________15 10.38 -$118,625.10 PMT = $15,935.89Each of the receipts will be $15,935.896.Mr. Palin has received a job offer from a large investment bank as an assistant to the vicepresident and Mr. Palin’s base salary will be $90,000. In addition, he will receive his first annual salary payment one year from the day he begins work. He will also get an immediate $45,000 bonus for joining the company and his salary will grow at 8 percent each year. Mr.Palin is expected to work for 20 years. What is the present value of the offer if the appropriate discount rate is 11 percent?Answer:Simplest approach is to set up a spreadsheet like:Year PMT PV@11%0 45,000 45,0001 90,000 81,081.082 97,200 78,889.70. . .. . .. . .19 359,641.75 49,514.6320 388,413.10 $48,176.39Total: $1,310,649.82The present value of the offer is $1,310,649.827.Natalia will face a tax rate of 25% before and after retirement. The interest rate is 9%. She is35 years from her retirement date and invests $5,000 to a tax deferred retirement plan. If shechooses to withdraw the total accumulated amount at retirement, what will she be left with after paying taxes?Answer:$5,000 x 1.0935 = $102,069After taxes this leaves $102,069 x 0.75 = $76,5528.Damian is currently twenty-five years old and plans to live to age eighty. His labor income is$80,000 per year, and he plans to maintain a constant level of real consumption spending over the next fifty-five years. Damian plans to retire at age 60. Assume the real interest rate is 5% per year and there are no taxes and no growth in real labor income. What is the value ofDamian’s human capital? What is the value of Damian’s permanent income?Answer:N I PV FV PMTResult_________35 5 ? 0 $80,000 PV =$1,309,936N I PV FV PMT Result________55 5 $1,309,936 0 ? PMT = $70,300Damian’s human capital is $1,309,936.Damian’s permanent income is $70,300.9.You are currently renting a house for $25,800 a year andyou have an option to buy it for$350,000. Maintenance and property taxes are $6,150 per year, and these costs are included in your rent. Property taxes ($4,150 of the $6,150) are deductible for tax purposes. Your tax rate is 35%. The real after tax rate is 3.5%. What is the NPV of the investment in the house?Answer:After-tax outflow for property taxes each year is 0.65 x $4,150 = $2,697.50Cash outflow in year t = $2,697.50 + $2,000= $4,697.50PV cost of owning = $350,000 + $4,697/0.035= $350,000 + $134,214= $484,214PV cost of renting = $25,800/0.035= $737,143So the NPV of investing in the house instead of renting is $737,143 – $484,214 = $252,929.10.Carson will face a tax rate of 30% before and after retirement. The interest rate is 6%. He is32 years from his retirement date and invests $3,000 to a tax deferred retirement plan. If hechooses to withdraw the total accumulated amount at retirement, what will he be left with after paying taxes? Show how to find the answer using the rule, “Deferral earns you the pretax rate of return after tax.”Answer:If Carson paid the initial tax he would have $3,000 x 0.7 = $2,100 to invest.Investing $2,100 at the pretax rate of 6% would result in$2,100 x 1.0632 = $13,552Longer Problems1.Tamara is currently twenty-eight years old, plans to retire at age seventy and to live to ageninety. Her labor income is $50,000 per year, and she intends to maintain a constant level of real consumption spending over the next sixty-two years. Assume no taxes, no growth in real labor income and a real interest rate of 4% per year.(a)What is the value of Tamara’s human capital?(b)What is the value of Tamara’s permanent income?Answer:(a) N I PV FV PMT Result42 4 ? 0 $50,000 PV =$1,009,281(b) N I PV FV PMT Result62 4 $1,009,281 0 ? PMT =$44,261The value of Tamara’s human capital is $1,009,281The value of Tamara’s permanent income is $44,2612.You have just turned twenty-eight years of age and feel it is necessary to upgrade yourqualifications. After some consideration, you feel that undertaking full-time study for an MBA degree is one alternative. For the two years of full-time study, tuition and living expenses will be $25,000 per year. In addition, you will have to give up your current job witha salary of $35,000 per year. Assume all cash flows occur at the end of the year. Assume areal interest rate of 4% per year, ignoring taxes. Also assume that the salary increase is at a constant real amount that startsafter you complete your degree (at the end of the year following graduation) and lasts until retirement at age sixty-five. In order to justify theinvestment, by how much does your salary have to increase as a result of getting the MBA degree?Answer:Find the FV of tuition and foregone salary at the end of two years:N i PV FV PMT Result________2 4 0 ? 60,000 FV = $122,400Find the increase in salary that has this amount as its PV:n i PV FV PMT Result_______35 4 $122,400 0 ? PMT = $6,5583.At the age of thirty Terry was earning $30,000 and decided to undertake an MBA to increasehis earning potential. Two years later Terry has his degree and has achieved a constant real increase of $5,898 in his annual salary that will last until he retires at age sixty. If Terry lives to the age of ninety, what will be the value of his human capital and permanent income?Assume a real interest rate of 2.52% per year, no taxes, and no growth in real labor income.Answer:New base salary = $30,000 + $5,898 = $35,898n i PV FV PMT Result________28 2.52 ? 0 $35,898 PV = $714,899n i PV FV PMT Result________58 2.52 $714,899 0 ? PMT = $23,584The value of Terry’s human capital is $714,899.The value of Terry’s permanent income is $23,584.4.Juliet currently rents an apartment but has the option to buy it for $185,000. Property taxesare $2,000 per year and are deductible for income tax purposes. Annual maintenance costs are $1,800 per year, but are not tax deductible. Juliet expects that the above taxes will increase at the rate of inflation. Her income tax rate is 35%, and she can earn a before-tax real interest rate of 5% per year. If Juliet buys the apartment she plans to keep it forever. What is the “break-even” annual rent such that Juliet would buy the apartment if the rent exceeded this amount?Answer:Real after-tax rate = 0.65 x 0.05= 0.0325 (or 3.25%)After-tax annual outflow for property taxes each year is 0.65 x $2,000 = $1,300Break-even rent: X/0.035 = $185,000 + $3,100/0.0325X = 0.035($185,000) + $3,100X = $6,012.50 + $3,100X = $9,112.50So the break-even rent is $9,112.50.5.Anton’s retirement goal is to set aside an a mount of money each year into a savings accountuntil he retires so that he can withdraw $80,000 each year during his retirement. He expects to retire in thirty years and expects to live for twenty years following his retirement. Anton expects to be able to earn 9 percent per year on his account balance. Calculate the deposit Anton must make for Plan 1 and the amount of the deposit Anton must make for Plan 2.Plan 1: Anton's first deposit will be one year from today and his last deposit will betwenty-nine years from today. He intends to make his first withdrawal thirty years from today.Plan 2: Anton's first deposit will be today and his last deposit will be thirty years fromtoday. He intends to make his first withdrawal thirty one years from today.Answer:Plan 1N I PMT Result__________20 9 $80,000 PV = $730,283.65N I FV Result__________29 9 $730,283.65 PMT = $5,882.96Under Plan 1, Anton must deposit $5, 882.96Plan 2N I PMT Result__________20 9 $80,000 PV = $730,283.65(set to Begin mode)N I FV Result_______31 9 $730,283.65 PMT = $4,479Under Plan 2, Anton must deposit $4,479.6.Your 68 year old mother plans to retire in 2 years, and she expects to live independently for 3years. She wants a retirement income that has, in the first year, the same purchasing power as $60,000 has today. However, her retirement income will be of a fixed amount, so her real income will decline over time. Her retirement income will start the day she retires (2 years from today), and she will receive a total of 3 retirement payments. Inflation is expected to be constant at 6%. Your mother has $100,000 in savings now, and she can earn 9% on savings now and in the future. How muchmust she save each year, starting today, to meet herretirement goals?Answer:First of all, your mother needs the following payments at age 70-72:Age 70: $67,416Age 71: $71,460.96Age 72: $75,748.62At age 68, the PV of these cash flows = $165,585.90Your mother has already set aside $100,000So to calculate what she has to save:Set calculator to Begin modePV N I/Y Result$65,585.90 2 9 PMT = $34,205.097. A relative of yours has just turned 45 years old and plans on retiring in 15 years on her 60thbirthday. She is saving money today for her retirement and is establishing a retirementaccount with your office. She would like to withdraw money from her retirement account on her birthday each year until she dies. She would ideally like to withdraw $60,000 on her 60th birthday, and increase her withdrawals 10% a year through her 69th birthday (i.e., she would like to withdraw $141,476.86 on her 69th birthday). She plans to die on her 70th birthday, at which time she would like to leave $400,000 to her descendants. Your relative currently has $100,000. You estimate that the money in the retirement account will earn 11% a year over the next 25 years. Calculate how much your relative should deposit each year (at the end of each year).Answer:Between ages 60-70, cash flows look like:Year CF Get the PV of these withdrawals.6060,0006166,006272,600. .. .. .69141,476.9070400,000At age 60, PV = $717,124.72At age 45, PV = $149,882.18Relative already has $100,000Solve:N I PV Result_________15 11 $49,882.18 PMT = $6,936.888.Consider the following retirement plan. Today is January 1 and your employer will make a$100 contribution to your retirement plan at the end of January and this amount will increase by $100 each month through December 31. Thus in February you get $200 and then up to a $1,200 contribution on December 31. Thus at the end of each January, you will alwaysreceive $100 and the end of each December you will always receive $1,200. The employer will continue this contribution pattern for the next 25 years. You expect to receive a 12% quoted yield, compounded monthly, on your investments. How much money will be in your account when you retire?Answer:Determine what the monthly deposits are worth on annualbasis:CF0 = 0, CF1 = 100, …, CF12 = $1,200NPV = $7,182.38 at start of each year.Determine EFF = 12.68%Set calculator to Begin mode:N I PMT Result_____________25 12.68 $7,182.38 F = $1,198,487。
2021年兹维博迪金融学第二版试题库TB
Chapter SevenPrinciples of Market ValuationThis chapter contains 30 multiple choice questions，10 short problems and 5 longer problems. Multiple Choice1.In regard to an asset，the ________ is defined as the process well-informed investors mustpay for it in a free and competitive market.(a)analyst value(b)technical value(c)competitive value(d)fundamental valueAnswer：(d)2.In corporate finance decision making，an extremely important rule is to choose theinvestment that ________ current shareholders’ wealth.(a)minimizes(b)maximizes(c)provides zero change in(d)jeopardizesAnswer：(b)3.In asset valuation，the method used to accomplish the estimation depends on the ________.(a)number of participants(b)quality of calculating instruments(c)richness of the information set available(d)geographic locationAnswer：(c)4.The ________ states that in a competitive market，if two assets are equivalent，they willtend to have the same market price.(a)Law of Real Interest Rates(b)Law of One Price(c)Law of Price Equivalency(d)Law of FuturesAnswer：(b)5.The Law of One Price is enforced by a process called ________，the purchase andimmediate sale of equivalent assets in order to earn a sure profit from a difference in their prices.(a)swapping(b)maximization(c)arbitrage(d)speculationAnswer：(c)6.________ refers to the totality of costs such as shipping，handling，insuring，and brokerfees.(a)Shipping costs(b)Transaction costs(c)Installation costs(d)Insurance costsAnswer：(b)7.The Law of One price is a statement about the price of one asset ________ the price ofanother.(a)absolute to(b)relative to(c)multiplied by(d)independent ofAnswer：(b)8.If an entity borrows at a lower rate and lends at a higher rate，this is an example of________.(a)opportunity arbitrage(b)interest-rate arbitrage(c)exchange arbitrage(d)nominal arbitrageAnswer： (b)9.If arbitrage ensures that any three currencies are freely convertible in competitivemarkets，then:(a)it is enough to know only one exchange rate to determine the third(b)we can estimate two exchange rates based on one exchange rate only(c)it is enough to know the exchange rates between any two in order to determine thethird(d)it is necessary to know all three ratesAnswer：(c)10.Suppose you have $15,000 in a bank account earning an interest rate of 4% per year. At thesame time you have an unpaid balance on your credit card of $6,000 on which you are paying an interest rate of 17% per year. What arbitrage opportunity do you face?(a)$240 per year(b)$600 per year(c)$780 per year(d)$1,020 per yearAnswer：(c)11.If the dollar price of Japanese Yen is $0.009594 per Japanese Yen and the dollar price ofChinese Yuan is $0.1433 per Chinese Yuan，what is the Japanese Yen price of a Chinese Yuan?(i.e.，JPY/CNY)(a)0.001375 JPY/CNY(b)0.066950 JPY/CNY(c)9.594 JPY/CNY(d)14.936419 JPY/CNYAnswer：(d)12.If the dollar price of guilders is $0.5634 per Guilder and the dollar price of Euros is $1.5576per Euro，what is the Euro price of the Guilder?(i.e.，EUR/ANG)(a)0.361700 EUR/ANG(b)0.877552 EUR/ANG(c)2.764643 EUR/ANG(d)5.634 EUR/ANGAnswer：(d)13.Suppose the price of gold is 51.09 British pounds per ounce. If the dollar price of gold is$100 per ounce，what would you expect the dollar price of a British pound to be?(a)$1.95733 per GBP(b)$1.5109 per GBP(c)$0.5109 per GBP(d)$0.4891 per GBPAnswer：(a)Questions 14-18 refer to the following exchange rate table. To answer 14-18 you will have to fill in the missing exchange rates.14.What is the Euro/Peso exchange rate?(i.e.，EUR/MXN)(a)0.617426EUR/MXN(b)0.641807 EUR/MXN(c)6.675516 EUR/MXN(d)16.196262 EUR/MXN Answer：(a)15.What is the Cdn Dlr/Euro exchange rate?(i.e.，CAD/EUR)(a)0.641807 CAD/EUR(b)1.558099 CAD/EUR(c)6.420 CAD/EUR(d)16.196262 CAD/EURAnswer：(b)16.What is the Euro/Cdn Dlr exchange rate?(i.e.，EUR/CAD)(a)0.3583 EUR/CAD(b)0.641807 EUR/CAD(c)1.558099 EUR/CAD(d)10.394 EUR/CADAnswer：(b)17.What is the Peso/Cdn Dlr exchange rate?(i.e.，MXN/CAD)(a)0.096201 MXN/CAD(b)0.641807 MXN/CAD(c)10.394882 MXN/CAD(d)16.196262 MXN/CADAnswer：(c)18.What is the Peso/Euro exchange rate?(i.e.，MXN/EUR)(a)0.617426 MXN/EUR(b)6.675516 MXN/EUR(c)15.581112 MXN/EUR(d)16.196262 MXN/EUR Answer：(d)19.You are travelling in FarOut where you can buy 130 kranes (a krane being the unit ofcurrency of FarOut) with a U.S. dollar at official FarOut banks. Your tour guide has a relative who dabbles in the black market and this particular relative will sell you kranes for just$0.00833 each on the black market. How much will you lose or gain by exchanging $200 on the black market instead of going to the bank?(a)you would gain approximately 1,660 kranes(b)you would lose approximately 1,660 kranes(c)you would gain approximately 1,990 kranes(d)you would lose approximately 1,990 kranesAnswer：(d)20.In estimating the value of a share of a firm’s stock，a simple model is to :(a)divide EPS by a P/E multiple(b)multiply EPS by a P/E multiple(c)multiply EPS by EAT(d)divide EPS by market valueAnswer：(b)21.A firm’s earnings per share are $6 and the industry average P/E multiple is 9. What wouldbe an estimate of the value of a share of the firm’s stock?(a)$54.00(b)$45.00(c)$1.50(d)$0.67Answer：(a)22.The value of the asset as it appears in the financial statement is called the asset’s ________.(a)market value(b)fixed value(c)book value(d)expected valueAnswer：(c)23.Consider the following stock market reaction to the information contained in a company’sannouncement. A corporation has just announced that it must pursue the issuance of company equity. We could expect to see ________ in the price of company stock.(a)a rise(b)a drop(c)a rapid rise(d)zero changeAnswer：(b)24.Consider what the stock market reaction to the following announcement would be. Acorporation has just announced that it is engaging in a stock split of the company’s shares.We could expect to see a ________ in the overall market capitalization rate and a ________ in the price of company stock.(a)rise；drop(b)drop；rise(c)rise；drop(d)rise；dropAnswer：(a)25.The ________ is the proposition that an asset’s current price fully reflects all publiclyavailable information about future economic fundamentals affecting the asset’s value.(a)public markets hypothesis(b)efficient markets exchange rates(c)fundamental value proposition(d)efficient markets hypothesisAnswer：(d)26.The market price of an asset reflects the ________ of all analysts’ opinions with heavierweights on analysts who control large amounts of money and on those analysts who have better than average information.(a)best estimate(b)weighted average(c)highest estimate(d)lowest estimateAnswer：(b)27.Assume that the worldwide risk-free real rate of interest is 4% per year. Inflation in Denmarkis 9% per year and in the United States it is 7% per year. Assuming there is no uncertainty about inflation，what are the implied nominal interest rates denominated in Danish krone and in U.S. dollars，respectively?(a)16.63% (DKK)；13.50% (USD)(b)13.50% (DKK)；16.63% (USD)(c)13.36% (DKK)；11.28% (USD)(d)11.28% (DKK)；13.36% (USD)Answer：(c)28.The ________ theory states that the expected real interest rate on risk-free loans is the sameall over the world.(a)nominal interest-rate parity(b)real interest-rate parity(c)efficient inflation rate parity(d)efficient market rateAnswer：(b)29.________ states that exchange rates adjust so as to maintain the same “real” price of a“representative” basket of goods and services around the world.(a)Purchasing power parity(b)Efficient markets hypothesis(c)Market valuation model(d)Exchange rate equityAnswer：(a)30.Assume that the worldwide risk-free real rate of interest is 5% per year. Inflation in Australiais 9% per year and in Great Britain it is 12% per year. Assuming there is no uncertainty about inflation，what are the implied nominal interest rates denominated in Australian dollars and Great Britain pounds，respectively?(a)22.08% (AUD)，11.45% (GBP)(b)11.45% (AUD)，22.08% (GBP)(c)17.60% (AUD)，14.45% (GBP)(d)14.45% (AUD)，17.60% (GBP)Answer：(d)Short Problems1.Suppose you have $20,000 in a bank account earning an interest rate of 4% per year. At thesame time you have an unpaid balance on your credit card of $7,000 on which you are paying an interest rate of 18% per year. What is the arbitrage opportunity you face?Answer：You could take $7,000 out of your bank account and pay down your creditcard balance. You would give up 4% per year in interest earnings ($280) but you wouldsave 18% per year in interest expenses ($1,260). So the arbitrage opportunity is worth$980 per year.2.Fill in the missing exchange rates in the following table:Answer:3.You observe that the dollar price of the Mexican peso is $0.09618 and the dollar price of theCanadian dollar is $0.9997. What must the exchange rate between the Mexican peso and the Canadian dollar be for there to be no arbitrage opportunity?Answer: CAD/MXN = 0.096180.9997= 0.096208 CAD/MXN4.Suppose that the exchange rate is $0.2970 to the Israeli shekel. How could you makearbitrage profits with $10,000 if the dollar price of gold is $200 per ounce and the shekel price is 750 ILS per ounce?Answer：Take $10,000 and buy 50 ounces of gold at $200 per ounce. Sell 50 ounces of gold in Israel for 37,500 ILS (750 ILS per ounce). Take 37,500 ILS and exchange it into dollars worth $11,137.50. The arbitrage profit is $1,137.50.5.You are travelling in FarOut where you can buy 150 kranes (a krane being the unit ofcurrency in FarOut) with a U.S. dollar at official FarOut banks. Your tour guide has a relative who dabbles in the black market and this particular relative will sell you kranes for just $0.00685 each on the black market. How much would you gain or lose by exchanging $300 on the black market instead of going to the bank?Answer:On the official market：$300 x 150 kranes = 45,000 kranesOn the black market：$300 x 1/0.00685 kranes = 43,796 kranesHence，you would lose 1,204 kranes.6. A firm’s earnings per share are $5.50 and the industry average P/E multiple is 8. Whatwould be an estimate of the value of a share of the firm’s stock?Is it possible for firms being classified in the same industry to have different price/earnings multiples?Answer:Estimated value share of stock = firm’s EPS x Industry average P/E= $5.50 x 8= $44.00Firms classified as being in the same industry may have different opportunities for growth in the future and may therefore differ in their P/E multiples.7.The P/E multiple of BHM Corporation is currently 5，while the P/E ratio of the S&P 500 is10. What reasons could account for this difference?Answer:•BHM’s reported earnings may be higher than they are expected to be in the future，or they may be inflated due to special accounting methods used by BHM.•BHM may be riskier than the S&P 500 either because it is in a relatively risky industry or has a relatively higher debt ratio.8.The price of Hubris Co. stock recently jumped when the CEO for the company announced anincreased dividend payment for the year. What might account for such a market reaction?Answer：The market may believe the company’s future prospects look very bright (that is，higher earnings，less risk，sound growth，etc.) and that the company can sustain such an earnings growth.9.Assume that the worldwide risk-free real rate of interest is 4% per year. Denmark has anexpected rate of inflation of 9% per year and in Spain has an expected rate of inflation of 14% per year. Assuming there is no uncertainty about inflation，what are the implied nominal interest rates denominated in Kroner and Euros?Answer: Denmark：nominal interest rate = (1.04) x (1.09) – 1= 13.36% per yearSpain：nominal interest rate = (1.04) x (1.14) –1= 18.56% per year10.Assume that the worldwide risk-free real rate of interest is 4% per year. The United Kingdomhas an expected rate of inflation of 8% per year and in Belgium it is 10% per year. Assuming there is no uncertainty about inflation，what are the implied nominal interest rates denominated in Pounds Sterling and Euros?Answer: United Kingdom：nominal interest rate = (1.04) x (1.08) – 1= 12.32% per yearBelgium：nominal interest rate = (1.04) x (1.10) – 1= 14.40% per yearLonger Problems1.Let’s assume that you have operated your own business for 18 years. For the most recentfiscal year，sales were $15 million. Net Income for the most recent fiscal year was $1.5million. The book value of your business was $11 million. Recently，a firm which isengaged in similar activities to your own was sold and the following information was made public:Multiple of Book Value 0.8xMultiple of Net Income 11xMultiple of Sales 0.7xa)How would you determine an appropriate range of value for your company?b)It has come to your attention that your company has future investment opportunitiesthat would be less profitable than the competing company above. What does this sayabout the valuation of your company?Answer：a) Multiple of Sales： 0.7x = $15 million x 0.7 = $10.5 millionMultiple of Net Income： 11x = $1.5 million x 11 = $16.5 millionMultiple of Book Value： 0.8x = $11 million x 0.8 = $8.8 millionb) The valuation of your company would be at the lower end of the range.2.BHM stock is trading for $47 per share on the NYSE and $45 per share on the Sydney StockExchange. Assume that the costs of buying and selling BHM stock are negligible.a)How can you make an arbitrage profit?b)Over time what would you expect to happen to stock prices in New York and Sydney?c)Now assume that the cost of buying and selling shares of BHM are 2% pertransaction. How does this affect your answers?Answer：a) You could buy BHM stock in Sydney and simultaneously sell it in New York. Your arbitrage profit would be $2 per share.b)The prices would become equal.c)There could remain a 2% discrepancy between the prices whichwould be $1.84 in this instance.3.Suppose you have $50,000 in a bank account earning an interest rate of 3.5% per year. At thesame time you have an unpaid balance on your credit card of $13,000 on which you arepaying an interest rate of 21% per year. What is the arbitrage opportunity you face?Answer：You could take $13,000 out of your bank account and pay down your creditcard balance. You would give up 3.5% per year in interest earnings ($455) but you would save 21% per year in interest expenses ($2,730). So the arbitrage opportunity is worth$2,275 per year.4.The quotes from Hubris Bank and Modesty Bank are given below:Hubris Bank: 106 Yen/$Modesty Bank: 104 Yen/$Answer the following questions based on these figures.a)If we assume no transaction costs，there is evidently an opportunity for arbitragehere. If an arbitrageur started with $10,000，exactly how would (s)he make profitsand how much profit would (s)he make?b)As many traders engage in arbitrage who do you expect to see in the above quotes atthese two banks?c)If there is a 1% transaction cost for transactions is there still an opportunity forarbitrage?Answer:Hubris Bank：106 Yen/$ Modesty Bank：104 Yen/$a)At Hubris Bank，buy Yen with dollars (Yen are cheaper).At Modesty Bank，buy dollars with Yen (dollars are cheaper).Start with $10,000:At Hubris Bank： $10,000 x 106 Yen/$ = 1,060,000 YenAt Modesty Bank： 1,060,000 Yen x 1$/104 Yen = $10,192.31You make a profit of $192.31.b)The Yen will appreciate at Hubris Bank and it will depreciate at Modesty Bank.Eventually the exchange rate will stabilize between 106 Yen/$ and 104 Yen/$.c)Assume 1% transaction cost.At Hubris Bank: $10,000 (0.99) x 106 Yen/$ = 1,049,400 YenAt Modesty Bank: 1,049,400 Yen x (0.99) x $1/104 Yen = $10,090.38There is still an opportunity for arbitrage profit，but it has decreased from$192.31 to $90.38.5.In the United States，the real rate of return is expected to be 5% and in Switzerland it isexpected to be 4%.a)If the inflation rate in the United States is expected to be 6% and the Swissinflation rate is expected to be 8%，what will the nominal interest rates be in theUnited States and Switzerland?b)Are these markets in equilibrium?Where would you prefer to invest and why?c)What if the Swiss inflation rate were 6%?Are the markets in equilibrium?d)What are the respective nominal rates if the worldwide risk-free real rate ofreturn is 4% and inflation in the U.S. is 6% and in Switzerland it is 8%?Answer:a) United States: Nominal interest rate = (1.05)(1.06) – 1= 11.30% per yearSwitzerland: Nominal interest rate = (1.04)(1.08) – 1= 12.32% per yearb)The markets are not in equilibrium. Investors will go where the real rate is highest.That is，in the U.S.c) United States: Nominal interest rate = (1.05)(1.06) – 1= 11.30% per yearSwitzerland: Nominal interest rate = (1.04)(1.06) – 1= 10.24% per yearMarkets are still not in equilibrium.d) United States: Nominal interest rate = (1.04)(1.06) – 1= 10.24% per yearSwitzerland: Nominal interest rate = (1.04)(1.08) – 1= 12.32% per year。
兹维博迪金融学第二版试题库6TB(1)
Chapter SixThe Analysis of Investment ProjectsThis chapter contains 41 multiple choice problems, 20 short problems and 8 longer problems.Multiple Choice1.The objective of a firm's management is to only undertake the projects that ________ themarket value of shareholders' equity.a)decreaseb)do not decreasec)changed)do not changeAnswer: (b)2.The decision rule that management uses with the net present value is to undertake only thoseprojects with ________ NPV.a) a discountedb) a contingentc) a positived)negativeAnswer: (c)3.If a firm decides to invest in automated machines that will allow the firm to reduce laborcosts, this is an example of a ________ capital expenditures project.a)new productsb)replacement of existing assetsc)cost reductiond)advertisingAnswer: (c)4.The NPV of a project represents the amount by which it is expected to increase ________.a)the break-even pointb)capital budgetingc)capital expendituresd)shareholder wealthAnswer: (d)5.Consider the following annual cash flows:Year Cash Flows (in thousands of dollars)0 –2,0001 1,2002 1,5003 1,800Using a cost of capital of 15%, compute this project's NPV.a)$5,361,000b)$3,548,000c)$3,361,000d)$1,361,000Answer: (d)6.Consider the following annual cash flows:Year Cash Flows (in thousands of dollars)0 –5,0001 4,1002 3,8003 3,500Using a cost of capital of 12%, compute this project's NPV.a)$14,181,000b)$9,181,000c)$4,181,000d)$3,548,000Answer: (c)7. A negative sign in front of a cash-flow forecast for a particular year means that it is an________.a)inflowb)outflowc)indeterminate flowd)more information is required to make this determinationAnswer: (b) cash inflows from operations can be computed in which of the following ways?a)Cash Flow = Revenue – Cash Expenses – Taxesb)Cash Flow = Net Income + Noncash Expensesc)Cash Flow = Revenue – Total Expenses – Taxes + Noncash Expensesd)all of the aboveAnswer: (d)9.Consider the development of a new type of laptop machine. In your estimates you determinethat you will sell 5,000 laptop units per year at a price of $2,500 per laptop. Productionequipment will have to be purchased at a cost of $2 million. The equipment will bedepreciated over five years using the straight-line method. Net working capital of $1.9million will also required to finance this project. The cash expenses for this project are $1,700 per laptop. The tax rate is 40%. Compute the net cash inflows from operations.a)$4 millionb)$2.56 millionc)$2.16 milliond)$1.76 millionAnswer: (b)10.Refer to question 9. What is the annual depreciation amount for this project?a)$4 millionb)$1 millionc)$0.78 milliond)$0.4 millionAnswer: (d)11.Refer to question 9. If we use a cost of capital equal to 13%, what is the NPV for this project?a)$2.3 millionb)$3.7 millionc)$5.1 milliond)$9 millionAnswer: (c)12.In computing a project's cost of capital the risk to use is ________.a)the risk of the financing instruments used to fund the projectb)the risk of the project's cash flowsc) a risk-free rated) a historical risk rate using T-billsAnswer: (b)13.A capital budgeting project's cost of capital should reflect only the ________ risk of theproject, not the project's ________ risk.a)unsystematic, systematicb)unsystematic, market-relatedc)systematic, unsystematicd)systematic, market-relatedAnswer: (c)14.The point of indifference between accepting and rejecting a project is referred to as the________ point.a)paybackb)NPVc)rejectiond)break-evenAnswer: (d)15.Consider a project that has total fixed costs of $400,000, an annual depreciation (based on thestraight-line method) of $150,000, annual cash flows of $255,000, and a tax rate of 34%. The difference between the revenue and variable cost (on a per unit basis) is $1,600 (so we use 1,600Q). Determine the break-even volume for this project.a)Q = 443 unitsb)Q = 349 unitsc)Q = 230 unitsd)Q = 194 unitsAnswer: (b)16.For a project, an initial cash outlay of $1.4 million is made. In year 1 the expected annualcash flow is $900,000, years 2-5 the expected annual cash flow is $1,000,000 and in year 6 the expected annual cash flow is $1.3 million. A cost of capital of 15% is used. The IRR (internal rate of return) is ________.a)72.1%b)65.8%c)51.7%d)40.0%Answer: (b)17.An initial cash outlay of $1.4 million is made for a capital budgeting project. In year 1, theexpected annual cash flow is $900,000, years 2-5, the expected annual cash flow is$1,000,000 and in year 6, the expected annual cash flow is $1.3 million. If a cost of capital of 15% is used, compute the NPV of this project.a)$1,800,000b)$2,100,000c)$2,427,225d)$3,296,790Answer: (c)18.The ________ is defined as the annual cash payment that has a present value equal to theinitial outlay.a)annualized cost of debtb)cost of debtc)cost of financingd)annualized capital costAnswer: (d)19.Project A has an initial $3.5 million capital outlay which is converted into an equivalentseven year annuity at a discount rate of 12% per year. Project B has a $7 million initial capital outlay and will last for 14 years. Project B has the same discount rate as Project A. What is the preferred alternative based on the annualized capital cost?a)Project A; its annualized capital cost = $528,050b)Project A; its annualized capital cost = $766,912c)Project B; its annualized capital cost = $1,056,099d)Project B; its annualized capital cost = $1,533,824Answer: (b)20.Project A has an initial capital outlay of $3 million. It will be converted into an equivalent 5year annuity at a discount rate of 12% per year. Project B has an initial capital outlay of $6 million. It will be a ten year annuity at the same discount rate as Project A. What are the annualized capital costs of both projects?a) a. Project A: $832,229 Project B: $1,664,458b) b. Project A: $530,952 Project B: $1,664,458c) c. Project A: $832,229 Project B: $1,061,905d) d. Project A: $530,952 Project B: $1,061,905Answer: (c)21.In comparing alternative annualized capital costs, the alternative with the ________annualized capital cost is the preferred alternative.a)lowestb)highestc)zerod)amortizedAnswer: (a)22.A project's IRR is ________ its scale, which makes IRR not a good measure for rankingmutually exclusive projects.a)contingent onb)independent ofc)inversely proportional tod)half ofAnswer: (b)23.The ________ rate is the rate that prevails in a zero-inflation scenario. The ________ rate isthe rate that one actually observes.a)nominal, inflationb)real, expectedc)nominal, reald)real, nominalAnswer: (d)24.If the nominal cost of capital is 16% per year and the expected rate of inflation is 5% per year,then compute the real cost of capital.a)21.8%b)11.5%c)11%d)10.5%Answer: (d)25.The nominal rate of interest is 15.7% and the expected rate of inflation is 6%. Compute thereal rate of return.a)22.6%b)10.9%c)9.15%d)7.85%Answer: (c)Use the following table to solve questions 26 through 28.Year Real Cash Flow Nominal Cash Flow1 800,000 840,0002 800,000 882,0003 800,000 926,1004 800,000 972,405In the above table, the real cost of capital is 11% per year, and the expected rate of inflation is 5% per year. The initial outlay for this project is $1.5 million.ing the information given above, determine the nominal cost of capital.a)16.55%b)15.45%c)11.66%d) 5.7%Answer: (a)pute the NPV of the real cash flows.a)$714,189b)$981,957c)$1,009,971d)$1,290,317Answer: (b)pute the NPV of the nominal cash flows.a)$714,189b)$981,957c)$1,009,971d)$1,290,317Answer: (b)29.How can NPV be properly calculated?a)by using the nominal cost of capital to discount nominal cash flowsb)by using the real cost of capital to discount real cash flowsc)neither (a) nor (b)d)both (a) and (b)Answer: (d)Use the following information to answer questions 30 through 35:A new type of candy bar is being considered by ChocoLicious. This project is completelyindependent of all the other projects at ChocoLicious. An outlay of $3.1 million is required for equipment to produce the new product, and additional net working capital in the amount of $1.5 million is also required. The firm will recover all working capital at the end of the project. The project will be terminated in five years and the equipment will be fully depreciated over fiver years using the straight-line method. Revenues are expected to be $5 million per year during the project, while operating expenses (excluding depreciation) for the project are expected to be $2 million per year. There will be an additional $0.5 million working capital requirement during the first year, and no working capital additions beyond that time. The required rate of return for this project is 12% and the relevant tax rate is 40%. Calculate the NPV of this project.30.What is the annual depreciation?a)$0.62 millionb)$0.81 millionc)$0.92milliond)$1.54 millionAnswer: (a)31.What is the net cash flow in year 1?a)$1.428 millionb)$1.548 millionc)$2.048 milliond)$2.458 millionAnswer: (b)32.What is the total cash flow in year 3?a)$1.428 millionb)$1.548 millionc)$2.048 milliond)$2.458 millionAnswer: (c)33.What is the total cash flow in year 5?a)$2.048 millionb)$2.548 millionc)$3.548 milliond)$4.048 millionAnswer: (d)34.Which is closest to the NPV of the project?a)$2.34 millionb)$2.78 millionc)$3.47 milliond)$3.92 millionAnswer: (c)35.What is the IRR of project?a)34.35%b)35.23%c)37.35%d)39.29%Answer: (d)36.Apex Corporation is considering the purchase of Zenith Corporation. The owners of ZenithCorporation are asking $75 million in cash and the managers of Apex Corporation estimate that, once under their control, Zenith Corporation will generate cash flows of $20 million per year for five years. The cash flows are net of taxes. The IRR of this investment is ________.a)8.17%b)10.42%c)15.34%d)20%Answer: (b)37.BGB Corporations is considering a project that will pay nothing for the first three years,$80,000 in the fourth year, $120,000 in the fifth year, and $160,000 in the sixth year. The appropriate discount rate is 8.8% and the project requires an investment tomorrow of$150,000 if we accept the project. The NPV of this project is:a)$149,135b)$124,939c)$94,901d)$82,263Answer: (d)Use the following information to answer questions 38 through 41.NetProducts Inc. is considering installing a new server. The new machine costs $61,000 and is expected to have a useful economic life of 5 years, after which it will have a book value of $0. In addition to the equipment costs, management expects installation costs of $9,000 and an initial outlay for net working capital of $7,000.The new server is expected to generate an additional $16,000 per year in earnings after tax over its useful life, but an additional $4,000 per year is required in net working capital. The net working capital will be recovered by the end of the fifth year. NetProducts Inc. has cost of capital (k) of 20%.38.What is the net cash flow in year 1?a)$12,000b)$26,000c)$30,000d)$34,000Answer: (b)39.What is the total cash flow in year 5?a)$26,000b)$30,000c)$46,000d)$53,000Answer: (d)40.What is the NPV of this project?a)$11,606.59b)$8,793.45c)$5,176.55d)$755.90Answer: (a)41.What is the IRR of this project?a)30.03%b)26.01%c)22.88%d)20.45%Answer: (b)Short Problems1.Explain why the internal rate of return (IRR) is not a good measure for ranking mutuallyexclusive projects.Answer: In some cases the ranking system according to IRR may be inconsistent with the objective of maximizing shareholder value. IRR is not a good measure for rankingmutually exclusive projects since a project's IRR is independent of its scale.2.You are considering two investment projects with the following patterns of expected futurenet after-tax cash flows:Year Project A Project B0 –$9 million –$9 million1 $2 million $4.0 million2 $2.5 million $3.5 million3 $3.0 million $3.0 million4 $3.5 million $2.5 million5 $4.0 million $2.0 millionFor both projects, the appropriate cost of capital is 11%. Which project would yourecommend and why?Answer:NPV A= PV – initial outlay= $1,703,796NPV B= PV – initial outlay= $2,471,586Project B is better than Project A3.Consider an investment that requires an initial outlay of $3 million. In the absence of inflationthis investment is expected to produce an annual after-tax cash flow of $800,000 for six years.The cost of capital for this project is 12%. Compute the NPV and internal rate of return (IRR) of this investment. Does this seem a worthwhile investment?Answer:NPV = PV – initial outlay= $289,126IRR = 15.34%NPV > 0and IRR > cost of capitalThis appears to be a worthwhile investment based on NPV and IRR.4.Projects requiring capital expenditures fall into three categories. What are they? Discuss howideas for investment projects evolve.Answer:Most investment projects requiring capital expenditures fall into three categories:new products, cost reduction, and replacement of existing assets. Ideas forinvestment projects can come from customers and competitors, or from within thefirm's own R&D or production departments.5.Explain the manner in which firms use (or should use) the cost of capital in computing the netpresent value for a project.Answer:The correct cost of capital is the one applicable to firms in the same industry asthe new project. If the project happens to be a "mini-replica" of the assetcurrently held by the firm, then management should use the firm's cost of capitalin computing the project's NPV.6. A firm is considering investing $15 million in machinery equipment that is expected to have auseful life of five years and is expected to reduce the firm's labor costs by $5 million per year.Assume the firm pays a 35% tax rate on accounting profits and uses the straight-linedepreciation method. What is the after-tax cash flow from the investment in years 1 through 5?If the hurdle rate for this investment is 16% per year, is it worthwhile? What are theinvestment's IRR and NPV?Answer:Increase in after-tax cash flow = Increase in before tax cash flow – increase intaxes= $5,000,000 – (5,000,000 – 3,000,000)(0.35)= $4,300,000NPV = PV - Initial Outlay= 14,079,463 – 15,000,000= -$920,537IRR = 13.34%This is not a worthwhile project based on NPV and IRR.7.Consider two projects but the projects last for different periods of time. Project A has aninitial outlay of $5 million and is expected to generate an equivalent 5 year annuity at adiscount rate of 11%. Project B requires twice the initial outlay, but will last ten years at the same discount rate. Which is the preferred project based on annualized capital cost?Answer:Project A:n I PV FV PMT5 11% -5,000,000 0 ?PMT = $1,352,852 per yearProject B:n I PV FV PMT10 11% -10,000,000 0 ?PMT = $1,698,014 per yearProject A is the preferred alternative because it has the lower annualized capitalcost.8.Consider the following mutually exclusive projects, for a firm using a discount rate of 10%:Project Initial Investment NPV IRRA $1,000,000 $100,000 10.2%B $100 $1 11%C $50,000 $70,000 23%D $200,000 $24,000 13%Which project should the firm accept?Answer: Note the scaling differences associated with these projects, and the conflicting NPV and IRR results. In such cases, the project with the highest NPV should be chosen. Therefore the firm should accept Project A.9.Two projects being considered are mutually exclusive and have the following projected cashflows:Year Project A Project B0 –$50,000 –$50,0001 0 15,6252 0 15,6253 0 15,6254 0 15,6255 99,500 15,625If the required rate of return on these projects is 10 percent, which should be chosen and why?Answer: Calculate net present value of each project and choose the project with thehigher NPV.Net Present Value (Project A) = $11,781.67Net Present Value (Project B) = $9,231.04Choose Project A.10.Consider the following mutually exclusive, average risk projects, for a firm with a discountrate of 9%:Project Initial Investment NPV IRRA $100 $1 11%B $25,000 $35,000 23%C $500,000 $50,000 10.2%D $100,000 $12,000 13%Which project should the firm accept?Answer:Choose Project C – it has the highest NPV.Note the scaling differences associated with these projects, and the conflicting NPV and IRR results. In such cases, the project with the highest NPV should be chosen. Therefore the firm should accept Project C.11.You are evaluating two mutually exclusive projects for Licorice Inc., with the following netcash flows:Year Project A Project B0 $(100,000) ($100,000)1 55,000 35,0002 45,000 38,0003 40,000 41,0004 35,000 42,0005 0 45,000If Licorice's cost of capital is 15%, which project should you choose?Answer:Choose the project with the higher NPV.Net Present Value (Project A) = $28,164.56Net Present Value (Project B) = $32,513.00Choose Project B.12.Pluto Inc. is considering the purchase of Neptune Corp. The owners of Neptune Corp. areasking for $150 million in cash. The managers of Pluto estimate that, under their control, Neptune Corp. will generate cash flows of $12 million per year for five years and then be sold for $200 million. The IRR of this investment is:Answer:First of all, set up the cash flows associated with this investment:Year Cash Flow___0 ($150,000,000)1-4 $12,000,000/yr5 $212,000,000Using a cash flow worksheet, the IRR = 13.13% per year.13.You are evaluating two independent projects for Licorice Corporation, with the following netcash flows:Year Project A Project B0 –$100,000 –$100,0001 55,000 35,0002 45,000 38,0003 40,000 41,0004 35,000 42,0005 0 45,000If Licorice Corp's cost of capital is 9%, which project(s) should be accepted?Answer:Net Present Value (Project A) = $44,016.54Net Present Value (Project B) = $54,754.23Note that these are independent projects; accepting one does not preclude accepting the other. Since both projects have positive NPVs, both should be accepted.14.Oscar’s Corp. is considering starting a new business involving bicycle production. This newbusiness involves purchases of $8 million of new equipment. This new business is anticipated to generate net income of $1.43 million per year for 6 years. The company uses straight-line depreciation to zero salvage value for tax purposes. Assuming a 30 percent tax rate and a 10 percent discount rate, calculate the project's IRR.Answer:Dep = ($8,000,000)/6= $1,333,333/yrAnnual cash flow = Net income + noncash charges= $1.43 million + $1,333,333= $2763,333/yrCalculate the internal rate of return = 25.85%Since IRR > discount rate, accept project.15.Brunhilde Corporation is considering a project that will pay $10,000 at the end of the firstyear, $20,000 at the end of the second year, and $40,000 at the end of the third year. The project's appropriate discount rate is 11% and it will require an investment tomorrow of$50,000 if accepted. Calculate the NPV of this project.Answer:The cash flows for this project are:Year Cash flow0 ($50,000)1 10,0002 20,0003 40,000NPV (@ 11% discount rate) = $4,489.1116.You are analyzing a capital budgeting project and, as shown by ???, some numbers areunreadable. You can read the following information:Cash Flows at the end of: Year 0 = ($24,300)Year 1 = $10,800Year 2 = $ 6,000Year 3 = $ 2,600Year 4 = $ ???Year 5 = $ 9,300The Cost of Capital is 13%, the NPV = –$2,663.48 and the IRR = ???%. Your superior, ignoring the important fact that we should reject the project, is demanding to know the Cash Flow in Year 4. Calculate the cash flow in Year 4.Answer:Solve the expression:10,800/1.13 + 6,000/(1.13)2 + 2,600/(1.13)3 + ???/(1.13)4 + 9,300/(1.13)5 –24300 =–2,663.48??? = $86517.Consider the following normal, independent projects that are being considered for next year'scapital budget. The firm had been using a cost of capital of 16%, but recently found out that the correct cost of capital was 10%. Your firm uses discounted cash flow methods (NPV, IRR) to choose projects. You are given the following information.Project Initial Investment NPV@16%IRRA $1,000,000 –$200,000 13.9%B $4,000,000 –$900,000 11.1%C $2,000,000 –$180,000 8.4%Note, the above information is correct except that the NPVs were calculated using 16%instead of 10%. Which project(s) should the firm accept?Answer: Since the cost of capital has decreased, the NPV for each project will change.However, we do not have the annual cash flows that we need to recompute NPV. Insteadwe consider IRR. Now Project A and Project B have IRRs greater than the cost of capital.The firm should accept projects A and B.18.You are considering two different pieces of equipment for your business. Either of them willserve your purpose equally well; however, they have different acquisition costs, operating costs, and useful lives. The specific characteristics of each piece of equipment are:Machine A Machine B Acquisition cost $50,000 $70,000Operating cost per annum 10,000 9,000Useful life 3 years 5 years Salvage value 0 0If you anticipate remaining in business for at least 15 years, and your discount rate is 10%, which machine should you select?Answer:PV of costs (Project A) = 50,000 + 24,868.52 = $74,868.52PV of costs (Project B) = 70,000 + 34,117.08 = $104,117.08Now determine which project is the cheaper alternative. Calculate the annualized cost:Project A:PV I N Result___________-74,868.52 10 3 PMT = $30,105.74Project B:PV I N Result___________-104,117.08 10 5 PMT = $27,465.82Choose Project B since its annualized cost is lower than that of Project A.19.Consider the following normal, independent projects that are being considered for nextyear’s capital budget. The firm had been using a cost of capital of 17%, but recently found out that the correct cost of capital was 10%. Your firm uses discounted cash flow methods (NPV,IRR) to choose projects. You are given the following information about the projects.Project Initial Investment NPV@17% IRRA $2,000,000 –$1,470,000 8.4%B $6,000,000 –$1,200,000 11.1%C $1,500,000 –$450,000 13.9%Note, the above information is correct except that the NPVs were calculated using 17% instead of 10%. Which project(s) should the firm accept?Answer:Since the cost of capital has decreased, this may change our assessment of the projects.To recompute the NPV, we need the annual cash flows, which are not displayed, so weneed to take a look at IRR instead. Now Projects B & C have IRRs greater than the cost of capital. The firm should accept Project B and Project C.20.Makine Corp. is considering a new business. This business involves startup costs of $13million. This business is anticipated to generate net income of $1.35 million per year for 13 years. The company uses straightline depreciation to zero salvage value for tax purposes.Assuming a 30 percent tax rate and a 10 percent discount rate, calculate the project’s NPV.Answer:Annual depreciation = $13 million/13= $1 millionAnnual net cash flow = net income + depreciation= 1.35 million + $1 million= $2.35 millionNPV = $3,692,887Longer Problems1.Reyes Inc. is considering investing $8 million in computer equipment that is expected to havea useful life of 4 years, and is expected to reduce the firm’s labor costs by $3 million peryear. Assume that Reyes, Inc. pays a 35% tax rate on accounting profits and uses the straight-line depreciation method. What is the after-tax cash flow from the investment in years 1through 4? If the firm's hurdle rate for the project is 14% per year is it worthwhile? What are the investment's NPV and IRR?Answer:Increase in after-tax cash flow = Increase in before tax cash flow –increase in taxes= $3 million – (3 – 2 million)(0.35)= $3 million – $0.35 million= $2.65 millionNPV = PV – Initial Outlay= $7,721,338 – $8,000,000= -$278,662IRR = 12.29%Based on NPV and IRR, the project does not seem worthwhile.2.Consider a project which involves an initial outlay of $5 million and which will generate anexpected annual cash flow of $1.6 million. The cost of capital used is 13%. This project will last 6 years.(a) Compute the project's NPV(b) Compute the IRRAnswer:(a) NPV = PV - Initial Outlay= $6,396,080 – $5,000,000= $1,396,080(b) IRR = 22.56%3.Sound Wired Corporation is considering an investment of $1,000,000 in equipment forproducing a new type of compact disc. The equipment has an expected life of five years.Sales are expected to be 150,000 units per year at a price of $25 per unit. Fixed costsexcluding depreciation of the equipment are $300,000 per year, and variable costs are $13 per unit. The equipment will be depreciated over five years using the straight-line method with a zero salvage value. Working capital requirements are assumed to be 1/12 of annual sales. The market capitalization rate for the project is 17% per year, and the corporation pays income tax at the rate of 35%. What is the project's NPV? What is the break-even volume?Answer:Sales revenue = $25 per unit x 150,000 units per year= $3,750,000 per yearInvestment in NWC = 1/12 x $3,750,000= $312,500Total investment = $1,000,000 + $312,500= $1,312,500Depreciation = $1,000,000 / 5= $200,000 per yearTotal annual operating costs = $13 x 150,000 + $500,000= $2,450,000 per yearCF = net income + depreciation= (1 - 0.35)(3,750,000 - $2,450,000) + $200,000= $1,045,000 per yearNPV = PV - Initial Outlay= $3,343,317 - $1,312,500= $2,030,817To determine break-even volume:In order for NPV to be 0, what must the cash flow from operations be?N I PV FVPMT5 17% -1,312,500 312,500 ?PMT = $365,689Cash Flow = Net profit + Depreciation$365,689 = 0.65 (12Q – 500,000) + 200,000$365,689 = 7.8Q – 325,000 + 200,000$365,689 = 7.8Q – 125,000$490,000 = 7.8Q62,909 = QSo the break-even volume is 62,909.4.In anticipation of the year 2008 Olympics in Beijing, China, TingTing Inc. is consideringgetting into the souvenir business. One idea under consideration is the production of panda bear statuettes. A machine costing $60,000 will have to be purchased and this new machine will have a life of three years (for both actual and tax purposes) and after three years the machine will have zero salvage value. In terms of depreciation, the machine will bedepreciated on a straight-line basis. TingTing Inc. believes it can sell 5,000 souvenir statues per year at a price of $15 each. For each statue the variable costs are $3 and fixed expenses (this does not include depreciation) will be $4,000 per year. The cost of capital for TingTing Inc. is 14% and the tax rate is 35%. The figures given above assume that there will be no inflation.(a) Compute the series of expected cash flows.(b) Compute the project's NPV. Is it a worthwhile project?(c) What is the NPV breakeven quantity?Now assume that over the next three years the expected rate of inflation is 7% per year.Also assume that in this environment both revenues and nondepreciation expensesincrease at that rate and the cost of capital remains the same.(d) Compute the series of expected nominal cash flows.(e) Compute the NPV of nominal cash flows. Is the project worth undertaking?Answer:(a) Increase in revenue = $75,000Fixed costs (ex. dep) = $4,000Depreciation = $20,000Total Fixed Cost = $24,000Total variable costs = $15,000Total operating costs = $39,000Operating Profit = $36,000Taxes = $12,600After-tax operating profit = $23,400Net Cash Flow = $43,400 in each of the next three yrs.(b) NPV = PV – Initial Outlay= $100,759 – $60,000= $40,759The project is worthwhile(c) n I PV FV PMT3 14% –60,000 0 ?PMT = $25,844Incremental cash flow = Increase in net profit + increase in depreciation$25,844 = 0.65(12Q - 24,000) + 20,000Q = 2,749 units per year(d) CF1= $43,400(1.07) = $46,438CF2= $46,438(1.07) = $49,688.66CF3= $49,688.66(1.07) = $53,167。
兹维博迪金融学第二版试题库2TB
Chapter TwoFinancial Markets and InstitutionsThis chapter contains 49 multiple-choice questions, 20 short problems and 10 longer problems.Multiple Choice1. A market that has no one specific location is termed a(n) ________ market.(a)over-the-counter(b)geographic location(c)intermediary(d)conceptualAnswer: (a)2. ________ problems arise because parties to contracts often cannot easily monitor or control one another.(a)Payment(b)Counter(c)Incentive(d)ExchangeAnswer: (c)3. Incentive problems take a variety of forms and include:(a)moral hazard(b)adverse selection(c)principal-agent(d)all of the aboveAnswer: (d)4. The ________ problem exists when having insurance against some risk causes the insured party to take greater risk or to take less care in preventing the event that gives rise to the loss.(a)moral hazard(b)adverse selection(c)principal-agent(d)all of the aboveAnswer: (a)5. Life annuities are examples of ________ problems.(a)moral hazard(b)adverse selection(c)principal-agent(d)all of the aboveAnswer: (b)6. ________ means giving the lender the right to seize specific business assets in the event of default.(a)Increasing moral hazard(b)Increasing adverse selection(c)Collateralization of loans(d)All of the aboveAnswer: (c)7. ________ instruments are also called fixed-income instruments.(a)Debt(b)Equity(c)Derivative(d)All of the aboveAnswer: (a)8. The market for short-term debt (less than one year) is called the ________ market, and the market for long-term debt and equity securities is called the ________ market.(a)capital; money(b)money; capital(c)fixed-income; money(d)derivative; equityAnswer: (b)9. ________ securities are financial instruments that derive their value from the prices of one or more other assets.(a)Debt(b)Equity(c)Derivative(d)Fixed-incomeAnswer: (c)10. A call option gives its holder the right to ________ some asset at a specified price on or before some specified expiration date.(a)sell(b)buy(c)loan(d)borrowAnswer: (b)11. A put option gives its holder the right to ________ some asset at a specified price on or before some specified expiration date.(a)sell(b)buy(c)loan(d)borrowAnswer: (a)12. ________ contracts oblige one party to the contract to buy, and the other party to sell, some asset at a specified price on some specified date.(a)Options(b)Uncertainty(c)Money market(d)ForwardAnswer: (d)13.The ________ curve depicts the relation between interest rates on fixed-income instruments issued bythe U.S. Treasury and the maturity of the instrument.(a)long-term(b)short-term(c)yield(d)exchange rateAnswer: (c)14.If the short-term rates are higher than the long-term rates, then the yield curve is ________.(a)upward sloping(b)downward sloping(c)horizontal(d)verticalAnswer: (b)Questions 15 and 16 are intended to be calculated as a pair.15.Suppose you are a French investor, who wants a safe investment in terms of francs. You are investingfor one year and the interest rate on a one-year French government bond is 5% and at the same time it is 9% on a U.S. government bond. The exchange rate is currently 6.15 French francs to the dollar.Suppose you invest $1,000 in a U.S. bond. Also suppose that a year from now the French franc/dollar exchange rate is 6.50 French francs to the dollar. What will be the realized French franc rate of return on the U.S. bond?(a)5.69%(b)9.00%(c)15.2%(d)7.00%Answer: (c)16.In question 15, what would the exchange rate at year’s end have to be in order for the French investorto earn exactly 4% per year on the investment in U.S. bonds?(a)6.20 FF/$(b)5.87 FF/$(c)6.40 FF/$(d)5.42 FF/$Answer: (b)Use the following yield data to answer questions 17 and 18.2/29/98Treasury 1-10 yr 5.58%10+ yr 5.72Corporate 1-10 yr High Qlty 5.98Med Qlty 6.17Corporate 10+ yr High Qlty 6.26Med Qlty 6.5717. Calculate the yield spread for Treasury bonds with maturity 1-10 year and corporate bonds of high quality of the same maturity.(a)11.56%(b)0.68%(c)0.59%(d)0.40%Answer: (d)18. Calculate the yield spread for Treasury bonds with maturity 10+ years and corporate bonds of medium quality of the same maturity.(a)12.29%(b)0.85%(c)0.54%(d)0.45%Answer: (b)19.You invest in a stock that costs $45.50 per share. It pays a cash dividend during the year of $1.20 andyou expect its price to be $49 at year’s end. What is your expected rate of return if you se ll the stock for $49 at the end of the year?(a)2.64%(b)7.69%(c)10.33%(d)–5.05%Answer: (c)20.You invest in a stock that costs $45.50 per share. It pays a cash dividend during the year of $1.20 andyou expect its price to be $49 at year’s end. What is your expecte d rate of return if you do not sell the stock at the end of the year?(a)2.64%(b)7.69%(c)10.33%(d)–5.05%Answer: (c)21.You invest in a stock that costs $45.50 per share. It pays a cash dividend during the year of $1.20 andyou expect its price to be $49 at year’s end. What is your realized rate of return if the stock’s price is actually $42 at year’s end?(a)–5.05%(b)18.02%(c)10.33%(d)5.05%Answer: (a)22. The ________ the standard deviation, the ________ the volatility of the rate of return.(a)higher, lower(b)lower, higher(c)higher, higher(d)none of the aboveAnswer: (c)23.________ is an investment strategy that seeks to match the returns of a specified stock market index.(a)Indexing(b)Benchmarking(c)Replicating(d)DiversifyingAnswer: (a)24. Suppose the risk-free nominal interest rate on a one-year U.S. Treasury bill is 7% per year and the expected rate of inflation is 3% per year. What is the expected real rate of return on the T-bill?(a)4%(b)3.88%(c)1.34%(d)3.74%Answer: (b)25. Suppose the risk-free nominal interest rate on a one-year U.S. Treasury bill is 6% per year and the expected rate of inflation is 4% per year. What is the expected real rate of return on the T-bill?(a)2%(b)5%(c)1.92%(d)1.89%Answer: (c)26. Suppose that the real rate of interest on a TIPS is 4.5% per year and the expected rate of inflation in the U.S. is 5% per year. What is the expected nominal rate of return on these bonds?(a)0.476%(b)4.75%(c)9.73%(d)9.75%Answer: (c)27. Currently you have a bank account containing $6,000, which earns interest at a rate of 4% per year. You also have an unpaid balance on your credit card of $3,000 on which you are paying an interest rate of 18% per year. If the time frame is one year, the arbitrage opportunity you face is:(a)$420(b)$540(c)$120(d)$300Answer: (a)28. A ________ interest rate is denominated in units of some currency, whereas a ________ interest rate is denominated in units of some commodity or “basket” of goods and services.(a)real, nominal(b)real, treasury(c)nominal, real(d)treasury, realAnswer: (c)29. ________ are firms whose primary function is to help businesses, governments, and other entities raise funds to finance their activities by issuing securities.(a)Closed-end funds(b)Investment banks(c)Asset management funds(d)Open-end fundsAnswer: (b)30. Currently, you have $24,000 in a bank account earning an interest rate of 4% per year. At the same time you have an unpaid balance on your credit card of $12,000 on which you are paying an interest rate of 18% per year. If the time frame is one year, the arbitrage opportunity you face is:(a)$2,160(b)$1,200(c)$480(d)$1,680Answer: (d)31. In the United States, the ________ establishes the precise disclosure requirements that must be satisfied for a public offering of securities.(a)Financial Accounting Standards Board(b)World Bank(c)Federal Reserve(d)Securities and Exchange CommissionAnswer: (d)32. Investment professionals typically use a(n) ________ index as a benchmark for measuring the performance of common stock mutual funds.(a)inflation adjusted(b)firm-size weighted(c)market-weighted(d)book-weightedAnswer: (c)33. The Dow Jones Industrial Index has some major defects, which include:(a)It is not broadly diversified enough to accurately reflect the wide spectrum of stocks in theUnited States.(b)It corresponds to a portfolio strategy that is unsuitable as a performance benchmark.(c)It only includes the 30 largest corporations.(d)(a) and (b)Answer: (d)34. Interest-rate arbitrage is ________ at a lower rate and ________ at a higher rate.(a)borrowing, lending(b)borrowing, defaulting(c)defaulting, lending(d)lending, borrowingAnswer: (a)35. ________ invest their funds in a new businesses and help the management team get the firm to the point at which it is ready to “go public.”(a)Investment banks(b)Venture capitalists(c)Asset management firms(d)Mutual fundsAnswer: (b)36.The case where there is an imbalance in the exchange of information about a business opportunity isknown as ________.(a)information symmetry(b)information asymmetry(c)information assets(d)(a) and (c)Answer: (b)37.Which of the following represents a defined-contribution pension plan?(a) A pension plan into which the employer and employee make regular contributions.(b) A pension plan whose benefit is determined by a formula that takes into account years of service,wages, and salary.(c) A pension plan whose benefit formula is 1% of retirement salary for each year of service.(d)All of the aboveAnswer: (a)38.Which of the following are characteristic of a mutual fund?(a)professional management(b)diversification(c)efficient record keeping and administration(d)all of the aboveAnswer: (d) asset value is defined as the ________.(a)future value of all assets held divided by the number of shares outstanding(b)book value of all securities held divided by the number of shares outstanding(c)market value of all securities held divided by the number of shares outstanding(d)book value of all assets held divided by the number of shares outstandingAnswer: (c)40.Which of the following describes a money market instrument?a.long-termb.liquidc.high-riskd.all of the aboveAnswer: (b)41.A country’s ________ provides the supply of local currency and operates the clearing system for thebanks.(a)stock exchange(b)underwriter(c)central bank(d)investment bankAnswer: (c)42.Which of the following statements is most correct?(a)open-end mutual funds and closed-end funds are identical(b)open-end mutual funds stand ready to redeem or issue shares at NAV(c)closed-end mutual funds stand ready to redeem or issue shares at NAV(d)mutual funds provide a poor means of diversificationAnswer: (b)43.Which of the following statements is most correct?(a)closed-end mutual funds do not redeem or issue shares at NAV(b)closed-end mutual fund prices can differ from NAV(c)shares of closed-end funds are traded through brokers(d)all of the above are correctAnswer: (d)44.In the United States, the ________ prohibited commercial banks from engaging in most underwritingactivities.(a)Investment Bank Act of 1909(b)SEC Act(c)Glass Steagall Act of 1933(d)Commercial Bank Act of 1952Answer: (c)45.Rules for trading securities serve the function of ________.(a)recognizing when government inaction is the best choice(b)standardizing procedures to keep transaction costs low(c)presenting financial information in a standardized format(d)establishing arbitrary rules to ensure the maximum revenue from transaction feesAnswer: (b)46.In Germany, the central bank is called the ________.(a)Riksbank(b)Bundesbank(c)Bank of Germany(d)ExchequerAnswer: (b)47.For the period 1926-2003, which of the following asset classes provided the highest average rate ofreturn?(a)Long-term U.S. Treasury bonds(b)U.S. T-bills(c)Inflation(d)Small stockAnswer: (d)48.For the period 1926-2003, which of the following asset classes provided the lowest volatility of therate of return?(a)Long-term U.S. Treasury bonds(b)U.S. T-bills(c)Inflation(d)Small stockAnswer: (b)49.The ________ is the unit of account for computing the real rate of return.(a)nominal interest rate on stock(b)standardized basket of consumption goods(c)country’s rate of inflation(d)none of the aboveAnswer: (b)Short Problems1. Give a brief definition of financial intermediaries. Provide three examples of financial intermediaries and the products they offer.Answer: Financial intermediaries are defined as firms whose primary business is to provide financial services and products. Among the main types of intermediaries are banks, investment companies and insurance companies. Products offered include checking accounts, commercial loans, mortgages, mutual funds and a wide range of insurance contracts.Consider the following yield data and answer questions 2 and 3:2/29/98Treasury 1-10 yr 5.58%10+ yr 5.72Corporate 1-10 yr High Qlty 5.98Med Qlty 6.17Corporate 10+ yr High Qlty 6.26Med Qlty 6.572. Calculate the yield spread for Treasury bonds with maturity 10+ years and corporate bonds of high quality of the same maturity.Answer: Yield Spread = 6.26 – 5.72%= 0.54%3. Calculate the yield spread for Treasury bonds with maturity 1-10 years and corporate bonds of medium quality of the same maturity.Answer: Yield Spread = 6.17 – 5.58%= 0.59%4. Discuss the level and shape of the Treasury yield curves that have appeared in the latest media.Answer: Answers will vary depending on media announcements at the time.5. You invest in a stock that costs $42.50 per share. It pays a cash dividend during the year of $1.80 and you expect its price to be $45 at year’s end. What is your expected rate of return if you sell the stock for $45 at the end of the year?Answer: Expected rate of return = Ending Price – Beginning Price + Cash DividendBeginning Price= $45 - $42.50 + $1.80$42.50= 10.12%6. Refer to Question 5. What if you do not sell the stock at the end of the year?Answer: You measure the rate of return exactly the same way, whether or not you sell. The price appreciation is as much a part of your returns the dividend. That you choose to keep it does not change the fact that you could convert it into $45 cash at the end of the year.7. You invest in a stock that costs $42.50 per share. It pays a cash dividend during the year of $1.80 and you expect its price to be $45 at year’s end. What is your realized rate of return if the stock’s price is actually $39 at year’s end?Answer: Realized rate of return = Ending Price – Beginning Price + Cash DividendBeginning Price= $39 - $42.50 + $1.80$42.50= -4%8. Suppose the risk-free nominal interest rate on a one-year U.S. Treasury bill is 5% per year and the expected rate of inflation is 3%. What is the expected real rate of return on the T-bill?Answer: Real rate = Nominal interest rate – Rate of Inflation1 + Rate of inflation= 0.05 – 0.031 + 0.03= 0.021.03= 1.94%9. Suppose you are a Dutch investor, who wants a safe investment in terms of Guilders. You are investing for one year and the interest rate on a one-year Netherlands government bond is 6% and at the same time it is 9% on a U.S. government bond. The exchange rate is currently 2.05 Guilders to the dollar. Suppose you invest $1,000 in a U.S. bond. Also suppose a year from now that the Guilder/dollar exchange rate is 2.15 Guilders to the dollar. What will be the realized Dutch rate of return on the U.S. bond?Answer: Dutch realized rate of return = $1090 x Future Guilder price of dollar – 20502050= $1090 x 2.15 – 20502050= 14.32%10. Refer to Question 9. What does the exchange rate have t o be at year’s end for the Dutch investor to earn exactly 12% per year on the investment in U.S. bonds?Answer: Dutch rate of return = $1090 x Future Guilder price of dollar – 205020500.12 = $1090 x Guilder price – 20502050Future price of Guilder = 2.11 Guilder per dollar11. Distinguish between nominal interest rates and real interest rates.Answer: The nominal interest rate is the promised amount of money you receive per unit you lend.The real rate of return is the nominal interest rate you earn corrected for the change in purchasing power of money. A nominal interest rate is denominated in units of some currency; a real interest rate is denominated in units of some commodity or basket of goods and services (commonly, whatever basket is used to compute the CPI).12.Discuss the costs associated with trading stocks and why index funds provide a low-cost advantage.Answer: Costs can come in the form of:1.the fund’s expense ratio (which includes advisory fees, distribution charges,and operating expenses).2.Portfolio transaction costs (brokerage and after trading costs).One of the prime advantages of an index fund should be its low cost. An index fund should pay only minimal advisory fees, keep operating expenses at the lowest possible level, and should keep portfolio transaction costs at minimal levels.13.Discuss the investment approach known as indexing.Answer: Indexing is an investment approach that seeks to match the investment returns of aspecified stock market index. When indexing, an investment manager attempts to replicate theinvestment results of the target index by holding all – or a representative sample – of thesecurities in the index. Indexing is a passive investment approach emphasizing broaddiversification and low portfolio trading activity.14.Outline the purpose of a mutual fund and describe the advantages of investing with a mutual fund.Answer: A mutual fund is one that pools the financial resources of many small savers and invests their money in securities. A mutual fund has substantial economies of scale in record keeping and in executing purchases and sales of securities and offers its customers a more efficient way ofinvesting in securities than the direct purchase and sale of securities in the markets. It alsoprovides an efficient means of diversification.15.Define interest-rate arbitrage.Answer: Interest-rate arbitrage is borrowing at a lower rate and lending at a higher rate.16.Describe the main features of the IMF and the Bank for International Settlements.Answer: The Bank for International Settlements (BIS) promotes uniformity of regulations. The IMF monitors economic and financial conditions in member countries, provides technicalassistance, establishes rules for international trade and finance, provides a forum forinternational consultation and provides individual members a lengthened time (if necessary) tocorrect imbalances in their payments to other countries.17.You invest in a stock costing $60 per share. It pays a cash dividend during the year of $2.50, and youexpect its price to be $85 at year’s end. Calculate your expected rate of return. If the stock price at the end of the year is actually $50, calculate your realized rate of return.Answer: Expected rate of return = ($2.50 + $85 - $60)/$60 = 45.8%Realized rate of return = ($2.50 + $50 - $60)/$60 = -12.5%18.You invest in a stock costing $45 per share. It pays a cash dividend of $3.20 during the year, and youexpect its price to be $60 at the end of the year. If the price is actually $42 at the end of the year, calculate your realized rate of return.Answer: Realized rate of return = ($3.20 + $42 - $45)/$45 = 0.4%19.Suppose you have $15,000 in a bank account earning an interest rate of 5% per year. At the same timeyou have an unpaid balance on your credit card of $8,000 for which you are paying 18% interest.What is the arbitrage opportunity you face?Answer: If you take $8,000 out of your bank account and pay off the credit card you give up0.05% x $8,000 = $400, but you can save 0.18 x $8,000 = $1,440 in interest expenses. So thearbitrage opportunity is worth $1,040 per year.20.Suppose the real rate of interest on a TIPS is 4% per year, and the expected U.S. inflation rate is 3.5%per year. What is the expected nominal rate of return on these bonds?Answer: (1+ nominal rate) = (1 + real rate) x (1 + inflation)= (1.04) x (1.035)= 1.0764nominal rate = 7.64% per yearLonger Problems1.Discuss the four main factors that determine rates of return in a market economy.Answer: The four main factors that should be discussed are:•The productivity of capital goods – expected rates of return on mines, dams, roads, bridges, factories, machinery and investments•The degree of uncertainty regarding the productivity of capital goods•The time preferences of people•Risk aversion2.Discuss the role of the financial intermediary and give two examples.Answer: A financial intermediary is an entity whose primary business is to provide customers with financial products that cannot be obtained more efficiently by transacting directly in securitiesmarkets.Examples include banks, insurance companies, mutual funds, investment companies, venture capital firms, asset management firms, and pension and retirement funds.3.Suppose that you have $30,000 in a bank account earning an interest rate of 6% per year. At the sametime you have an unpaid balance on your credit card of $14,000 on which you are paying an interest rate of 18% per year. What is the arbitrage opportunity you face?Answer: You could take $14,000 out of your bank account and pay down your credit card balance.You would give up 6% per year in interest earnings ($840 per year), but you would save 18% per year in interest expenses ($2,520 per year). Therefore, the arbitrage opportunity is $1,680 per year.e the data in the table below to compute both the DIJ-type index and the market-weighted index fora hypothetical two-stock index. Discuss which index more accurately reflects the reality of the market.Answer:DJI type index = Average of current stock prices x 100Average of stock prices in base year= (30 + 2)/2 x 100(20 + 10)/2= 106.67, indicating an increase of 6.67%market-weighted index = (0.8 x 30/20) + (0.2 x 2/10) x 100= (1.2 + 0.04) x 100= 124, indicating an increase of 24%The market-weighted index shows a 24% increase, which reflects what has actually happened to the total market value of all stocks: 2.5 billion to 3.1 billion is growth of 0.6 billion, which as a percent is(0.6)/(2.5) = 24%5.You invest in a stock that pays $2 per quarter and costs you $50.50 per share. At the end of the yearyou expect the stock price to be $59.50. What is the expected rate of return on this stock? What is the realized rate of return if the price of the stock is $52 at the end of the year?Answer:Expected rate of return = $2(4) + $59.50 - $50.50$50.50= 33.66% per yearRealized rate of return = $2(4) + $52 - $50.50$50.50= 18.81% per year6.Outline the six core functions performed by the financial system.Answer:The six core functions performed by the financial system are:1.To provide ways of managing risk.2.To provide ways to transfer economic resources through time, across borders, and amongindustries.3.To provide ways of clearing and settling payment to facilitate trade.4.To provide a mechanism for the pooling of resources and for the subdividing of shares in variousenterprises.5.To provide ways of dealing with the incentive problems created when one party to a transactionhas information that the other party does not, or when one party acts as an agent for another.6.To provide price information to help coordinate decentralized decision making in various sectorsof the economy.7. Outline the basic types of financial assets that are traded in the markets.Answer:Debt instruments – issued by anyone who borrows money – firms, government, and households.Equity – the claim of the owners of a firm. Corporations who issue equity securities are issuingcommon stock.Derivatives – such as options and futures contracts that derive their value from the prices of one or more other assets.8.Describ e how a banking panic can cause a “contagion” to set in the economy.Answer:If there is a banking panic and if a bank does not have sufficient funds to pay off its depositors, then “contagion” can set in, and other banks are faced with a run. If there is a “flight to currency,” then a contagion problem occurs for the banking system as a whole, and the people refuse to hold deposits of any bank and insist on having currency.9. Discuss the rates of return and volatility of U.S. T-bills, U.S. Treasury bonds, and large stock overthe period of 1926-2003.Answer:From a historical perspective, T-bills have proved to be the least risky asset class, whereas large stock has proved to be the most risky asset class.Large stocks (as measured in the S&P 500 stock portfolio) have provided an average rate of return of12.25% between 1926 and 2003, whereas T-bills have provided an average rate of return of 3.79%and 5.64% for U.S. Treasury bonds.Large stock returns, with a standard deviation of 20.5%, have also been the most volatile asset class between 1926 and 2003. U.S. Treasury bonds had a standard deviation of 8.19% over the sameperiod and U.S. bills have been the least volatile asset class, with a standard deviation of 3.18%.e the data in the table below to compute both the DIJ-type index and the market-weighted index fora hypothetical two-stock index. Discuss which index more accurately reflects the reality of the market.Answer: DJI type index = Average of current stock prices x 100Average of stock prices in base year= (60 + 120)/2 x 100(110 + 60)/2= 105.88, indicating an increase of 5.58%market-weighted index = (0.79 x 60/100) + (0.21 x 120/60) x 100= (0.43 + 0.42) x 100= 85, indicating a decrease of 15%The market-weighted index shows a 15% decrease, which more accurately reflects what has actually happened to the total market value of all stocks: 28 to 24 billion is a loss of 4 billion, which as a percent is -4/28 =-14.29%.2-21。
兹维博迪金融学第二版试题库15TB
Chapter FifteenMarkets for Options and Contingent ClaimsThis chapter contains 50 multiple choice questions, 15 short problems, and 9 longer problems. Multiple Choice1.An option to buy a specified item at a fixed price is a(n) ________; an option to sell is a ________.(a)put; call(b)spot option, call(c)call; put(d)put; spot optionAnswer: (c)2.A(n) ________ option can be exercised up to and on the expiration date, whereas a(n) ________option can only be exercised on the expiration date.(a)American-type; Bermudan-type(b)American-type; European-type(c)European-type; American-type(d)Bermudan-type; European-typeAnswer: (b)3.The difference between exercise price and current stock price is the tangible value of an ________,and the difference between the current stock price and exercise price is the tangible value of an ________.(a)out of the money put option; in the money call option(b)in the money put option; out of the money call option(c)in the put money option; at the money call option(d)at the money put option; in the money put optionAnswer: (b)15-14. A call option is said to be “out of the money” if its ________.(a)exercise price is equal to the price of the underlying stock(b)current stock price is greater than its strike price(c)strike price is greater than the current stock price(d)strike price is less than its current stock priceAnswer: (c)5.The time value of an option is ________.(a)the difference between an option’s stock price and its tangible value(b)the difference between the current stock price and exercise price(c)the difference between the exercise price and the stock price(d)the difference between an option’s market price and its tangible valueAnswer: (d)6.The prices of puts are ________ the higher the exercise price, and the prices of calls are ________ thehigher is the exercise price.(a)lower; higher(b)higher; lower(c)lower; lower(d)higher; higherAnswer: (b)15-2Questions 7 through 10 refer to the following hypothetical information:Listing of LePlastrier Options (symbol: LLB)(Prices listed are closing prices.)February 27, 20097.What is the tangible value of the April LLB 110 put?(a)0(b)0.25(c)3.25(d)7.375Answer: (b)8.What is the tangible value of the February LLB 107 call?(a)0(b)5.625(c)–0.75(d)2.75Answer: (d)15-39.In what state is the January LLB 107 call?(a)in-the-money(b)out-of-the-money(c)at-the-money(d)zero stateAnswer: (a)10.In what state is the February LLB 113 put?(a)in-the-money(b)out-of-the-money(c)at-the-money(d)zero stateAnswer: (a)11.Which is the correct formula describing the put-call parity relation?(a)S + C =E(1 + r)+ Pr(b)S + P = Er+ C T(c)S + P =E(1 + r)+ CT(d)S + C = Er+ P TAnswer: (c)12.A “protective-put” strategy is where one ________.(a)buys a share of stock and a call option(b)buys a put option and a call option(c)buys a put option and a share of stock(d)sells a put option and buys a call optionAnswer: (c)15-413.SPX options are effectively calls or puts on a hypothetical index fund that invests in a portfoliocomposed of the stocks that make up the S&P 500 index, each of the 500 companies ________.(a)equally represented with respect to the others(b)in proportion to the total value of its shares outstanding(c)in proportion to the trading volume of its shares(d)rotating on a proportional basis dependent on earningsAnswer: (b)14.The SPX contract specifies that if the call option is exercised, the owner of the options __________.(a)pays a cash settlement of $100 times the difference between the index value and the strikeprice(b)receives a cash payment of $100 times the difference between the index and tangible values(c)receives a cash payment of $100 times the difference between the index value and the strikeprice(d)receives a payment of index shares $100 times the difference between the index value andstrike priceAnswer: (c)15.The stock of Deneuvre Ltd, currently lists for $370 a share, while one-year European call options onthis stock with an exercise price of $150 sell for $290 and European put options with the sameexpiration date and exercise price sell for $58.89. Infer the yield on a one-year zero-coupon U.S.government bond sold today.(a)2.49%(b)8.00%(c)11.11%(d)24.90%Answer: (b)16.The stock of Fellini Ltd, currently lists for $550 a share, while one-year European call options on thisstock with an exercise price of $250 sell for $380 and European put options with the same expiration date and exercise price sell for $56.24. Infer the yield on a one-year zero-coupon U.S. government bond sold today.(a)6.67%(b)10.5%(c)19.76%(d)23.76%Answer: (b)15-517.Consider a stock that can take only one of two values a year from now, either $250 or $90. Alsoconsider a call option on the stock with an exercise price of $160 expiring in one year. At expiration, the call will pay either $90 if the stock price is $250 or it will pay nothing if the stock price is $90.Calculate the call option’s hedge ratio.(a)0.3600(b)0.4444(c)0.5625(d)0.6400Answer: (c)18.Consider a stock that can take only one of two values a year from now, either $320 or $130. Also,consider a call option on the stock with an exercise price of $200 expiring in one year. At expiration, the call will pay either $120 if the stock price is $320 or it will pay nothing if the stock price if $130.The risk-free rate is 5% per year. Calculate the hedge ratio.(a)hedge ratio = 0.3750(b)hedge ratio = 0.4063(c)hedge ratio = 0.6000(d)hedge ratio = 0.6316Answer: (d)19.As one attempts to improve the two state model, we can further subdivide time intervals into shorterincrements and build the ________.(a)Binomial option pricing model(b)Black-Scholes model(c)Discrete model(d)a and bAnswer: (d)20.When the ________ price of the underlying stock equals the ________, this reasoning leads to thesimplified Black-Scholes formula.(a)future; price of the call(b)current; future value of the strike price(c)current; present value of the strike price(d)future; price of the putAnswer: (c)15-621.Which is the correct formula using Black-Scholes method for a European call option on a non-dividend paying stock?(a)C = N(d1)S + N(d2)Ee-rT(b)C = N(d2)S + N(d1)Ee-rT(c)C = N(d1)S–N(d2)Ee-rT(d)C = N(d1)E–N(d2)Se-rTAnswer: (c)e the Black-Scholes formula to find the value of a European call option on the following stock:Time to maturity 6 monthsStandard deviation 50 percent per yearExercise price 60Stock price 60Interest rate 10 percent per yearAssume it is a non-dividend paying stock. The value of a call is ________.(a)$6.83(b)$9.76(c)$9.96(d)$14.36Answer: (b)e the Black-Scholes formula to find the value of a European call option on the following non-dividend paying stock:Time to maturity 4 monthsStandard deviation 45 percent per yearExercise price 65Stock price 60Interest rate 11 percent per year(a)$5.09(b)$7.75(c)$9.66(d)$11.43Answer: (a)15-724.The Black-Scholes formula has four parameters that are directly observable and one that is not.Which of the following parameter is not directly observable?(a)exercise price(b)stock price(c)volatility of the stock return(d)risk-free interest rateAnswer: (c)25.As a financial analyst at Dodgie Brothers investment house, you are asked by a client if she shouldpurchase European call options on Angel Heart Ltd shares that are currently selling in U.S. dollars for $45.00. The options on Angel Heart Ltd have an exercise price of $65.00. The current stock price for Angel Heart is $70 and the estimated rate of return variance of the stock is 0.09. If these options expire in 35 days and the riskless interest rate over the period is 6%, what should your client do?(a)The call is valued at $19.63; this is less than $70 and not worth buying.(b)The call is valued at $5.37; this is less than $45 and not worth buying.(c)The call is valued at $70; this is greater than $45 and worth buying.(d)The call is valued at $15; this is greater than $6 and worth buying.Answer: (b)e the linear approximation of the Black-Scholes model to find the value of a European call optionon the following stock:Time to maturity 6 monthsStandard deviation 0.3Exercise price 50Stock price 50Interest rate 10 percent per yearWhat is the discrepancy between the value obtained from the linear approximation and traditional Black-Scholes formula?(a)Linear approx = $3.01; Discrepancy = $1.0154(b)Linear approx = $4.24; Discrepancy = $1.2016(c)Linear approx = $3.01; Discrepancy = $1.2016(d)Linear approx = $4.76; Discrepancy = $1.2153Answer: (b)15-8e the Black-Scholes formula to find the value of a European call option and a European put optionon the following stock:Time to maturity 0.5Standard deviation 30% per yearExercise price 100Stock price 100Risk-free interest rate 10 percent per yearThe values are closest to:(a)Value of call = $16.73; Value of put = $7.22(b)Value of call = $12.27; Value of put = $9.32(c)Value of call = $10.90; Value of put = $6.02(d)Value of call = $8.28; Value of put = $3.40Answer: (c)e the Black-Scholes formula to find the value of a European call option and a European put optionon the following stock:Time to maturity 0.5Standard deviation 42% per yearExercise price 100Stock price 110Risk-free interest rate 12 percent per yearThe values are closest to:(a)Value of call = $29.26; Value of put = $7.95(b)Value of call = $21.53; Value of put = $5.73(c)Value of call = $10.30; Value of put = $13.90(d)Value of call = $8.28; Value of put = $3.40Answer: (b)29.Call options become more valuable as the exercise price ________, as the stock price ________, asthe interest rate ________, and as the stock’s volatility ________.(a)increases; increases; increases; increases(b)increases; decreases; decreases; increases(c)decreases; increases; decreases; increases(d)decreases; increases; increases; increasesAnswer: (d)15-930.Implied volatility is the value of σ that makes ________ of the option equal to the value computedusing the option-pricing formula.(a)the exercise price(b)the observed market price(c)the historical market price(d)the call valueAnswer: (b)31.Calculate the implied volatility of a stock which has a time to maturity of 3 months, a risk-free rate of8%, exercise price of $70, current stock price of $65, and does not pay dividends. Use the linear function of the option price. The value of the call is $6.50(a)≈ 15%(b)≈ 35%(c)≈ 46%(d)≈ 50%Answer: (d)32.Calculate the implied volatility of a stock using the linear function of the option price for thefollowing data: time to maturity = 4 months, call value = $5.80, stock price = $50 and risk-free rate = 10%. The value is closest to:(a)≈ 14.54%(b)≈ 36.78(c)≈ 45%(d)≈ 50.50%Answer: (d)33.The same methodology used to price options can be used to value many other contingent claims,including:(a)corporate stocks and bonds(b)loan guarantees(c)real options embedded in research and development(d)all of the aboveAnswer: (d)15-1034.The replication strategy used in contingent claims analysis is known as:(a)claims financing(b)self-financing(c)replicating financing(d)risk adjusted financingAnswer: (b)Questions 35-37 refer to the following information:Crabby Tabby Corporation is in the cat food business and has a total market value of $140 million. The corporation issues two types of securities: common stock (850,000 shares) and zero-coupon bonds (95,000 bonds each with a face value of $1,000). The bonds are considered to be default-free and mature in one year. The risk-free interest rate is 4.5% per year.35.What is the market value of Crabby Tabby’s bonds?(a)$99,275,000(b)$95,000,000(c)$92,476,091(d)$90,909,091Answer: (d)36.What is the market value of Crabby Tabby’s stocks?(a)$45,000,000(b)$43,062,201(c)$46,976,946(d)$49,090,909Answer: (d)37.What is Crabby Tabby’s share price?(a)$52.94(b)$55.26(c)$57.75(d)$58.26Answer: (b)15-11Questions 38-40 refer to the following information:The Callas Corporation is in the music publishing business, and has a total market value of $115 million. The corporation issues two types of securities: common stock (800,000 shares) and zero-coupon bonds (90,000 bonds each with a face value of $1,000). The bonds are considered to be default-free and mature in one year. The risk-free interest rate is 6% per year.38.What is the market value of Callas’ bonds?(a)$95,400,000(b)$90,000,000(c)$84,905,650(d)$83,333,333Answer: (c)39.What is the market value of Callas’ stock?(a)$30,094,340(b)$27,042,314(c)$25,000,000(d)$19,600,000Answer: (a)40.What is Callas’ share price?(a)$24.50(b)$31.25(c)$37.62(d)$41.66Answer: (c)15-1241.The Gobbi Corporation has a total market value of $120 million. The corporation issues two types ofsecurities: common stock (950,000 shares) and zero-coupon bonds (95,000 bonds, each with a face value of $1,000). There is risk associated with the bonds, however, because the bonds mature in one year. What do the stockholders receive a year from now, if the value (denoted V1) of the firm’s assets falls short of $95 million?(a)The company will default on the debt and the stockholders will get nothing.(b)The company will default on the debt and the stockholders will receive all of the firm’s assets.(c)The stockholders receive V1– $95 million.(d)None of the above.Answer: (a)42.Lenski Corporation has issued two types of securities: common stock (2 million shares) and zero-coupon bonds with an aggregate face value of $95 million (95,000 bonds each with a face value of $1,000). Lenski’s bonds mature one year from now. If we know that the total market value of Lenski Corporation is $200 million, the risk-free interest rate is 7% per year and the volatility of the firm’s asset value is 0.35, then what are the separate market values of Lenski Corporation stocks and bonds?(a)E = $105 million; D = $95 million(b)E = $111.58 million; D = $82.64 million(c)E = $88.42 million; D = $111.58 million(d)E = $111.58 million; D = $88.42 millionAnswer: (d)43.Lenski Corporation has issued two types of securities: common stock (2 million shares) and zero-coupon bonds with an aggregate face value of $95 million (95,000 bonds each with a face value of $1,000). Lenski’s bonds mature one year from now. If we know that the total market value of Lenski Corporation is $200 million, the risk-free rate interest rate is 7% per year and the volatility of the firm’s asset valu e is 0.35, then what is the continuously compounded promised rate of interest on the debt?(a)7.00% per year(b)7.18% per year(c)7.44% per year(d)10.00% per yearAnswer: (b)15-13Questions 44-40 refer to the following information:The Dolce Company is in the confectionary business, and has a total market value of $80 million. The corporation issues two types of securities: common stock (700,000 shares) and zero-coupon bonds (60,000 bonds each with a face value of $1,000). The bonds are considered to be default-free and mature in one year. The risk-free interest rate is 5% per year and the volatility of the firm’s asset value is 0.3.44.What is the market value of the firm’s equity?(a)$1.31 million(b)$22.93 million(c)$24.24 per year(d)$35.55 per yearAnswer: (c)45.What is th e market value of the firm’s debt?(a)$44.45 million(b)$55.76 million(c)$57.07 million(d)$60 millionAnswer: (b)46.What is the continuously compounded promised rate of interest on the debt?(a)5.03% per year(b)7.33% per year(c)8.33% per year(d)28.77% per yearAnswer: (b)47.Suppose that a bank undertakes to guarantee the debt of Dolce against default. What is the fair marketvalue of this guarantee?(a)$1.11 million(b)$1.21 million(c)$1.31 million(d)$3.50 millionAnswer: (c)15-1448.In the United States, the largest provider of financial guarantees is ________.(a)insurance companies(b)banks(c)government and government agencies(d)real estate investment trustsAnswer: (c)49.An implicit guarantee is involved any time a loan is made and the fundamental identity is:(a)Risky Loan = Default-Free Loan + Loan Guarantee(b)Risky Loan = Default-Free Loan – Loan Guarantee(c)Risky Loan = Default-Free Loan x Loan Guarantee(d)Risky Loan = Default-Free Loan / Loan guaranteeAnswer: (b)50.A high-grade bond has a ________ guarantee component, compared with a junk bond that typicallyhas a ________ component.(a)very small; large(b)large; very small(c)large; large(d)small; smallAnswer: (a)15-15Shorter Problems1.Refer to the following table to answer this question.Listing of LePlastrier Options (symbol: LLB)(Prices listed are closing prices.)February 27, 2009Answer the following questions:(a) For the call options, what happens to the option prices as the exercise price increases?The puts?(b) What is the price of a February LLB 110 put?(c) What is the option price of a January LLB 107 call?(d) What is the tangible value of an April LLB 113 put?(e) What is the tangible value of a February LLB 110 call?(f) In what state is the January LLB 113 call?(g) In what state is the April LLB 110 put?Answer:(a) For call options, we notice that as the exercise price increases, the price of thecall decreases. For the put options, we notice that as the exercise price increases,the price of the put increases.(b) February LLB 110 put: = $5.875(c) January LLB 107 call:= $3.375(d) The April LLB 113 put is in the money.Tangible value = $113.00 – $109.875 = $3.12515-1615-17(e) The February LLB 110 call is out of the money, so its tangible value is zero. (f) January LLB 113 call: Strike price > Stock price, so this option is out of the money. (g) April LLB 110 put: Strike price > Stock price, so this option is in the money.2. Is it possible to insure against downside price risk? If so, describe how you would achieve this. Answer: Yes it is. Buy a share of stock and a put option. Such an approach is called a protectiveput strategy.3. The stock of LaDolce Vita Ltd, currently lists for $350.00 a share, while one-year European calloptions on this stock with an exercise price of $150 sell for $280 and European put options with the same expiration date and exercise price sell for $69.53. (a) Infer the yield on a one-year zero-coupon U.S. government bond sold today. (b) If the yield is actually at 8%, construct a profitable trade to exploit the potential forarbitrage.Answer: Use the put-call parity relation. (a) S + P =E(1 + r T) + C350 + 69.53 = 1501 + r+ 280r 7.5%(b) Yield is actually 8%. A potential trade to exploit the potential for arbitrage is as follows:350 + 69.53 = E/1.08 + 280 E = 150.69So the bonds are underpriced by approximately 69 cents.We might want to acquire a long position in bonds, which consists of long positions in one share and one put and writing one call. This will earn an immediate revenue. = $350 + 69.53 – 280 = $139.53If we use this revenue to purchase a portion of the one-year bond, at expiration the bond pays off $150.69, while the portfolio you sold requires payment of $150.4.Consider a stock of Capote Ltd. This stock can take only one of two values a year from now, either$220 or $70. Also consider a call option on Capote stock with an exercise price of $150 expiring in a year. At expiration, the call will pay either $70 if the stock price is $220 or it will pay nothing if the stock price is $70. What is the option’s hedge ratio?Answer:Hedge ratio = range of option values/range of stock values= 70/150= 0.47The hedge ratio for this call option is 0.47.5.Consider a stock of Santana Inc. This stock can take only one of two values a year from now, either$220 or $70. Also, consider a put option on Santana stock with an exercise price of $150 expiring in a year. At expiration, the put will pay either $80 if the stock price is $70 or it will pay nothing if the stock price is $220. What is the option’s hedge ratio?Answer:Hedge ratio = range of option values/range of stock values= 80/150= 0.53The hedge ratio for this call option is 0.53.6.Stock Price $65Strike Price $72Risk-free rate 10% per yearVolatility 45% per yearTime to Maturity 6 months(c) After that, recalculate the value of the European call option based on one of the followingchanges while keeping the other parameters the same as in (b).(i) Time to Maturity = 3 months(ii) Volatility = 50% per year(iii) Stock price = $68(iv) Exercise price = $75(v) Interest rate = 13% per year15-18Answer:(a) Predictions:(b)S E r T d σResult65 72 0.1 0.5 0 0.45 C = $6.8054(c) (i) T = 0.25C = $3.797Call value decreases as T decreases – confirms prediction(ii) σ = 50%C = $7.7222Call value increases as σ increases – confirms prediction(iii) S = $68C = $8.3846Call value increases as S increases – confirms prediction(iv) E = $75C = $5.8092,Call value decreases as E increases – confirms prediction(v) r = 13%C = $7.1951 (confirms prediction)Call value increases as r increases – confirms predictione the Black-Scholes formula to find the value of a European call option on the following stock:Time to maturity 6 monthsStandard deviation 45% per yearExercise price 55Stock price 55Interest rate 10%Assume we are looking at a non-dividend paying stock. What is the put price?Answer:S E r T d σResult55 55 0.1 0.5 0 0.45 C = $8.207, P = $5.52515-198.(a) Use the Black-Scholes formula to find the price of a 4 month European call option on a non-dividend paying stock with a current price of $68. Assume the exercise price is $74, the continuously compounded risk-free rate of interest is 7%, and σ = 0.45.(b) Use the put-call parity relation to find the Black-Scholes formula for the price of thecorresponding put option.Answer:(a)S E r T d σResult68 74 0.07 0.333 0 0.45 C = $5.3023(b) C = S – [E/(1 + r)T] + P5.023 = 68 – [74/(1.080.333)] + P$9.5960 ≈ P9.(a) Use the Black-Scholes formula to find the price of a 6 month European call option on a non-dividend paying stock with a current price of $65, a strike price of $72. The continuouslycompounded risk-free rate of interest is 8% and σ = 0.4.(b) Use the put-call parity relation to find the Black-Scholes formula for the price of thecorresponding put option.Answer:(a)S E r T d σResult65 72 0.08 0.5 0 0.4 C = $5.6374(b) C = S – [E/(1 + r)T] + P5.6374 = 65 – [72/(1.080.5)] + P$9.8143 ≈ P15-20e the linear approximation of the Black-Scholes formula to calculate the implied volatility for aEuropean call option where:Stock Price $55Strike Price $60Option Value $4.78Risk-free rate 8% per yearTime to maturity 3 monthsAnswer:Using the linear approximation:C≈0.4σTSC≈0.4σ0.25554.78≈(0.4)(0.5)σ55.4345≈σIf one computes σ using traditional Black-Scholes, this yields an implied volatility of σ =0.5756.11.Borodin Corporation is in the music business and has a total market value of $125 million. Thecorporation issues two types of securities: common stock (900,000 shares) and zero-coupon bonds (95,000 bonds, each with a face value of $1,000). The bonds are considered to be default free and mature in one year. The risk-free interest rate is 5% per year. What is the market value of Borodin’s bonds? Of its stocks? What is Borodin’s share price?Answer:The combined market value of Borodin’s stocks and bonds is $125 million. That is,V = $125 million = E + DTo determine the market value of bonds:D = (95,000 x $1,000)/1.05= $90,476,190The market value of the stocks is:E = V – D= $125,000,000 - $90,476,190= $34,523,810Share price = $34,523,810/900,000= $38.36 per share15-2112.Describe index options and the process known as cash settlement with index options.Answer:It is possible to trade in calls and puts on stock indexes, such as the S&P 500. For example, SPX options are effectively calls or puts on a hypothetical index fund that invests in a portfoliocomposed of the stocks that make up the S&P 500 index, each of the 500 companies in proportion to the total value of its shares outstanding.The process of cash settlement differs from what happens in the case of CBOE options onindividual stocks. If a call option were settled in cash, in the case of an index option, the sellerwould pay the owner of the call $100 times the difference between the index value and the strike price, instead of delivering the shares of individual stock.13.Construct a synthetic call option based on the following payoffs to Capone stock and to the calloption, which can be described by the following tree:Stock Price Now In One Year Call-Option PayoffStock Price$145 $25$120$95 0The risk-free rate is 7% per year.Answer:Hedge ratio = $25/50 Borrow = 0.5 x 95/(1.07)= 0.5 = $44.39Thus, if we were to buy 0.5 share of the stock and borrow $44.39, we would have a synthetic call option.The call’s price must be C = 0.5S – $44.39= $60 –$44.39= $15.6115-2214.Python Corp. is in the gourmet food business, primarily cheese comestibles. It has issued two types ofsecurities: common stock (1 million shares) and zero-coupon bonds with an aggregate face value of $90 million (90,000 bonds each with a face value of $1,000). Python’s bonds mature one year from now. Let the volatility of the firm’s asset value be 0.35, and the risk-free interest rate be 7.5% per year.If we know that the total market value of Python is $130 million, what are the separate market values of its stocks and bonds?Answer:V B r T Result____130 90 7.5 1 0.35 E = $48.27The market value of the equity is $48.27 millionThe value of the debt is equal to V – E:D = V – E= $130 – $48.27 million= $81.73 million15.Refer to question 14. What is the continuously compounded promised rate of interest on the debt?Answer:The continuously compounded promised rate of interest on the debt, R, is therefore equal to:R = In(90/81.73) = 0.0964 or 9.64%15-23Longer Problems1.Many option-pricing applications do not involve financial instruments. Discuss “real options” andprovide some examples of the applications of real options technology.Answer:The common element for using option-pricing is this: The future is uncertain (if it were not, there would be no need to create options because we know now what we will do later), and in anuncertain environment, having the flexibility to decide what to do after some of that uncertainty is resolved definitely has value. Option-pricing theory provides the means for assessing that value.The major categories of options within project-investment valuations are the option to initiate or expand, the option to abandon or contract, and the option to wait, slow down, or speed updevelopment. There are growth options, which involve creating excess capacity as an option toexpand, and research and development as creating the opportunity to produce new products and even new businesses, but not the obligation to do so if they are not economically viable.An example of an application of the real options technology is in the generation of electric power, the power. A power plant can be constructed to use a single fuel such as oil or natural gas or it can be built to operate on either. The value of that option is the ability to use the least-cost fuelavailable at each point in time and the cost of that option is manifest in both the higher cost ofconstruction and less efficient energy conversion than with the corresponding specializedequipment.Another example comes from the entertainment industry and involves the decision about making a sequel to a movie. The choices are either to produce both the original movie and its sequel at the same time, or wait and produce the sequel after the success or failure of the original is known. One does not have to be a movie production expert to guess that the incremental cost of producing the sequel is going to be less if the first path is followed. Although this is done, more typically the latter is chosen, especially with higher- budget films. The economic reason is that the second approach provides the option not to make the sequel (if, for example, the original is not a success). If theproducer knew (almost certainly) that the sequel will be produced, then the option value of waiting for more information is small and the cost of doing the sequel separately is likely to exceed thebenefit. Hence, once again, we see that the amount of uncertainty is critical to the decision, and the option-pricing model provides the means for quantifying the cost-benefit trade-off. The individual’s decision as to how much vocational education to acquire can be formulated as an option-valuation problem in which the optimal exercise conditions reflect when to stop training and start working. In the classic labor–leisure trade-off, one whose job provides the flexibility to increase or decrease the number of hours worked and, hence, his or her total compensation, on relatively short notice, has a valuable option relative to those whose available work hours are fixed. Wage, welfare, and pension plan floors that provide for minimum compensation have an optionlike structure.15-24。
兹维博迪金融学第二版试题库16TB
fricti ons in elude sChapter SixteenFinancial Structure of the FirmThis chapter contains 35 multiple choice questi on s, 13 short problems, and 9 Ion ger problems. Multiple Choice1.In making capital structure decisi ons the unit of an alysis is _____________(a)in dividual departme nts withi n the firm(b)the investment project, one year at a time(c)the investment project as a whole(d)the firm as a wholeAn swer: (d)2.In the “ frictionless ” world of Modigliani and Miller, shareholder wealth no matterwhat capital structure the firm adopts.(a)is greater(b)is less(c)is different(d)is the sameAn swer: (d)3.Examples of real world(a)regulations(b)taxes(c)con tract law(d)all of the aboveAn swer: (d)4.Reta ined ear nings and accrued wages arise from a firm sources of funds is .(a)internal financing(b)external financing(c)preferred financing(d)investment financing An swer: (a)Answer: (b)s plans more directly to the discipline of the capital market5. If managers of a firm seek funds from outside investors or lenders, this source of funds isreferred to as ___________ .(a) internal financing(b) external financing(c) preferred financing(d) investment financingAnswer: (b)6. Operations of the firm include retained earnings, accrued wages, and accounts payable, whereasthe decisions regarding dividend policy or maintaining a line of credit with a bank are examples__________________________ .(a) investment policy(b) operations policy(c) financing policy(d) external policyAnswer: (c)7. _________ subjects the corporationthan ___________ .(a) Investment policy; financing policy(b) Financing policy; investment policy(c) Internal financing; external financing(d) External financing; internal financingAnswer: (d) 8. Common stock, ___________ , and preferred stock are examples of equity claims.(a) mortgage debentures(b) stock options(c)junk bonds(d)residual claims Answer: (b)9.When a corporation pledges a particular asset as security, this promised asset is referred to as(a)leased asset(b)pension liability(c)collateral(d)leverageAnswer: (c)10.Regarding a long-term lease, it is the ____________ who bears the residual value risk.(a)lessor(b)lessee(c)investment bank(d)underwriterAnswer: (a)11.When a corporation establishes a separate pension trust with a pool of assets sufficient to pay the promisedbenefits, this is referred to as __________________________ .(a)the unfunded pension plan(b)the defined contribution plan(c)funding the pension plan(d)defining the pension planAnswer: (c)12. Compass Corporation and North Corporation are virtually identical companies. The one difference between these two corporations is that Compass leases most of its plant and equipment whereas North buys its plant andequipment and finances it by borrowing. The liabilities and shareholders ' equity side of the Com-vp a lsusemb a lraknecte sheetscomprised of(a)plant, equipment and bonds(b)plant, equipment and equity(c)bonds and equity(d)leases and equityAnswer: (d)pass Corporation and North Corporation are virtually identical companies. The one difference between them is thatCompass has a completely unfunded pension plan and North has a fully funded pension plan. The assets side of the North market-value balance sheet will comprise .(a)operating assets, bonds, pension liability(b)operating assets, pension assets(c)operating assets, pension liabilities(d)pension liability, shareholders ' equityAnswer: (b)14.Consider a corporation called Freedett that issues only stocks. Currently, Freedett has total earnings of $60 million per yearand it pays out all these earnings in the form of dividends to the shareholders of Freedett. Currently there are 6 million shares of Freedett outstanding. The market capitalization rate on these expected dividends is 11% per year. Calculate the total value of Freedett Corporation in the “ frictionless ” world of Modigliani and Miller.(a)$6 million(b)$54.5 million(c)$545.5 million(d)$660 millionAnswer: (c)15.The effect of increasing financial leverage is to increase the _____________ .(a)mean EPS(b)risk of EPS(c)return of EPS(d)both a and bAnswer: (d)16.Consider a corporation called Freedett that issues only stocks. Currently, Freedett has total earnings of $60 million per yearand it pays out all these earnings in the form of dividends to the shareholders of Freedett. Currently, there are 6 million shares of Freedett outstanding. The market capitalization rate on these expected dividends is 11% per year. The corporate environment is the “ frictionless ” world of Modigliani and Miller. Calculate the price pershare of Freedett stock.(a)$9.08(b)$90.91(c)$100.91(d)$110.00Answer: (b)17.Consider a corporation, Bit-O-Dett, in a frictionless environment. Currently, Bit-O-Dett is partially debt financed, by havingissued bonds with a face value of $50 million at an interest rate of 9% per year. One will assume that the bonds are “ rolled ove-rO- ” as they mature. BDett has total earnings of $70 million per year and 11 million shares outstanding. Calculate the earnings per share for Bit-O-Dett Corporation.(a)$6.36(b)$5.95(c)$5.36(d)$1.82Answer: (b)18.When considering the choice of capital structure, the firm may be able to reduce potentially costly conflicts of interestamong various stakeholders of the firm. Such conflicts could exist between(a)shareholders and creditors(b)managers and shareholders(c)both (a) and (b)(d)neither (a) nor (b)Answer: (c)19. A government body offering to guarantee the debt of a firm that invests in an economically depressed area is an exampleof:(a)tax abatement(b) a subsidy(c)an incentive problem(d)equity financingAnswer: (b)20.The management of Godzilla Inc. is trying to choose an appropriate capital structure, in particular how much debt theyshould hold. If the firm sells 5 million in perpetual bonds with a coupon rate of 8%, what is the present value of Godzilla Inc ' s interest tax shield, if therate is 34%?(a)$136,000(b)$1.30 million(c)$1.57 million(d)$1.70 millionAnswer: (d)Answer: (c)s total value include: 21. The capital structure of Quokku Corporation consists of $200 million of debt and $320 million of equity. The return onequity is 15%, the interest rate on debt is 9% and the tax rate is 34%. Calculate the present value of the interest tax shield for Quokku Corporation.(a) $40.8 million(b) $50 million(c) $68 million(d) $108.8 millionAnswer: (c)22. Financial distress costs that can reduce a firm(a)legal fees (b)lost business (c)managerial time spent associated with trying to avoid bankruptcy (d) all of the aboveAnswer: (d)23. Issuing debt to repurchase shares is one way of creating value for the shareholders by reducing the amount ofavailable to managers.(a) free cash flow(b) interest(c) dividends(d) stock optionsAnswer: (a) 24. Creditors face a potential ___________ when they lend to certain firms, such as those with largeamounts of debt. Managers of such firms may be tempted to redeploy assets so as to increase the wealth of the shareholders at the expense of the debtholders.(a) agency hazard(b) interest hazard(c)moral hazard(d)deployment hazard Answer: (c)25._________ is a form of financing appropriate when a business is starting out as a smallenterprise and its future prospects are very uncertain.(a)Debt with warrants(b)Leasing arrangement(c)Loans from friends or relatives(d)Common stock repurchaseAnswer: (c)26._________ is typically used either when the firm goes public for the first time, or when itwants to undertake a major expansion.(a)Factoring receivables(b) A common stock issuance(c) A leasing arrangement(d) A loan from friends or relativesAnswer: (b)27._________ is a form of financing that raises cash by selling a company asset rather than byborrowing or issuing new equity.(a)Factoring receivables(b)Common stock issuance(c) A loan from friends or relatives(d) A leasing arrangementAnswer: (a)28._________ is essentially debt financing secured by a leased asset.(a)Factoring receivables(b)Common stock issuanceAnswer: (d)Answer: (c)s(c) A loan from friends or relatives (d) A leasing arrangement29. Warrants are ___________ options giving their owners the right to buy shares of the issuingcompany ' s stock at a fixed price.(a) put (b) call (c) currency (d) futures Answer: (b)30. When a company envisions a need for raising new equity capital some time before the debt has to be repaid, this is a formof financing known as _______________________________________________ .(a) factoring receivables (b) leasing arrangement (c) common stock issuance (d) debt with warrants Answer: (d)31. Debt forces management to distribute cash to the firm and .(a)voting power; dividends(b) dividends; prescheduled interest payments (c) principle; dividends(d)principle; prescheduled interest paymentsAnswer: (d)32. There are three alternative methods used in estimating the _____________ of an investment projectto take into account ___________ .(a)future value; pure equity financing(b)future value; financial leverage(c)net present value; financial leverage(d)net present value; pure equity financing33.The __________ is a weighted average of the cost of equity and the after tax cost of debt.(a)APV(b)FTE(c)WACC(d)Unlevered NPVAnswer: (c)34.The NPV computed using the incremental expected after tax cash flow to the firm ' sshareholders and cost of equity capital is known as ______________(a)Adjusted Present Value Method(b)Flows to Equity Method(c)Weighted Average Cost of Capital(d)Unlevered NPV MethodAnswer: (b)35.Under the __________ the value that is created through debt financing is added to the projectunlevered NPV.(a)Adjusted Present Value Method(b)Flows to Equity Method(c)Weighted Average Cost of Capital(d)Unlevered NPV MethodAnswer: (a)Answer: (c)Short Problems1.Briefly describe the main features of each of the following kinds of corporate debt: secured debt, I on g-term leases, andpension liabilities.Answer:Secured debt:« The corporati on pledges a particular asset as security for that promise. The asset pledged as security is called collateral and the debt is called secured.« The secured len der gets first priority on those assets in the eve nt of a non payme nt.Lon g-term leases:« This is similar to buying the asset and financing the purchase with debt secured by the leased asset« The lessor bears the residual-value risk.Pension liabilities:« Classified into two types -defi ned con tributi on and defi ned ben efit.« In a defi ned con tributi on pla n each employee has an acco unt into which the employer and usually the employee make regular contributions.*In a defi ned ben efit pla n the employee ' s pension ben efit is determ ined by aformula that takes into acco unt years of service for the employer and wages and salary.*Pension funding practices differ across coun tries.*The establishme nt of a separate pension trust with a pool of assets sufficie nt topay the promised ben efits is called “ funding the pension pla n. ”2.How may the firm perform the functions of in termediary in its choice of capital structure?Answer:The firm may be able to provide stakeholders with financial assets not otherwise available to them. The firm,therefore, expands the opportunity set of financial instruments available and earns a premium for doing so.To the extent that the firm engages in this activity, it is performing the functions of a financial in termediary.as th 3. Con sider a corporati on, Rhein gold Corp., i n a fricti onl ess en vir onment. Curre ntly, Rhein goldis partially debt financed by having issued bonds with a face value of $60 million at an interest rate of 9% per year. One will assume that the bonds are “ rolled over Rheingold Corporation has total earnings of $80 million per year and 10 million shares outsta nding. Calculate the earnings per share for Rhein gold Corporati on.Answer:EPS = Net earningsNumber of shares outsta nding= EBIT -Interest paymentsNumber of shares outsta nding EPS = $80,000,000 -0.09(60,000,000)10,000,000 EPS = $80,000,000 -5,400,00010,000,000 EPS = $7.464. How does issuing debt help deal with the incentive problem created by free cash flow?Answer:Debt forces management to distribute cash to the firm ' s debtfolders in the foprescheduled payme nts of in terest and prin ciple. Otherwise, when man agers have a lot of discreti on about how to allocate a firm' s cash flow they may be tempted to in vest in projectsthat in crease their own power, prestige or perks, but do not in crease shareholder wealth. Issu ing debt to repurchase shares can therefore, be a way of creati ng value for the shareholders by reduci ng the amountof free cash flow available to man agers.5.Skippy Corporati on has decided to issue $40 milli on of bonds and to repurchase 400,000 shares of its stock. What will bethe impact on the price of its shares and on shareholder wealth? If EBIT is $20 million, and there are no taxes, which case has the higher EPS -all equity or the partial debt financing case? Assume Skippy has 2 milli on shares outsta nding. Assume in terest on debt is 7%, and also in an all equity case, 1.6 milli on shares with bonds are issued.Answer:In a frict ionl ess world, the wealth of shareholders is the same regardless of capital structure, and stock price would not be affected either. I n a world with taxes, etc., the man ageme nt might be able to create shareholder wealth by issu ing debt and repurchas ing shares by reduc ing tax costs and reduci ng free cash flow available to man ageme nt.All equity:EBIT = $20 millio nEPS = $20 millio n/2 millio n=$10 per shareWith $40 millio n of debt:Net earnings = $20,000,000 -(0.07 x 40,000,000)=$17.2 millio nEPS = $17.2 millio n/1.6 millio n=$10.75 per share6.Provide details on the financing method known as factori ng receivables.Answer:Factor ing is rais ing cash by sell ing a compa ny asset rather tha n by borrow ing or issu ing new equity. A factor is a firm that specializes in in vesti ng in receivables and usually receives the acco unts receivable at a disco unt.7.Provide brief details on the com mon stock issua nee financing method.Answer:Common stock issua nee is appropriate whe n the firm goes public for the first time, or whe n it wants to un dertake a major expa nsion .It is also a method of financing used whe n the firm is orga ni zed as a corporati on. It is also con sidered a useful approach whe n the age ncy costs associated with debt financing may be too high.11. 8. Provide brief details on the debt with warra nts financing method.Answer:Warra nts are call opti ons giv ing their owners the right to buy shares of the issu ing compa ny ' s stock at a fixed price .In this in sta nee, warra nts are attached to a debt issue whe n the compa ny en visi ons a n eed for rais ing new equity capital some time before the debt is to be repaid. The debt bears a lower in terest rate tha n it would if it had no warra nts attached.9. Provide brief details on the financing method known as leas ing arran geme nt.Answer:Leas ing is esse ntially debt financing secured by a leased asset. In a leas ing arran geme nt, the lessor provides some real asset - a n office or equipme nt, etc. -to the lessee in return for con tractually fixed payme nts over a set period of time. It is appropriate if there is no more debt capacity for the firm.10. Provide brief details on when a loan from friends or relatives might be appropriate as a financing method.Answer:This method is appropriate whe n a bus in ess is start ing out as a small en terprise, and its future prospects are very un certa in. On ly those who know the own ers of the firm and trust them would provide capital to the firm.Con sider the follow ing sce nario. Doug' s In depe ndent Films is a small movie product ion compa ny that has 12 own ers, and the own ers want to double the nu mber of new movies the compa ny produces. The product ion compa ny has recen tly attracted widespread acclaim for its film “ Driving Miss Spider. ” The company recently incorporated, and now wants to raise $20 million from outside investors. How should Doug ' s InFstfisancing?Answer:Doug ' s In depe ndent Films should look at issu ing com mon stock as a method of financing. Appropriate whe n a firm is orga ni zed as a corporati on, com mon stock issua nee is typically used whe n a firm wants to un dertake a major expa nsion. If the firm were to un dertake debt financing, the age ncy costs would be very high.12.Consider the following seenario. Tamara ' s Tempeh Emporium, Inc. is a chain of vegetarianfood stores owned by three sibli ngs, each of whom holds equal amounts of outsta nding stock.The firm has $20 millio n in total assets, and the compa ny n eeds an additi onal $5 milli on to purchase equipme nt to improve its tran sportati on n etwork throughout the Northeastern U.S. The compa ny has proved to be very profitable and has grow n at an extremely rapid pace, to such an extent that the company ' s real estate is heavily mortgaged and its accountsreceivables are being factored. How should Tamara ' s Tempeh Emporium obtain its financing?Answer:This compa ny should un dertake a leas ing arra ngeme nt because it has no more debt capacity. Leas ing provides debt financing secured by the leased equipme nt.13.Discuss how real world frictions can affect capital structure decisions.Answer:In the real world there are a nu mber of frict ions that can cause capital structure policy to have an effect on the wealth of shareholders. These in clude taxes, regulati ons, and conflicts of interest between the stakeholders of the firm. A firm ' s management mi therefore, be able to create shareholder value thought its capital structure decisi ons in one of three ways:⑴ by reduc ing tax costs or the costs of burde nsome regulati ons, (2) by reduci ng pote ntial con flicts of in terest among various stakeholders in the firm, and (3)by providi ng stakeholders with finan cial assets not otherwise available to them.Longer Problems1. Keating Corporation has decided to issue $35 million of bonds and to repurchase 350,000 shares of its stock. KeatingCorporation has a total value of $100 million, 1,000,000 shares outsta nding, and in terest on its debt is 7%.a)In a frictionless environment what will be the impact on the price of its shares and on the wealth of its shareholders?b)In the real world with its varied frictions, what will be the impact on the price of its shares and on the wealth of itsshareholders?c)Assume Keating ' s EBIT has an equal probability of being $25 million, $17 million or $5 milli on. In the abse nee oftaxes, show the impact of the finan cial restructuri ng on the probability distribution of earnings per share.Answer:a.In a frict ionl ess world, repurchas ing shares has no impact on share price or shareholder wealth.b.In the real world, one may be able to create shareholder wealth by issu ing debt and repurchas ing shares. This couldbe achieved by reduc ing tax costs or by reduci ng the free cash flow available to man ageme nt and expos ing itself to greater market discipli ne.c.EPS all equity = EBIT/1,000,000 sharesEPS with debt = [EBIT -0.07(.35)]/650,000 =(EBIT -2.45)/650,000Market value=$6,400/0.11 =$58,182 Len ski:In come before taxes = $10,000 -0.05(20,000)=$10,000 -$1,000 =$9,000Tax=0.36($9,000)=$3,240In come available to stockholders=$9,000 -$3,240=$5,760Market value2. Con sider the follow ing in formati on regard ing two firms, On egi n and Len ski.Calculate the market value of both On egi n and Len ski Corporati ons. Which is greater and by what amount?Answer: On egi n:In come available = $10,000 -0.36(10,000)=$10,000 -$3,600 =$6,400=5,760/0.125 + 1,000/0.05 =$46,080 + $20,000 =$66,080The value of Lenski Corporation is greater than the value of Onegin Corporation by $7,898. That is, as we add debt to the firm we n ote an in crease in the value of the firm .In a world with corporate tax rates, the value of the levered firm will exceed the uni evered firm by the prese nt value of the tax shield. Lenski ' s tax shield = $20,000 x 0.36 = $7,200.s uni evered N 3. On egi n and Len ski Compa nies differ only in their capital structure. On egi n Corporati on is anall-equity firm, whereas Len ski Corporati on issues stocks and bon ds. Assume there are no corporate in come taxes in volved. On egi n Corporati on has 2 milli on shares outsta nding and pays out all its yearly earnings in the form of divide nds. Len ski Corporati on pays out divide nds as well, but 45% of the compa ny ' s value is in bon ds, Wlsehip a reariskcoup on rate of 8.5%, and are rolled over every year. Len ski Corporati on has 1,200,000 shares outsta nding. Both firms have a market capitalizati on rate of 12% and are valued at $220 million. Calculate the value of Onegin Corporation ' s shares and Lenski Corporation Answer:Len ski has debt = 0.45 x $220 millio n=$99 millio nequity = $220 millio n -$99 millio n=$121 millio n Value of Len ski shares = $121 millio n/1,200,000=$108.34 per shareValue of Onegin ' s shares = $220 million/2 million =$110 per share4. Skippy Corporati on is con sideri ng a new project with an in itial outlay of $200 milli on that will result inexpected additi onal reve nue of $40 milli on per year. The project will in cur annual maintenance costs of $10 milli on and will last in defi nitely. The effective tax rate on Skippy ' s profits is 30%. Skippy ' s capital structure is 30% debt and 80% equity, which is the same proporti ons it would use for the new project. Its debt is riskless with an in terest rate of 8% per year.(a) What is the uni evered expected cash flow from this project?(b) If the required rate of return on unievered investments is 10% per year, what is this project ' s NPV? Answer:(a) The project ' s expectedafterremental cash flow is the expected return of the $30 millio n less maintenance of $10 millio n, multiplied by 1 minus the tax rate:Un levered expected cash flow = (1 -0.3) ($40 millio n -$10 millio n) =0.7($30 millio n) =$21 millio n(b) Usi ng 10% as the disco unt rate, the prese nt value of the project is: $21 millio n/0.1 = $210 millio n. Subtract ing the in itial outlay of $200 millio n, we find that the project millio n.5. Refer to question 4. Use the APV method to find the NPV of Skippy s project.Answer:APV = Un levered PV + PV of In creme ntal Tax Shield=$210 millio n + (0.06 APV)=$210/0.94 = $223.4 millionPV of the in creme ntal tax shield = 0.06 x $223.4 = $13.4 millionThe in crease in value to Skippy shareholders give n by the ANPV of the project is:ANPV = Un levered NPV + PV of in creme ntal tax shield=$10 millio n + $13.4 millio n = $23.4 millio n6. Refer to question 4. Use the FTE method to find the NPV of Skippy s project.Answer:k e = k + (1 -t)(k -r)dk e = 0.10 + (1 -0.3)(.10 -0.08)(0.2/0.8)k e = 0.10 + (0.7)(0.02)(0.25)k e = 0.10 + 0.0035k e = 0.1035The expected in creme ntal after-tax cash flow to Skippy s shareholders from the project is:CFS = Unievered Expected Cash Flow -After-tax Interest Expense=$21 millio n -0.056DThe in crease in the prese nt value of equity outsta nding is:E = CFS/k e = $202.9 million -0.1353E=$202.9 millio n/1.1353 = $178.72 millio nSi nee D = 0.25E, D = $44.68The amount of new equity to be issued is $200 million -$44.68 million = $155.32 million.NPV = $178.72 millio n -$155.32 millio n = $23.4 millio nNote that this is the same result that was obta ined with the APV method in questi on 5.s project.7.Refer to question 4. Use the WACC method to find the NPV of SkippyAnswer:WACC = k』1/(1 + d)] + (1 -t)r[d/(1 + d)]=0.1035(1/1.25) + (0.7)(0.08)(.25/1.25)=0.0828 + 0.0112=0.094The NPV is the expected uni evered after-tax annual cash flow disco un ted at the WACC, less the $200 million initial outlay:NPV = $21 millio n/0.094 -$200 millio n=$223.4 millio n —$200 millio n = $23.4 millio nNote that this is the same result that was obta ined using the APV and FTE methods in questi ons 5 and 6 respectively.8.From your study of capital structure you will know that in reality many frictions exist which are likely to affecttradeoffs when finding an optimal capital structure. Describe the particular legal and tax en vir onment the U.S.corporati ons face. Now compare and con trast this with the legal and tax en vir onments across other G7 coun tries (or G8 if you like to in clude Russia). Then comme nt on how these en vir onments are likely to affect capital structure across the G7 countries. Also, detail any other factors that may be important in determining capital structure across the G7/G8 coun tries -for example, own ership, regulatory en vir onment and banking system.Answer:An swers will vary.9.Write a short essay detaili ng the debt/equity/preferred stock structure of the compa ny you work for. If possible,provide details regard ing any in terest rates that your firm must pay on existing debt. Also, determine the rate of return that shareholders require. Describe any unfun ded or fully fun ded pension pla ns that your compa ny may have. How does the pension pla n of your compa ny affect the stakeholders?Answer:An swers will vary.。
兹维博迪金融学第二版试题库17TB
Chapter SeventeenReal OptionsThis chapter contains 28 multiple choice questions, 10 short problems, and 5 longer problems.Multiple Choice1.There is a basic similarity between the options involved in investment projects and ________ optionson stocks.(a)switch(b)call(c)abandon(d)expandAnswer: (b)2.In comparing the similarity between options in investment projects and call options on stocks, thedecision maker has the ________ to buy something of value at a future date.(a)obligation(b)right but not the obligation(c)desire but not the right(d)financial meansAnswer: (b)3.In general, the ________ the uncertainty about future outcomes, the ________ the need to accountexplicitly for any options.(a)greater; greater(b)greater; less(c)less; greater(d)none of the aboveAnswer: (a)4.A(n) ________ in the uncertainty about a project's future payoffs ________ its value.(a)increase, decreases(b)increase, increases(c)decrease increases(d)increase, does not changeAnswer: (b)5.An option to ________ a project corresponds to an American put option.(a)defer(b)abandon(c)rescale(d)reverseAnswer: (b)6.An option to ________ allows the project to be expanded or contracted for some fixed price.(a)defer(b)abandon(c)rescale(d)reverseAnswer: (c)7.An option to ________ allows the postponement of the beginning of an investment project.(a)defer(b)abandon(c)rescale(d)reverseAnswer: (a)8.An option to ________ corresponds to an American call option.(a)defer(b)abandon(c)rescale(d)reverseAnswer: (a)9.If a company’s investment in a new project has a salvage va lue of zero, this investment is said to be________.(a)uncertain(b)irreversible(c)deferrable(d)mutableAnswer: (b)10.The option to ________ an investment decision is valuable even if the expected price in the future isequal to the current price.(a)defer(b)reverse(c)renew(d)obligateAnswer: (a)11.Taking management's flexibility explicitly into account ________ a project’s NPV.(a)decreases(b)increases(c)does not change(d)reversesAnswer: (b)12.________ can be used to determine a set of possible NPVs, with respect to variables within an project,to determine if the optimal strategy is to abandon, defer, or immediately proceed with the investment.(a)A decision tree(b)The APV method(c)Probability mapping(d)Sensitivity analysisAnswer: (d)13.The ________ formula can be applied to capital budgeting problems.(a)Dividend valuation(b)Capital structure valuation(c)Black-Scholes(d)all of the aboveAnswer: (c)14.In a capital budgeting framework, we can use the same valuation models developed to price________.(a)European exchange rate futures(b)American exchange rate futures(c)European preferred stock valuations(d)European call options on a stockAnswer: (d)15.In the context of option pricing, the value of flexibility ________ the volatility of the project.(a)undermines(b)is unaffected by(c)increases with(d)decreases withAnswer: (c)16.Failing to take into account the managerial options to delay the start of a project, or once started toexpand or abandon it, will cause an analyst evaluating the project to ________.(a)overestimate its NPV(b)underestimate its NPV(c)overestimate its initial costs(d)underestimate its initial costsAnswer: (b)17.A company is considering a new project that would require an initial investment of $5 million and inits second phase one year from now another investment of $105 million t o build a plant. From today’s perspective the value of the completed plant a year from now is a random variable with a mean of $110 million and a standard deviation of 0.2. The riskless interest rate is 5% per year. If one were to evaluate this investment with the Black-Scholes formula in order to take its flexibility into account, which of the following is true?(a)the value of E to be used in the formula is $110 million(b)the value of S to be used in the formula is $100 million(c)the value of C is found to be $8.02 million(d)none of the aboveAnswer: (b)18.True Blue Inc. is considering acquiring another firm, Mellow Yellow Inc. Let us assume that they areboth 100% equity financed firms, that is, neither firm has any debt outstanding. Each firm has 1 million shares of common stock outstanding that can be freely bought and sold in a competitive market. The current market value of Mellow Yellow Inc. is $50 million and its standard deviation is0.2. Suppose Mellow Yellow’s management offers True Blue an option to ac quire 100% of MellowYellow’s shares a year from now for $55 million. The riskless interest rate is 5% per year. If the option costs $2.25 million, the NPV is:(a)$5.27 million(b)$3.02 million(c)$0.77 million(d)$0Answer: (c)19.Consider the example in question 17. Assuming all other data remains the same, what would the NPVbe if the price to acquire Mellow Yellow’s stock were to $58 million instead of $55 million?(a)–$5.02 million(b)–$0.15 million(c)$2.1 million(d)$4.35 millionAnswer: (b)20.Consider the example in question 17. Assuming all other data remains the same, what would the NPVbe if Mellow Yellow’s standard deviation were 0.3 instead of 0.2?(a)(b)$0.85 million(c)$2.76 million(d)$5.01 millionAnswer: (c)21.Consider the example in question 17. What would the NPV be is the price to acquire Mellow Yellowwere $62 million instead of $55 million and its standard deviation were 0.4 instead of 0.2? Assume all other data remains the same.(a)$2.61 million(b)$4.86 million(c)$7.11 million(d)The NPV is the same as for the original data in question 17.Answer: (a)22.An option to abandon a project is an example of a(n) ________ option.(a)explicit purchase(b)managerial(c)call(d)irreversibleAnswer: (b)23.If a company is considering the acquisition of another company and has the opportunity to do so ayear from now the type of option this capital budgeting may entail is called a(n) ________ option.(a)explicit purchase(b)technical(c)growth(d)fundamentalAnswer: (a)24.Recognizing the similarity between call options and managerial options is important because________.(a)it clarifies the role of uncertainty in evaluating projects(b)it structures the analysis of investment projects as a sequence of management decisions overtime(c)it gives us a method for estimating the option value of projects by applying the quantitativemodels developed for valuing call options on stocks(d)all of the aboveAnswer: (d)e the Black-Scholes formula to calculate the value of an option where T = 2 years, = 0.3, theexercise price = $200 million, the current price is $181.41, and the riskless interest rate is 5% per year.(a)$15.86 million(b)$30.22 million(c)$30.66 million(d)$51.71 millionAnswer: (c)26.Consider Benedick Corp., which has the opportunity to invest in a hydro-electricity plant. An initialoutlay of $19 million is required to build the facility to house the equipment. In the second phase, one year from now, equipment costing $210 million must be purchased. Suppose from today's perspective the value of the plant a year from now is a random variable with a mean of $240 million and astandard deviation of 0.35 million. Use the Black-Scholes formula to compute the value of the option.(a)$22.15 million(b)$27.65 million(c)$27.89 million(d)$40.44 millionAnswer: (c)27.What is the NPV of the project in question 27?(a)$19 million(b)$8.89 million(c)$8.65 million(d)$3.15 millionAnswer: (b)28.Consider the scenario in question 27. If the standard deviation is changed to 0.25, what happens to thevalue of the option?(a)It is unchanged(b)It increases by approximately $8 million(c)It decreases by approximately $8 million(d)It is reduced by approximately 10%Answer: (c)pute the NPV of the project from question 27 if its standard deviation is now 0.25.(a)$0(b)$1 million(c)$12 million(d)$16.65 millionAnswer: (b)Short Problems1.What are some important “real options” a manger has with regards to investment projects? Why is itimportant to be aware of them?Answer:Many, if not most, corporate investment opportunities present the ability for managers to delaythe start of a project, or once started, to expand it or abandon it. Failure to take into accountthese real options will cause an analyst evaluating the project to underestimate its NPV.2.Discuss deferral, abandon, rescale options.Answer:The option to postpone the beginning of an investment project is a deferral option and can bemapped nicely into an American call option. Here the exercise price of the option is the project’s required initial investment and the maturity date of the option corresponds to the final decision point beyond which the decision cannot be postponed. An option to abandon a project corresponds to an American put option. The exercise price for the option would be the amount that must be paid to terminate the project. This could be a contracted amount or simply the market value of theproject if it is liquidated. On both sides of a deferral option and an option to abandon may liepossibilities to exercise an option to rescale the project where the project can be expanded orcontracted for some fixed price.3.What is the fundamental similarity between options in investment projects and call options on stocks?Answer:The fundamental similarity is that the decision maker has the right but not the obligation tobuy something of value at a future date.4.Discuss irreversibility in terms of an investment decision.Answer:Consider the situation of a company contemplating whether to invest in a factory. The investment is completely irreversible, meaning that the custom-built facility can be used to produce noalternative product nor can it be modified to do so except at a prohibitive cost. Hence after theinitial investment the factory immediately has no value in an alternative use. This is for practical purposes equivalent to assuming the salvage value is zero. Once the investment is undertaken the costs are sunk and cannot be recovered.ing the Black-Scholes formula, calculate the value of an option where T = 3 years, the standarddeviation of the annualized continuously compounded rate of return on stock = 0.3, the exercise price = $400 million, the current price of the stock is $350 million, and the riskless interest rate is 5% per year.Answer:S E r T σResult6. A new project would required a company to make an initial outlay of $125 million. In 3 years, phasetwo of the project would require the company to purchase buildings and equipment at a cost of $400 million. From today’s perspective the value of phase two when completed is a random variable with a mean of $425 million and a standard deviation of 0.4. The riskless interest rate is 5% per year.Compute the NPV of the investment. Should the project be undertaken?Answer:S E r T σResultNPV = C – Initial investment= $94.09 – $125 million= –$30.91 millionA project should only be undertaken if it has a positive NPV, so this project should not bepursued.7.See question 6. What happens to the NPV of the investment project if the volatility = 0.6?Answer:S E r T σResultNPV = C – Initial investment= $137.45 – $125 million= $12.44 millionThe increase in volatility results in an increases value of the call, making the NPV positive.8.Consider a firm, McIntyre Oil Corporation, which is considering the acquisition of another firm,Argyll Inc. Let us assume that both of these firms are both 100% equity financed firms, that is, neither firm has any debt outstanding. Each firm has 1 million shares of common stock outstanding that can be freely bought and sold in a competitive market. The current value of Argyll Inc. is $80 million and its standard deviation is 0.283. The riskless interest rate is 6%. Suppose Argyll'smanagement offers McIntyre Corp. an option to acquire 100% of Argyll's shares two years from now for $90 million. What is the value of the option?Answer:S E r T σResult9.Refer to question 8. Argyll offers the option to McIntyre at a price of $10 million. Is this investmentworthwhile to McIntyre?Answer:NPV = C – Initial investment= $12.76 million – $10 million= $2.76 millionSince the NPV is positive, the project is worthwhile10.A company is considering a new project that would require an initial investment of $5 million and inits second phase one year from now another investment of $105 mil lion to build a plant. From today’s perspective the value of the completed plant a year from now is a random variable with a mean of $110 million and a standard deviation of 0.2. The riskless interest rate is 5% per year. Discuss how one should view this situation in the context of the Black-Scholes formula.Answer:By undertaking the first phase of the project, the company would in effect be paying $5 million to “buy an option” that will mature in one year. The option is to undertake phase two of the pr oject, and its “exercise price” is $105 million. The present value of the completed project is $100 million.The Black-Scholes formula says that this option is worth approximately $8 million. The project, therefore, has a positive NPV of approximately $3 m illion, although if we ignore management’s option to discontinue the project after the first year and do a conventional DCF analysis the NPV is negative. Our conclusion is that taking management’s flexibility explicitly into account increases a project’s NPV. Moreover, from the theory of option pricing, we know that the value of flexibility increases with the volatility of the project.Longer Problems1.Discuss why it is important to recognize the similarities between call options and managerial or realoptions.Answer:(1) It helps in structuring the analysis of the investment project as a sequence ofmanagerial decisions over time.(2) It clarifies the role of uncertainty in evaluating projects.(3) It gives us a method for estimating the option value of projects by applying thequantitative models developed for valuing call options on stocks.2.Discuss the more complex real options of switching options and compound options.Answer:More complex real options would include switching options, which requires the payment of a fixed amount to change operating or production modes. An example would be an electric generatingplant that could switch between using alternative sources of fuel (perhaps coal and natural gas).The option to close down and restart a production line, or exit and then reenter a market are also examples of switching options that can be modeled as portfolios of American put and call options.Complex investment projects, which are typically organized into a set of alternative stages withcritical decision at the end of each stage, can be analyzed as compound options in which options on options exist. For example, a major drug company’s product cycles consist of a research stage in which alternative compounds are tested, a product development stage in which clinical trials are conducted, and a marketing stage in which the final product is brought to market. Each stageinvolves new investments that are conditional on exercise of the option to proceed with the previous stage.3.Discuss real options in the context of the movie industry.Answer:The movie industry provides a good example of the importance of real-option values in evaluating investment projects. Often a movie studio will buy the rights to a movie script and then wait todecide if and when to actually produce it. Thus, the studio has the option to wait. Once production starts, and at every subsequent step in the process, the studio has the option to discontinue theproject in response to information about cost overruns or changing tastes of the moviegoing public.Another very important managerial option in the movie business is the option of the film studio to make sequels. If the original movie turns out to be a success, then the studio has the exclusive right to make additional movies with the same title and characters. The option to make sequels can be a significant part of a movie project’s total value.4.W. Jofish Inc. is considering the acquisition of another firm, B.B. John Corp. Let us assume that bothof these firms are both 100% equity financed firms, that is, neither firm has any debt outstanding.Each firm has 1 million shares of common stock outstanding that can be freely bought and sold in a competitive market. The current value of B.B. John Corp. is $120 million and its standard deviation is0.3. The riskless interest rate is 5%. Suppose B.B. John Corp.’s management offers W. Jofish Inc. anoption to acquire 100% of B.B. John’s shares two years from now for $135 million. The option is priced at $10 million. What is the value of the option? Is this investment worthwhile to W. Jofish?How would the evaluation change if the standard deviation of B.B. John were actually 0.5 instead of0.3?Answer:S E r T σResultNPV = C – Initial investment= $10.98 million – $10 million= $0.98 millionSince the NPV is positive, the project is worthwhile.The value of flexibility increases with the volatility of the project, so we would expect the NPV to increase if the standard deviation increases:S E r T σResultNPV = C – Initial investment= $20.53 million – $10 million= $10.53 millionAs expected, the increase in volatility dramatically increases the NPV of the project.5. A company is considering a new project that would require an initial investment of $25 million and inits second phase one year from now another investment of $210 million to build a plant. From t oday’s perspective the value of the completed plant a year from now is a random variable with a mean of $225 million and a standard deviation of 0.35. The riskless interest rate is 5% per year. What is the NPV of the project?Answer:S E r T ResultNPV = C – Initial investment= $27.89 million – $25 million= $2.89 millionSince the project has a positive NPV, the company should pursue it.。
兹维博迪金融学第二版精彩试题库9TB（1）
兹维博迪金融学第二版精彩试题库9TB（1）Chapter NineValuation of Common StocksThis chapter contains 47 multiple choice questions, 17 short problems, and 9 longer problems. Multiple Choice1.In a quote listing of stocks, the ________ is defined as the annualized dollar dividend dividedby the stock’s price, and is usually expressed as a percentage.(a)cash dividend(b)dividend payout(c)dividend coverage(d)dividend yieldAnswer: (d)2.According to the discounted-dividend model, the price ofa share of stock is the ________value of all expected ________ dividends per share, discounted at the market capitalization rate.(a)present; current(b)present; future(c)future; future(d)future; currentAnswer: (b)3.The value of common stock is determined by which of the following expected cash flows?(a)dividends and interest payments(b)dividends and maturity value of stock(c)dividends and net cash flows from operations of the firm(d)interest payments and maturity valueAnswer: (c)4.The ________ is the expected rate of return that investors require in order to be willing toinvest in the stock.(a)market capitalization rate(b)risk-adjusted discount rate(c)cost of debt(d)a and bAnswer: (d)5.The ________ of dividends is the most basic assumption underlying the discounted dividendmodel.(a)industry average(b)non-constant growth(c)constant growth(d)variabilityAnswer: (c)6.BHM stock is expected to pay a dividend of $2.50 a year from now, and its dividends areexpected to grow by 6% per year thereafter. What is the price of a BHM share if the market capitalization rate is 7% per year?(a)$250.00(b)$192.31(c)$25.00(d)$19.23Answer: (c)7.IOU stock is expected to pay a dividend of $1.67 a year from now, and its dividends are notexpected to grow in the foreseeable future. If the market capitalization rate is 7%, what is the current price of a share ofIOU stock?(a)$11.69(b)$23.86(c)$116.90(d)$238.60Answer: (b)8.GMATS stock is currently selling for $34.50 a share. The current dividend for this stock is$1.60 and dividends are expected to grow at a constant rate of 10% per year thereafter. What must be the market capitalization rate for a share of GMATS stock?(a)4.90%(b)5.36%(c)14.64%(d)15.10%Answer: (d)9.Avacor stock is expected to pay a dividend of $1.89 a year from now, and its dividends areexpected to grow at a constant rate of 5% per year thereafter. If the market capitalization rate is 14% per year, what is the current price of a share of Avacor stock?(a)$13.50(b)$18.90(c)$21.00(d)$37.80Answer: (c)10.GRITO stock is currently selling for $46.10 a share. If the company is expected to pay adividend of $5.60 a year from now and dividends are not expected to grow thereafter, what is the market capitalizationrate for a share of GRITO stock?(a)7.56%(b)8.23%(c)10.50%(d)12.15%Answer: (d)11.In the DDM model, if D1 and k are held constant, what will happen to the price of a stock ifthe constant growth rate gets higher?(a)the price of the stock will be higher(b)the price of the stock will hold constant(c)the price of the stock will be lower(d)it cannot be determined from the information givenAnswer: (a)12.The relation between earnings and dividends in any period is ________.(a)Dividends = Earnings/Net New Investment(b)Dividends = Earnings x Net New Investment(c)Dividends = Earnings + Net New Investment(d)Dividends = Earnings – Net New InvestmentAnswer: (d)13.Consider a firm called Nowhere Corporation, whose earnings per share are $12. The firminvests an amount each year that is just sufficient to replace the production capacity that is wearing out, and so the new investment is zero. The firm pays out all its earnings as dividends. Calculate the price of a share of Nowhere Corporation stock, give that k = 14%.(a)$168.00(b)$166.67(c)$85.71(d)$82.40Answer: (c)14.Consider a firm called SureBet Corporation. SureBet reinvests 55% of its earnings each yearinto new investments that earn a rate of return of 17% per year. Currently, SureBetCorporation has earnings per share of $12 and pays out 45% or $5.40 as dividends. Calculate the growth rate of earnings and dividends.(a)7.65%(b)8.50%(c)9.35%(d)24.75%Answer: (c)15.What adds value to the current price of a share of stock is ________.(a)growth per se(b)tax advantages(c)investment opportunities that earn rates of return > k(d)all of the aboveAnswer: (c)16.In order to evaluate the stock of Beltran Inc., an analyst uses the constant growth discounteddividend model. Expected earnings of $12 per share is assumed, as are an earnings retention rate of 70% and an expected rate of return on future investments of 17% per year. If the market capitalization rate is 14% per year, calculate the price for a share of Beltran stock.(a)$171.43(b)$367.35(c)$400.00(d)$857.14Answer: (a)17.In order to evaluate the stock of The Rendell-Vine Corporation, an analyst uses the constantgrowth discounted dividend model. Expected earnings of $12 per share is assumed, as are an earnings retention rate of 70% and an expected rate of return on future investments of 17% per year. If the market capitalization rate is 14% per year, what is the implied net present value of future investments?(a)$314.29(b)$281.64(c)$171.43(d)$85.72Answer: (d)18.In order to evaluate the stock of Toys’R’Me, an analyst uses the constant growthdiscounted dividend model. Expected earnings of $14 per share is assumed, as are anearnings retention rate of 60% and an expected rate of return on future investments of 17% per year. If the market capitalization rate is 15% per year, what is the implied net present value of future investments?(a)$23.34(b)$70.00(c)$93.34(d)$116.67Answer: (a)19.Firms with consistently high P/E multiples are interpretedto have either relatively ________market capitalization rates or relatively ________ present value of value-added investments.(a)low; low(b)high; high(c)high; low(d)low; highAnswer: (d)20.In a “frictionless” financial environment, the shareholders wealth is ________ the dividendpolicy the firm adopts.(a)increased by(b)decreased by(c)not affected by(d)determined byAnswer: (c)21.In a ________ the company pays cash to buy shares of its stock in the stock market, therebyreducing the number of shares outstanding.(a)cash dividend(b)share repurchase(c)stock split(d)a and bAnswer: (b)22.Stock splits and stock dividends ________ the number of shares of stock outstanding.(a)decrease(b)do not alter(c)increase(d)a or bAnswer: (c)23.SureBet Corporation has total assets with a market value of $15 million: $3 million in cashand $12 million in other assets. The market value of its debt is $3 million; of its equity $12 million. There are 1,000,000 shares of SureBet common stock outstanding, each with amarket price of $12. If SureBet distributes a cash dividend of $1.50 per share, the market value of its assets and of its equity ________ by ________.(a)increases; $1.5 million(b)increases; $10.5 million(c)decreases; $1.5 million(d)decreases; $10.5 millionAnswer: (c)24.SureBet Corporation has total assets with a market value of $15 million: $3 million in cashand $12 million in other assets. The market value of its debt is $3 million; of its equity $12 million. There are 1,000,000 shares of SureBet common stock outstanding, each with amarket price of $12. If SureBet repurchases shares worth $2.4 million, the resulting number of shares outstanding is ________ , with a price per share of ________.(a)200,000; $15(b)200,000; $12(c)800,000; $15(d)800,000; $12Answer: (d)25.“Frictions” that can cause a firm’s dividend policy to have an effect on the wealth ofshareholders include:(a)regulations(b)taxes(c)cost of external finance(d)all of the aboveAnswer: (d)26.Outside investors may interpret an increase in a corporation’s cash dividend as ________sign.(a)a positive sign(b)a negative sign(c)an indifferent sign(d)b or cAnswer: (a)27.From the perspective of a shareholder with regard to personal taxation, it is always ________for the corporation to pay out cash by ________.(a)better; cash dividends(b)worse; cash dividends(c)worse; share repurchases(d)it varies according to the situationAnswer: (b)28.An increase in a corporation’s cash dividend is most likely to ________.(a)decrease the price of its stock(b)increase the price of its stock(c)have no impact on the price of its stock(d)decrease trading activity of its stockAnswer: (b)29.Raising cash by issuing new stock is ________ to the corporation than raising cash byforegoing the payments of dividends.(a)is less costly(b)is more costly(c)is no different(d)just as costlyAnswer: (b)30.Gough Fraser is considering purchasing the stock of ASIOA Companies, which he plans tohold indefinitely. ASIOA just paid an annual dividend of $2.50 and the price of the stock is $48 per share. The earnings and dividends of the company are expected to grow forever at a rate of 6 percent per year. What annual rate of return does Gough expect on his investment?(a)10.58%(b)11.21%(c)11.52%(d)12.46%Answer: (c)31.Beazley Inc. just paid a dividend of $3.00 per share. This dividend is expected to grow at asupernormal rate of 15 percent per year for the next two years. It is then expected to grow at a rate of 6 percent per year forever. The appropriate discount rate for Beazley’s stock is 17 percent. What is the price of the stock?(a)$17.64(b)$27.27(c)$33.78(d)$46.15Answer: (c)32.Beazley Corporation would like to raise $100,000,000 byissuing preferred stock. Thepreferred stock will have a par value of $1,000 per share and pay a dividend of $72 per year.If the required rate of return for this stock is 16 percent, how many shares of preferred stock must Beazley issue?(a)450(b)16,000(c)222,222(d)265,332Answer: (c)33.If you use the constant dividend growth model to value a stock, which of the following iscertain to cause you to increase your estimate of the current value of the stock?(a)Decreasing the required rate of return for the stock(b)Decreasing the estimate of the amount of next year’s dividend(c)Decreasing the expected dividend growth rate(d)All of the aboveAnswer: (a)34.The constant dividend growth model may be used to find the price of a stock in all of thefollowing situations except when:(a)g < k(b)k < g(c)g = 0(d)k≠ gAnswer: (b)35.CarsonCorp just paid an annual dividend of $3.00. Dividends are expected to grow at aconstant rate forever. The price of the stock is currently $63.00. The required rate of return for this stock is 15 percent. What is the expected growth rate of CarsonCorp’s dividend?(a)5.00%(b)5.48%(c)6.33%(d)10.00%Answer: (a)36.The common stock of Century Inc. is expected to pay a dividend of $2.00 one year fromtoday. After that the dividend is expected to grow at a rate of 10 percent per year for two years and then at a rate of 5 percent per year forever. If the required rate of return for this stock is 15 percent what is the current price?(a)$12.00(b)$18.29(c)$21.69(d)$25.40Answer: (c)37.A firm’s common stock is trading at $80 per share. In the past the firm has paid a constantdividend of $6 per share. However, the company has just announced new investments that the market did not know about. The market expects that with these new investments, the dividends should grow at 4% per year forever. Assuming that the discount rate remains the same, what will be the price of the stock after the announcement?(a)$94.50(b)$156.00(c)$171.43(d)$178.29Answer: (d)38.If the model below is to give a reasonable valuation of a stock, which of the followingpossible situations must be excluded?P0 = D1/(r – g)(a)There is no growth.(b)The growth rate exceeds the required rate of return.(c)The required rate of return is exceptionally high.(d)Growth is constant.Answer: (b)39.According to the constant growth model of stock valuation, capital appreciation in commonstock is a direct result of ________.(a)growth in future dividends(b)a reduction in the required rate of return(c)growth in corporate assets(d)a growth rate that exceeds the required rate of returnAnswer: (a)Questions 40 through 43 refer to the following information: New competition in Sophco’s market is going to have an impact on the growth in thefirm’s dividends. A current divid end of $1.00 was paid yesterday by Sophco, and thisdividend is expected to increase by 25% in the first year. After that point, the growth individends is expected to “decay” to the firm’s long-run constant growth of 10%. Sucha “decay” process is one in which dividend growth declines by 5 percentage points peryear up to the point where the expected constant rate of dividend growth is reached. So,year 2 dividend will be 20 percent higher than year 1, year 3 dividends will be 15 percent higher than year 1, and after year 3, dividends will grow by 10 percent forever. Forproblems 40 – 43, assume investors in Sophco require a rate of return of 15%.40.Calculate Sophco’s dividend in year 2.(a)$1.13(b)$1.25(c)$1.5(d)$1.73Answer: (c)41.Calculate the Sophco’s dividend in year 4.(a)$1.24(b)$1.57(c)$1.73(d)$1.90Answer: (d)42.Determine the price of Sophco’s stock at the end of year 3 (just after the dividend has beenpaid).(a)$26.12(b)$28.34(c)$38.00(d)$39.73Answer: (c)43.Calculate the current price of Sophco’s stock.(a)$26.12(b)$28.34(c)$38.00(d)$39.73Answer: (b)Questions 44 through 47 refer to the following information: New competition in Acme Unlimited’s market is going to have an impact on the growth of the firm’s dividends. A current dividend of $1.50 was paid yesterday, and thisdividend is expected to increase by 35% in the first year. After that point, the growth individends is expected to “decay” to the firm’s long run constant growth of 5%. Such a “decay” process is one in which dividend growth declines by 10 percentage points per year up to the point where the expected constant rate of dividend growth is reached. So, year 2 dividend will be 25 percent higher than year 1, year 3 dividend will be 15 percent higher, and after year 3, dividends will grow by 5 percent forever. Assume that investors require a rate of return of 17 on Acme Unlimited’s stock.44.Calculate the dividend in year 2.(a)$2.54(b)$2.92(c)$3.21(d)$3.30Answer: (a)45.Calculate the dividend in year 4.(a)$2.35(b)$2.54(c)$3.21(d)$3.53Answer: (c)46.Determine the price of Acme Unlimited’s stock at theend of year 3 (just after the dividendhas been paid).(a)$22.13(b)$26.75(c)$29.67(d)$34.24Answer: (b)47.Calculate the current price of Acme Unlimited’s sto ck.(a)$22.13(b)$26.75(c)$29.67(d)$34.24Answer: (a)Short Problems1.Discuss the two ways in which a corporation can distribute cash to its shareholders.Answer:There are two ways a corporation can distribute cash to its shareholders: by paying acash dividend or by repurchasing the company’s shares in the stock market. When acompany pays a cash dividend, all shareholders receive cash in amounts proportional to the number of shares they own.In a share repurchase, the company pays cash to buy shares of its stock in the stockmarket, thereby reducing the number of shares outstanding. In this case, onlyshareholders who choose to sell some of their shares will receive cash.2.Does growth “per se” add value to the current price of ashare? If not, what does add valueto a share’s current price?Answer:Growth per se does not add value. What adds value is the opportunity to invest inprojects that can earn rates of return in excess of the required rate, k. When a firm’sfuture investment opportunities yield a rate of return equal to k, the stock’s value can be estimated using the formula P0 = E1/k.3.In order to evaluate the stock of DippinDonuts, an analyst uses the constant growthdiscounted dividend model. Expected earnings of $15 per share are assumed, as are anearnings retention rate of 70% and an expected rate of return on future investments of 18% per year. If the market capitalization rate is 15% per year, what is the implied net present value of future investments?Answer:g = 0.7 x 0.18= 12.6%Use the constant growth formula to solve for P0:P0 = D1/(k – g)= 4.50/(0.15-0.126)= $187.50Next find P0 with the formula P0 = E1/k:= 15/0.15= $100The NPV of future investments is the difference between these two values: $187.50 –$100 = $87.504.In order to evaluate the stock of EasyStreet Corporation, an analyst uses the constant growthdiscounted dividend model. Expected earnings of $16 per share are assumed, as are anearnings retention rate of 60% and expected rate of return on future investments of 17% per year. If the market capitalization rate is 14% per year, what is the implied net present value of future investments?Answer:g = 0.6 X 0.17= 10.2%Use the constant growth formula to solve for P0:P0 = D1/(k – g)= $6.40/(0.14 – 0.102)= $168.42Next find P0 with the formula P0 = E1/k:= 16/0.14= $114.29The NPV of future investments is the difference between the two values: $168.42 –$114.29 = $54.13./doc/2e3789790.html,anic Earth stock is expected to pay a dividend of $2.70 per share a year from now, and itsdividends are expected to grow by 7% per year thereafter. If its price is now $30 per share, what must be the market capitalization rate?Answer:Use the constant growth formula to solve for k:P0 = D1/(k – g)30 = 2.70/(k – 0.07)k = 16%6.Walch stock currently sells for $27.62 a share, and is expected to pay a dividend of D1 a yearfrom now. If its dividends are expected to grow by 4.5% per year thereafter and thecapitalization rate is 15% per year, what is the value of D1?Answer:Use the constant growth formula to solve for D1:P0 = D1/(k – g)D1 = P0(k – g)= $27.62(0.15 – 0.045)= $2.907.Discuss how outside investors may interpret an increase ina corporation’s cash dividend asopposed to a decrease.Answer:Inves tors may interpret an increase in a corporation’s cash dividend as a positive sign since it would suggest that management is confident the earnings can be sustained in the future.The result is most likely to be an increase in stock price. A decrease could be viewed as a bad signal that will most likely cause a decline in stock price.8.Consider the balance sheet of SureThing Corporation:Assets Liabilities and Shareholders’ EquityCash: $3 million Debt: $3 millionOther Assets: $11 million Equity: $11 millionTotal: $14 million T otal: $14 millionNumber of shares outstanding = 440,000Price per share = $25If SureThing pays a cash dividend of $2.50 per share, what will the balance sheet look like afterward?Answer:Balance sheet after payment of cash dividend:Assets Liabilities and Shareholders’ EquityCash: $1.9 million Debt: $3 millionOther assets: $11 million Equity: $9.9 millionTotal: $12.9 million Total: $12.9 millionNumber of shares outstanding = 440,000Price per share = $22.509.Consider the balance sheet of SureThing Corporation:Assets Liabilities and Shareholders’ EquityCash: $3 million Debt: $3 millionOther assets: $11 million Equity: $11 millionTotal: $14 million T otal: $14 millionNumber of shares outstanding = 440,000Price per share = $25If SureThing Corporation repurchases shares worth $2.5 million, what will the new balance sheet for SureThing Corporation look like?Answer:Balance sheet after share repurchase:Assets Liabilities and Shareholders’ EquityCash: $0.5 million Debt: $3 millionOther assets: $11 million Equity: $8.5 millionTotal: $11.5 million Total: $11.5 million Number of shares outstanding = 340,000Price per share = $2510.Consider the balance sheet of SureThing Corporation:Assets Liabilities and Shareholders’ Eq uity Cash: $3 million Debt: $3 million Other assets: $11 million Equity: $11 million Total: $14 million Total: $14 million Number of shares outstanding = 440,000Price per share = $25If SureThing is paying a 20% stock dividend, what will the number of shares outstanding be?What will be the price per share?What would be the effect of a two-for-one stock split?Answer:After paying a 20% stock dividend:Number of shares outstanding = 528,000Price per share = $20.83After a two-for-one stock split:Number of shares outstanding = 880,000Price per share = $12.5011.Gough Fraser is considering purchasing the stock of ASIOA Companies, which he plans tohold indefinitely. ASIOA just paid an annual dividend of $3.00 and the price of the stock is $48 per share. The earnings and dividends of the company are expected to grow forever at a rate of 6 percent per year. What annual rate of return does Gough expect on his investment?Answer:D1 is 3.00. Given 6% annual growth, D1 = 3.00 x 1.06 = 4.80.Use the constant growth formula to solve for k:P0 = D1/(k – g)48 = 4.80/(k – 0.06)48k – 2.88 = 4.8048k = 7.68k = 16%12.Halpert Corporation would like to raise $100,000,000 by issuing preferred stock. Thepreferred stock will have a par value of $1,000 per share and pay a dividend of $48 per year.If the required rate of return for this stock is 15 percent, how many shares of preferred stock must Halpert issue?Answer:P0 = D1kP0 = $480.15= $320Number of shares = $100,000,000/$320= 312,500 shares13.Aslan Inc. just paid a dividend of $5.00 per share. This dividend is expected to grow at asupernormal rate of 20 percent per year for the next two years. It is then expected to grow at a rate of 5 percent per year forever. The appropriate discount rate for Aslan’s stock is 17 percent. What is the price of the stock?Answer:D0 = $5D1 = $5(1.2)= $6.00D2 = $6.00(1.2)= $7.20D3 = $7.20(1.05) = $7.56P2 = D3/(k – g)= $7.56/(0.17 – 0.05)= $63.00P0 = $6.00/(1.17) + ($7.20 + $63.00)/(1.17)2= $56.4114.Druids Corp. just paid an annual dividend of $2.50. Dividends are expected to grow at aconstant rate forever. The price of the stock is currently $38.40. The required rate of return for this stock is 15 percent. What is the expected growth rate of Druids dividend?Answer:D0 = $2.50D1 = $2.50(1 + g)P0 = $38.40k = 15%Use the constant growth formula to solve for g:P0 = D1/(k – g)38.40 = 2.50(1 + g)/(0.15 – g)5.76 – 38.4g = 2.5 + 2.5g3.26 = 40.9g0.0797 = g15.The common stock of Century Inc. is expected to pay a dividend of $1.80 one year fromtoday. After that the dividend is expected to grow at a rate of 15 percent per year for two years and then at a rate of 5 percent per year forever. If the required rate of return for this stock is 15 percent, what is the current price?Answer:D1 = $1.80D2 = $2.07D3 = $2.38D4 = $2.50P3 = $2.50/(0.15 – 0.05)= $25.00P0 = 1.80/(1.15) + 2.07/ (1.15)2 + (2.38 + 25.00)/(1.15)3 = $21.14。
兹维博迪金融学第二版试题库12TB
兹维博迪金融学第二版试题库12TBChapter TwelvePortfolio Opportunities and ChoiceThis chapter contains 30 multiple choice questions, 10 short problems, and 5 longer problems.Multiple Choice1. A person's wealth portfolio consists of all one’s ________ and ________.(a)retained earnings; credit(b)stocks; bonds(c)assets; liabilities(d)student loans; mortgagesAnswer: (c)2.The principle of diversification usually applies to all ________.(a)risk averse people(b)risk neutral people(c)risk tolerant people(d)b and cAnswer: (a)3.Which of the following decisions can be considered part of portfolio selection?(a)Whether to buy or rent one’s house(b)What kind of life insurance to purchase(c)Whether to invest in stocks or bonds(d)All of the aboveAnswer: (d)12-14.An insurance policy that guarantees a person an income for as long as one lives is termed a ________.(a)lump sum payment(b)life annuity(c)perpetual annuity(d)life perpetuityAnswer: (b)5.The ________ is the length of time between decisions to revise portfolios, whereas the ________ isthe total length of time for which one plans.(a)trading horizon; decision horizon(b)planning horizon; decision horizon(c)decision horizon; trading horizon(d)decision horizon; planning horizonAnswer: (d)6.In making portfolio-selection decisions, people can in general achieve a ________ expected rate ofreturn by exposing themselves to ________ risk.(a)higher; no(b)higher; greater(c)higher; lower(d)lower; greaterAnswer: (b)7.The ________ the assets that make up the portfolio is found to be a very important factor whenconsidering the ability of diversification to reduce the riskiness of an investor's portfolio.(a)expected return of(b)variance of(c)correlation among(d)skewness amongAnswer: (c)12-28.Risk tolerance can be influenced by which of the following characteristics?(a)job status(b)age(c)wealth(d)all of the aboveAnswer: (d)9.The ________ is defined as a security that offers a perfectly predictable rate of return in terms of theunit of account and the length of the investor's decision horizon.(a)riskless asset(b)risky asset(c)30-day bond(d)30-day debentureAnswer: (a)10.A portfolio contains one risky asset and one riskless asset. The expected rate of return on the riskyasset is 0.13 and the riskless rate is 0.05. The standard deviation of the risky asset is 0.2, and the standard deviation of the portfolio is 0.075. What is the expected rate of return on the portfolio using the trade-off line?(a)0.0490(b)0.0800(c)0.0980(d)0.1175Answer: (b)11.An investor has a $100,000 investment to allocate between a risky asset and a riskless asset. Theequation for the trade-off line is determined to be E(r) = 0.05 + 0.09w. If the investor is requiring a portfolio composition corresponding to an expected rate of return of 0.11, how much should be invested in the risky asset?(a)$18,181(b)$33,333(c)$66,667(d)$81,819Answer: (c)12-312.An investor has a $100,000 investment to allocate between a risky asset and a riskless asset. Theequation for the trade-off line is determined to be E(r) = 0.07 + 0.12w. If the investor is requiring a portfolio composition corresponding to an expected rate of return of 0.17, how much should beinvested in the riskless asset?(a)$16,667(b)$29,412(c)$70,588(d)$83,333Answer: (a)13.An investor has a $100,000 investment to allocate between a risky asset and a riskless asset. Theequation for the trade-off line is determined to be E(r) = 0.07 + 0.12w. If the investor requires aportfolio composition corresponding to an expected rate of return of 0.17, what is the corresponding standard deviation of the portfolio? The standard deviation of risky asset is 0.3.(a)0.05(b)0.25(c)0.49(d)0.83Answer: (b)14.The expected rate of return on a risky asset is 0.13 and the riskless rate is 0.06. The standard deviationof the risky asset is 0.25. What happens to the slope of the trade-off line if the riskless rate changes to0.05 per year and the expected return on the risky asset changes to 0.14?(a)No change(b)The slope of the line falls from 36% to 28%(c)The slope of the line rises from 28% to 36%(d)The slope of the line rises from 52% to 56%Answer: (c)15.The formula for the trade-off line between risk and expected return is ________.(a)E(r) = r f+ w[E(r s) –r f](b)E(r) = r f+ [E(r s) –r f](c)E(r) = r f+ w[E(r s) + r f](d)all of the aboveAnswer: (a)12-416.In the trade-off line, the risk premium depends on ________(a)the risk premium of the risky asset(b)the proportion of the portfolio invested in the risky asset(c)the risk premium of the riskless asset(d)both a and bAnswer: (d)17.When one of the two assets in a portfolio is riskless, thestandard deviation of its rate of return and itscorrelation with other asset are________.(a)greater than zero but less than positive one(b)less than zero but greater than negative one(c)zero(d)none of the aboveAnswer: (c)18.The expected rate of return on a risky asset is 0.16 and the riskless rate is 0.07. The standard deviationof the risky asset is 0.2. What happens to the slope of the trade-off line if the riskless rate changes to .06 per year and the expected return on the risky asset changes to 0.15?(a)no change(b)the slope rises from 0.45 to 0.5(c)the slope falls from 0.5 to 0.45(d)the slope falls from 0.45 to 0.4Answer: (a)19.A portfolio contains a riskless asset with an expected rate of return of 0.06 and a risky asset with anexpected rate of return of 0.15. The standard deviation of the risky asset is 0.25. If the expected rate of return of this portfolio is 0.10, what is its standard deviation?(a)0.11(b)0.14(c)0.22(d)0.44Answer: (a)12-5Consider a portfolio of two risky assets with the following distribution of rates of return on risky assets for questions 20 and21. The portfolio is 55% Risky Asset 1 and 45% Risky Asset 2, and the correlation coefficient is 0.4.Risky Asset 1 Risky Asset 2MeanStandard Deviation 0.160.250.090.1820.What is the mean of this portfolio?(a)0.1215(b)0.1285(c)0.2005(d)0.2185Answer: (b)21.What is the standard deviation of this portfolio?(a)0.15958(b)0.18541(c)0.25467(d)0.34378Answer: (b)Consider a portfolio of two risky assets with the following distribution of rates of return on risky assets for questions 22 and 23. The portfolio is 70% Risky Asset 1 and 30% Risky Asset 2, and the correlation coefficient is 0.3.Risky Asset 1 Risky Asset 2MeanStandard Deviation 0.120.160.200.3022.What is the mean of this portfolio?(a)0.1716(b)0.1600(c)0.1414(d)0.1320Answer: (c)12-623.What is the standard deviation of this portfolio?(a)0.16338(b)0.14368(c)0.02669(d)0.02064Answer: (a)24.In practice, the vast majority of assets are positively correlated with each other because they are allaffected by ________.(a)common economic factors(b)firm specific factors(c)potential lawsuits(d)managerial inefficienciesAnswer: (a)25.A mutual fund company offers a safe money market fund whose current rate is 0.04. The samecompany also offers an equity fund with an aggressive growth objective, which historically has exhibited an expected return of 0.25 and a standard deviation of 0.30. Derive the equation for the risk-reward trade-off line.(a)E(r) = 0.04 + 0.25σ(b)E(r) = 0.04 + 0.7σ(c)E(r) = 0.04 + 0.21σ(d)E(r) = 0.04 + 0.83σAnswer: (b)26.The ________ refers to the set of portfolios of risky assets offering the highest possible expected rateof return for any given standard deviation.(a)minimum portfolio frontier(b)effective portfolio frontier(c)expected portfolio frontier(d)efficient portfolio frontierAnswer: (d)12-727.The optimal combination of risky assets is found as ________ between a straight line representing theriskless asset and the efficient frontier of risky assets.(a)the point of bisection(b)the point of intersection(c)the point of tangency(d)the point of highest returnAnswer: (c)28.The power of diversification to reduce the riskiness of an investor’s portfolio depends on the________ among the assets that make up the portfolio.(a)expected returns(b)variances(c)correlations(d)none of the aboveAnswer: (c)29.In the context of the optimal combination of risky assets, in order to decide on the menu of assetchoices to offer its customers a financial intermediary shouldconsider:(a)investor preferences(b)the expected returns and standard deviations of the risky assets(c)both a and b(d)neither a nor bAnswer: (b)30.An investor has $100,000 invested in a portfolio that is composed of a tangency portfolio and ariskless asset, such that 35% is in the tangency portfolio and 65% is in the riskless asset. If thetangency portfolio is composed of 43.75% Risky Asset A and 56.25% Risky Asset B, which of the following accurately displays the amount of money invested in each component of the portfolio?(a)$35,000 in Riskless Asset; $43,750 in Risky Asset A; $56,250 in Risky Asset B(b)$65,000 in Riskless Asset; $43,750 in Risky Asset A; $56,250 in Risky Asset B(c)$35,000 in Riskless Asset; $28,437.50 in Risky Asset A; $36,562.50 in Risky Asset B(d)$65,000 in Riskless Asset; $15,312.50 in Risky Asset A; $19,687.50 in Risky Asset BAnswer: (d)12-8Short Problems1.Discuss the time horizons as they relate to portfolio planning.Answer:In formulating a plan for portfolio selection you begin bydetermining our goals and timehorizons. The planning horizon is the total length of time for which one plans. Thelongest time horizon would typically correspond to the retirement goal and would be thebalance of one’s lifetime. There are also shorter planning horizons that correspond tospecific financial goals, such as paying for a child’s education. The decision horizon isthe length of time between decisions to revise the portfolio. The length of the decisionhorizon is controlled by the individual, within certain limits. The shortest possibledecision horizon is the trading horizon, defined as the minimum time interval over whichinvestors can revise their portfolios.2.What is the riskless asset if the unit of account is the Japanese Yen and the length of the decisionhorizon is a month?Answer:The Japanese Yen one-month zero-coupon bond.3.Describe the steps involved in the portfolio optimization process.Answer:(1) Find the optimal combination of risky assets.(2) Mix this optimal risk-asset portfolio with the riskless asset.12-94.Who would you expect to be more risk tolerant, a young investor or an elderly one? An investor ormoderate means or a wealthy one?A young person with a secure job can look forward to a long period of earning a salarythat will probably increase with the rate of inflation. For her, investment in stocks wouldnot be as risky as for an older person who needs to ensure a steady source of income forthe rest of his life. A wealthier individual may be willing to take more risks (than a poorerperson) because his capacity to take bigger gambles and lose is higher. That is, he maystill be quite wealthy after his losses.5.An investor has a $100,000 investment to allocate betweena risky asset and a riskless asset. Theequation for the trade-off line is determined to be E(r) = 0.05 + 0.07w. If the investor requires aportfolio composition corresponding to an expected rate of return of 0.10, how much should beinvested in the risky asset? In the riskless asset?Answer:E(r) = 0.05 + 0.07w0.10 = 0.05 + 0.07w0.05 = 0.07w0.71429 = wThe investor should invest $71,429 in the risky asset and $28,571 in the riskless asset. 6.An investor has $75,000 to allocate between a risky asset and a riskless asset. The equation for the trade-off line is determined to be E(r) = 0.06 + 0.1w. If the investor requires a portfolio composition with an expected rate of return of 0.12, how much should be invested in each asset?E(r) = 0.06 + 0.1w0.12 = 0.06 + 0.1w0.06 = 0.1w0.6 = w0.6($75,000) = $45,000 should be invested in the risky asset0.4($75,000 = $30,000 should be invested in the riskless assetThere would have to be 16 million uncorrelated drugs in the portfolio.12-107.Consider the portfolio of two risky assets with the following distribution of rates of return on riskassets.Risky Asset 1 Risky Asset 2MeanStandard Deviation 0.170.230.100.19What are the mean and standard deviation of a portfolio that is 60% Risky Asset 1 and 40% Risky Asset 2 if the correlation coefficient is 0.3?Answer:E(r) = wE(r1) + (1 - w)E(r2)= 0.6(0.17) + 0.4(0.10)= 0.142The mean is 14.2%σ2= w2σ12 + (1 - w)2σ22 + 2w(1-w)ρ1,2σ1σ2= (0.6)2(0.23)2 + (0.4)2(0.19)2 + 2(0.6)(0.4)(0.3)(0.23)(0.19) σ2= 0.03111σ= 0.17639The standard deviation is 17.6%8.An investor has a $150,000 investment to allocate betweena risky asset and a riskless asset. Theexpected rate of return for the risky asset is 0.18 and the expected rate of return for the riskless asset is 0.07. The standard deviation of the risky asset is 0.2. If the investor requires a portfoliocomposition corresponding to an expected rate of return of 0.15, what is the standard deviation of the portfolio?Answer:Use the trade-off line to find w:E(r) = r f + w[E(r s) – r f)0.15 = 0.07 + w[0.18 – 0.07]0.15 = 0.07 + 0.11w0.08 = 0.11w0.7272 = wSo the standard deviation of the portfolio is 0.2(0.7272) = 0.1455.12-119.Discuss how to create efficient portfolios when the raw materials are two risky assets and a risklessasset.Answer:Let us now summarize what we have learned about creating efficient portfolios when the rawmaterials are two risky assets and a riskless asset. There is a single portfolio of the two riskyassets that it is best to combine with the riskless asset. We call this particular risky portfolio the optimal combination of riskyassets. The preferred portfolio is always some combination of this tangency portfolio and the riskless asset10.The expected rate of return on a risky asset is 0.19 and the riskless rate is 0.05. The standard deviationof the risky asset is 0.3.a. What happens to the slope of the trade-off line if the riskless rate decreases to 0.04 and theexpected return on the risky asset increases to 0.2?b. What happens to the slope of the trade-off line if the riskless rate increases to 0.06 and theexpected return on the risky assets increases to 0.2?Answer:a. Slope = (E(r s) –r f)/σsSlope of original scenario: (0.19 – 0.05)/0.3 = 0.14/0.3 = 0.467 Slope in revised scenario: (0.20 – 0.04)/0.3 = 0.16/0.3 = 0.533 The slope rises from 0.467 to 0.533.b.Slope of original scenario: (0.19 – 0.05)/0.3 = 0.14/0.3 = 0.467 Slope in revised scenario: (0.20 – 0.06)/0.3 = 0.14/0.3 = 0.467 The slope is unchanged.12-12Longer Problems1. A mutual fund advertises a money market fund whose current rate is 0.06, and is deemed “safe.” Inaddition, the mutual fund also offers an equity fund that is considered very aggressive in terms of growth. Historical expected returns are 0.30 with a standard deviation of 0.25.(a) Derive the risk-reward trade-off line.(b) For each unit of extra risk that an investor bears, how much extra expected return willresult?(c) What allocation should be placed in the money market fund if an investor desires anexpected return of 18%?Answer:(a) E(r) = r f + w[E(r s) – r f)= 0.06 + w[0.3 – 0.06]= 0.06 +0 .24w= 0.06 +0 .24(σ/0.25)= 0.06 + 0.96σ(b) For each unit of extra risk that an investor bears, the extra expected return will be 0.96(the slope of the risk-reward line)(c) 0.18 = 0.06 + w[0.30 - 0.06]0.18 = 0.06 + 0.24w0.12 = 0.24w0.5 = wInvest 50% in the money market fund and 50% in the equity fund.12-132.Suppose you are the manager of a mutual fund and a client comes to you wanting to invest 65% of aportfolio into your mutual fund and the remaining 35% into a “safe” money market fund. The mutual fund that you manage has an expected rate of return of 0.18 and a standard deviation of 0.25. The money market fund rate is 0.065.(a) If your client invests as described above, what is the expected return and standarddeviation of his portfolio?(b) The fund that you manage has the following stocks andtheir corresponding proportions:Stock X: 30%, Stock Y: 35%, and Stock Z: 35%If we include the position in the riskless asset, what are the investment proportions ofyour client’s portfolio?Answer:(a) E(r) = r f + w[E(r s) – r f)= 0.065 +0 .65[0.18 – 0.065]= 0.065 + 0.65[0.115]= 0.13975σ= 0.65 (0.25)= 0.1625(b) Stock X: (0.65 x 30%) = 19.50%Stock Y: (0.65 x 35%) = 22.75%Stock Z: (0.65 x 35%) = 22.75%Riskless Asset: = 35.00%Total = 100.00%12-143.If we have many risky assets to choose from, how do we determine the optimal combination of riskyassets?Answer:When there are many risky assets we use a two-step method of portfolio constructionsimilar to the one used in the previous section. In the first step, we consider portfoliosconstructed from the risky assets only, and in the second step we find the tangencyportfolio of risky assets to combine with the riskless asset. Because the computationinvolves a lot of number crunching, it is best done using computers. The efficientportfolio frontier is defined as the set of portfolios of risky assets offering the highestpossible expected rate of return for any given standard deviation. The reason theindividual basic assets lie inside the efficient frontier is that there is usually somecombination of two or more basic securities that has a higher expected rate of returnthan the basic security for the same standard deviation.The optimal combination of risky assets is found as the point of tangency between astraight line from the point representing the riskless asset and the efficient frontier ofrisky assets. The straight line connecting the riskless asset and the tangency pointrepresenting the optimal combination or risky assets is the best feasible risk rewardtradeoff line.4.Suppose you have the following two stocks:Risky Asset A Risky Asset BMean 0.10 0.18Standard Deviation 0.12 0.25_____________________________________________________The minimum-variance portfolio of these assets requires investment proportions of 83.92% ofRisky Asset A and 16.08% of Risky Asset B. The correlation between the two stocks is 0.1?What is the corresponding expected return and standarddeviation of the portfolio?Answer:The corresponding E(r) = w1 E(r1) + (1 - w1) E(r2)= 0.8392 (0.1) + 0.1608 (0.18)= 0.113The corresponding σ2= w12σ12 + (1 - w1)2σ22 + 2w(1 - w1) ρ1,2σ1σ2σ2= 0.01257So σ= 0.11212-155.Is it true that investing in stocks is less risky in the long run than the short run? Why or why not?Answer:There is a widespread—but mistaken—belief that stocks are less risky in the long run than in the short run. Based on this belief, it is generally inferred that you should invest more of your money in stocks the longer your planned holding period. Two propositions have been used to persuadeskeptics that this so-called time diversification effect is valid: The longer the investor’s holdi ng period, the smaller the standard deviation of the annualized rate of return on stocks.The longer the investor’s holding period, the lower the probability that stocks will earn a rate of return less than the corresponding risk-free interest rate on bonds.Although they are true, these propositions do not support the validity of the claim that stocks are less risky in the long run than in the short run or that you should invest more in stocks because you have a longer planned holding period. Let us explain why. First, the fact that the standarddeviation of the annualized rate of return on an investmentin stocks declines as the length of the holding period increases is merely an artifact of expressing investment performance in terms of the annualized rate of return. There is no genuine diversification in this situation. You care about the amount of wealth that you will have at the end of the holding period, and there is no decline in its standard deviation. For example, compare the results of investing all of your money in stocks versus risk-free bonds for one year and for 25 years. Even though the standard deviation of your annualized rate of return for the 25-year period is approximately one-fifth of the one-year result, the standard deviation of your ending wealth for the 25-year holding period is five times greater than the one-year standard deviation. Second, it is true that the longer the holding period, thelower the probability of a shortfall, defined as the stock portfolio’s earning less than the ri sk-free interest rate over that same period. However, the risk of a shortfall depends on its severity when it happens as well as its probability of happening. If we consider measures of risk that take account of both the severity and the probability of a shortfall, there is no decline in risk as the holdingperiod lengthens. For example, consider as a measure of risk the price of insuring a stock portfolio against a shortfall. It actually increases with the length of the holding period.12-16。
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Chapter SevenPrinciples of Market ValuationThis chapter contains 30 multiple choice questions，10 short problems and 5 longer problems. Multiple Choice1.In regard to an asset，the ________ is defined as the process well-informed investors mustpay for it in a free and competitive market.(a)analyst value(b)technical value(c)competitive value(d)fundamental valueAnswer：(d)2.In corporate finance decision making，an extremely important rule is to choose theinvestment that ________ current shareholders’ wealth.(a)minimizes(b)maximizes(c)provides zero change in(d)jeopardizesAnswer：(b)3.In asset valuation，the method used to accomplish the estimation depends on the ________.(a)number of participants(b)quality of calculating instruments(c)richness of the information set available(d)geographic locationAnswer：(c)4.The ________ states that in a competitive market，if two assets are equivalent，they willtend to have the same market price.(a)Law of Real Interest Rates(b)Law of One Price(c)Law of Price Equivalency(d)Law of FuturesAnswer：(b)5.The Law of One Price is enforced by a process called ________，the purchase andimmediate sale of equivalent assets in order to earn a sure profit from a difference in their prices.(a)swapping(b)maximization(c)arbitrage(d)speculationAnswer：(c)6.________ refers to the totality of costs such as shipping，handling，insuring，and brokerfees.(a)Shipping costs(b)Transaction costs(c)Installation costs(d)Insurance costsAnswer：(b)7.The Law of One price is a statement about the price of one asset ________ the price ofanother.(a)absolute to(b)relative to(c)multiplied by(d)independent ofAnswer：(b)8.If an entity borrows at a lower rate and lends at a higher rate，this is an example of________.(a)opportunity arbitrage(b)interest-rate arbitrage(c)exchange arbitrage(d)nominal arbitrageAnswer： (b)9.If arbitrage ensures that any three currencies are freely convertible in competitivemarkets，then:(a)it is enough to know only one exchange rate to determine the third(b)we can estimate two exchange rates based on one exchange rate only(c)it is enough to know the exchange rates between any two in order to determine thethird(d)it is necessary to know all three ratesAnswer：(c)10.Suppose you have $15,000 in a bank account earning an interest rate of 4% per year. At thesame time you have an unpaid balance on your credit card of $6,000 on which you are paying an interest rate of 17% per year. What arbitrage opportunity do you face?(a)$240 per year(b)$600 per year(c)$780 per year(d)$1,020 per yearAnswer：(c)11.If the dollar price of Japanese Yen is $0.009594 per Japanese Yen and the dollar price ofChinese Yuan is $0.1433 per Chinese Yuan，what is the Japanese Yen price of a Chinese Yuan?(i.e.，JPY/CNY)(a)0.001375 JPY/CNY(b)0.066950 JPY/CNY(c)9.594 JPY/CNY(d)14.936419 JPY/CNYAnswer：(d)12.If the dollar price of guilders is $0.5634 per Guilder and the dollar price of Euros is $1.5576per Euro，what is the Euro price of the Guilder?(i.e.，EUR/ANG)(a)0.361700 EUR/ANG(b)0.877552 EUR/ANG(c)2.764643 EUR/ANG(d)5.634 EUR/ANGAnswer：(d)13.Suppose the price of gold is 51.09 British pounds per ounce. If the dollar price of gold is$100 per ounce，what would you expect the dollar price of a British pound to be?(a)$1.95733 per GBP(b)$1.5109 per GBP(c)$0.5109 per GBP(d)$0.4891 per GBPAnswer：(a)Questions 14-18 refer to the following exchange rate table. To answer 14-18 you will have to fill in the missing exchange rates.14.What is the Euro/Peso exchange rate?(i.e.，EUR/MXN)(a)0.617426EUR/MXN(b)0.641807 EUR/MXN(c)6.675516 EUR/MXN(d)16.196262 EUR/MXN Answer：(a)15.What is the Cdn Dlr/Euro exchange rate?(i.e.，CAD/EUR)(a)0.641807 CAD/EUR(b)1.558099 CAD/EUR(c)6.420 CAD/EUR(d)16.196262 CAD/EURAnswer：(b)16.What is the Euro/Cdn Dlr exchange rate?(i.e.，EUR/CAD)(a)0.3583 EUR/CAD(b)0.641807 EUR/CAD(c)1.558099 EUR/CAD(d)10.394 EUR/CADAnswer：(b)17.What is the Peso/Cdn Dlr exchange rate?(i.e.，MXN/CAD)(a)0.096201 MXN/CAD(b)0.641807 MXN/CAD(c)10.394882 MXN/CAD(d)16.196262 MXN/CADAnswer：(c)18.What is the Peso/Euro exchange rate?(i.e.，MXN/EUR)(a)0.617426 MXN/EUR(b)6.675516 MXN/EUR(c)15.581112 MXN/EUR(d)16.196262 MXN/EUR Answer：(d)19.You are travelling in FarOut where you can buy 130 kranes (a krane being the unit ofcurrency of FarOut) with a U.S. dollar at official FarOut banks. Your tour guide has a relative who dabbles in the black market and this particular relative will sell you kranes for just$0.00833 each on the black market. How much will you lose or gain by exchanging $200 on the black market instead of going to the bank?(a)you would gain approximately 1,660 kranes(b)you would lose approximately 1,660 kranes(c)you would gain approximately 1,990 kranes(d)you would lose approximately 1,990 kranesAnswer：(d)20.In estimating the value of a share of a firm’s stock，a simple model is to :(a)divide EPS by a P/E multiple(b)multiply EPS by a P/E multiple(c)multiply EPS by EAT(d)divide EPS by market valueAnswer：(b)21.A firm’s earnings per share are $6 and the industry average P/E multiple is 9. What wouldbe an estimate of the value of a share of the firm’s stock?(a)$54.00(b)$45.00(c)$1.50(d)$0.67Answer：(a)22.The value of the asset as it appears in the financial statement is called the asset’s ________.(a)market value(b)fixed value(c)book value(d)expected valueAnswer：(c)23.Consider the following stock market reaction to the information contained in a company’sannouncement. A corporation has just announced that it must pursue the issuance of company equity. We could expect to see ________ in the price of company stock.(a)a rise(b)a drop(c)a rapid rise(d)zero changeAnswer：(b)24.Consider what the stock market reaction to the following announcement would be. Acorporation has just announced that it is engaging in a stock split of the company’s shares.We could expect to see a ________ in the overall market capitalization rate and a ________ in the price of company stock.(a)rise；drop(b)drop；rise(c)rise；drop(d)rise；dropAnswer：(a)25.The ________ is the proposition that an asset’s current price fully reflects all publiclyavailable information about future economic fundamentals affecting the asset’s value.(a)public markets hypothesis(b)efficient markets exchange rates(c)fundamental value proposition(d)efficient markets hypothesisAnswer：(d)26.The market price of an asset reflects the ________ of all analysts’ opinions with heavierweights on analysts who control large amounts of money and on those analysts who have better than average information.(a)best estimate(b)weighted average(c)highest estimate(d)lowest estimateAnswer：(b)27.Assume that the worldwide risk-free real rate of interest is 4% per year. Inflation in Denmarkis 9% per year and in the United States it is 7% per year. Assuming there is no uncertainty about inflation，what are the implied nominal interest rates denominated in Danish krone and in U.S. dollars，respectively?(a)16.63% (DKK)；13.50% (USD)(b)13.50% (DKK)；16.63% (USD)(c)13.36% (DKK)；11.28% (USD)(d)11.28% (DKK)；13.36% (USD)Answer：(c)28.The ________ theory states that the expected real interest rate on risk-free loans is the sameall over the world.(a)nominal interest-rate parity(b)real interest-rate parity(c)efficient inflation rate parity(d)efficient market rateAnswer：(b)29.________ states that exchange rates adjust so as to maintain the same “real” price of a“representative” basket of goods and services around the world.(a)Purchasing power parity(b)Efficient markets hypothesis(c)Market valuation model(d)Exchange rate equityAnswer：(a)30.Assume that the worldwide risk-free real rate of interest is 5% per year. Inflation in Australiais 9% per year and in Great Britain it is 12% per year. Assuming there is no uncertainty about inflation，what are the implied nominal interest rates denominated in Australian dollars and Great Britain pounds，respectively?(a)22.08% (AUD)，11.45% (GBP)(b)11.45% (AUD)，22.08% (GBP)(c)17.60% (AUD)，14.45% (GBP)(d)14.45% (AUD)，17.60% (GBP)Answer：(d)Short Problems1.Suppose you have $20,000 in a bank account earning an interest rate of 4% per year. At thesame time you have an unpaid balance on your credit card of $7,000 on which you are paying an interest rate of 18% per year. What is the arbitrage opportunity you face?Answer：You could take $7,000 out of your bank account and pay down your creditcard balance. You would give up 4% per year in interest earnings ($280) but you wouldsave 18% per year in interest expenses ($1,260). So the arbitrage opportunity is worth$980 per year.2.Fill in the missing exchange rates in the following table:Answer:3.You observe that the dollar price of the Mexican peso is $0.09618 and the dollar price of theCanadian dollar is $0.9997. What must the exchange rate between the Mexican peso and the Canadian dollar be for there to be no arbitrage opportunity?Answer: CAD/MXN = 0.096180.9997= 0.096208 CAD/MXN4.Suppose that the exchange rate is $0.2970 to the Israeli shekel. How could you makearbitrage profits with $10,000 if the dollar price of gold is $200 per ounce and the shekel price is 750 ILS per ounce?Answer：Take $10,000 and buy 50 ounces of gold at $200 per ounce. Sell 50 ounces of gold in Israel for 37,500 ILS (750 ILS per ounce). Take 37,500 ILS and exchange it into dollars worth $11,137.50. The arbitrage profit is $1,137.50.5.You are travelling in FarOut where you can buy 150 kranes (a krane being the unit ofcurrency in FarOut) with a U.S. dollar at official FarOut banks. Your tour guide has a relative who dabbles in the black market and this particular relative will sell you kranes for just $0.00685 each on the black market. How much would you gain or lose by exchanging $300 on the black market instead of going to the bank?Answer:On the official market：$300 x 150 kranes = 45,000 kranesOn the black market：$300 x 1/0.00685 kranes = 43,796 kranesHence，you would lose 1,204 kranes.6. A firm’s earnings per share are $5.50 and the industry average P/E multiple is 8. Whatwould be an estimate of the value of a share of the firm’s stock?Is it possible for firms being classified in the same industry to have different price/earnings multiples?Answer:Estimated value share of stock = firm’s EPS x Industry average P/E= $5.50 x 8= $44.00Firms classified as being in the same industry may have different opportunities for growth in the future and may therefore differ in their P/E multiples.7.The P/E multiple of BHM Corporation is currently 5，while the P/E ratio of the S&P 500 is10. What reasons could account for this difference?Answer:•BHM’s reported earnings may be higher than they are expected to be in the future，or they may be inflated due to special accounting methods used by BHM.•BHM may be riskier than the S&P 500 either because it is in a relatively risky industry or has a relatively higher debt ratio.8.The price of Hubris Co. stock recently jumped when the CEO for the company announced anincreased dividend payment for the year. What might account for such a market reaction?Answer：The market may believe the company’s future prospects look very bright (that is，higher earnings，less risk，sound growth，etc.) and that the company can sustain such an earnings growth.9.Assume that the worldwide risk-free real rate of interest is 4% per year. Denmark has anexpected rate of inflation of 9% per year and in Spain has an expected rate of inflation of 14% per year. Assuming there is no uncertainty about inflation，what are the implied nominal interest rates denominated in Kroner and Euros?Answer: Denmark：nominal interest rate = (1.04) x (1.09) – 1= 13.36% per yearSpain：nominal interest rate = (1.04) x (1.14) –1= 18.56% per year10.Assume that the worldwide risk-free real rate of interest is 4% per year. The United Kingdomhas an expected rate of inflation of 8% per year and in Belgium it is 10% per year. Assuming there is no uncertainty about inflation，what are the implied nominal interest rates denominated in Pounds Sterling and Euros?Answer: United Kingdom：nominal interest rate = (1.04) x (1.08) – 1= 12.32% per yearBelgium：nominal interest rate = (1.04) x (1.10) – 1= 14.40% per yearLonger Problems1.Let’s assume that you have operated your own business for 18 years. For the most recentfiscal year，sales were $15 million. Net Income for the most recent fiscal year was $1.5million. The book value of your business was $11 million. Recently，a firm which isengaged in similar activities to your own was sold and the following information was made public:Multiple of Book Value 0.8xMultiple of Net Income 11xMultiple of Sales 0.7xa)How would you determine an appropriate range of value for your company?b)It has come to your attention that your company has future investment opportunitiesthat would be less profitable than the competing company above. What does this sayabout the valuation of your company?Answer：a) Multiple of Sales： 0.7x = $15 million x 0.7 = $10.5 millionMultiple of Net Income： 11x = $1.5 million x 11 = $16.5 millionMultiple of Book Value： 0.8x = $11 million x 0.8 = $8.8 millionb) The valuation of your company would be at the lower end of the range.2.BHM stock is trading for $47 per share on the NYSE and $45 per share on the Sydney StockExchange. Assume that the costs of buying and selling BHM stock are negligible.a)How can you make an arbitrage profit?b)Over time what would you expect to happen to stock prices in New York and Sydney?c)Now assume that the cost of buying and selling shares of BHM are 2% pertransaction. How does this affect your answers?Answer：a) You could buy BHM stock in Sydney and simultaneously sell it in New York. Your arbitrage profit would be $2 per share.b)The prices would become equal.c)There could remain a 2% discrepancy between the prices whichwould be $1.84 in this instance.3.Suppose you have $50,000 in a bank account earning an interest rate of 3.5% per year. At thesame time you have an unpaid balance on your credit card of $13,000 on which you arepaying an interest rate of 21% per year. What is the arbitrage opportunity you face?Answer：You could take $13,000 out of your bank account and pay down your creditcard balance. You would give up 3.5% per year in interest earnings ($455) but you would save 21% per year in interest expenses ($2,730). So the arbitrage opportunity is worth$2,275 per year.4.The quotes from Hubris Bank and Modesty Bank are given below:Hubris Bank: 106 Yen/$Modesty Bank: 104 Yen/$Answer the following questions based on these figures.a)If we assume no transaction costs，there is evidently an opportunity for arbitragehere. If an arbitrageur started with $10,000，exactly how would (s)he make profitsand how much profit would (s)he make?b)As many traders engage in arbitrage who do you expect to see in the above quotes atthese two banks?c)If there is a 1% transaction cost for transactions is there still an opportunity forarbitrage?Answer:Hubris Bank：106 Yen/$ Modesty Bank：104 Yen/$a)At Hubris Bank，buy Yen with dollars (Yen are cheaper).At Modesty Bank，buy dollars with Yen (dollars are cheaper).Start with $10,000:At Hubris Bank： $10,000 x 106 Yen/$ = 1,060,000 YenAt Modesty Bank： 1,060,000 Yen x 1$/104 Yen = $10,192.31You make a profit of $192.31.b)The Yen will appreciate at Hubris Bank and it will depreciate at Modesty Bank.Eventually the exchange rate will stabilize between 106 Yen/$ and 104 Yen/$.c)Assume 1% transaction cost.At Hubris Bank: $10,000 (0.99) x 106 Yen/$ = 1,049,400 YenAt Modesty Bank: 1,049,400 Yen x (0.99) x $1/104 Yen = $10,090.38There is still an opportunity for arbitrage profit，but it has decreased from$192.31 to $90.38.5.In the United States，the real rate of return is expected to be 5% and in Switzerland it isexpected to be 4%.a)If the inflation rate in the United States is expected to be 6% and the Swissinflation rate is expected to be 8%，what will the nominal interest rates be in theUnited States and Switzerland?b)Are these markets in equilibrium?Where would you prefer to invest and why?c)What if the Swiss inflation rate were 6%?Are the markets in equilibrium?d)What are the respective nominal rates if the worldwide risk-free real rate ofreturn is 4% and inflation in the U.S. is 6% and in Switzerland it is 8%?Answer:a) United States: Nominal interest rate = (1.05)(1.06) – 1= 11.30% per yearSwitzerland: Nominal interest rate = (1.04)(1.08) – 1= 12.32% per yearb)The markets are not in equilibrium. Investors will go where the real rate is highest.That is，in the U.S.c) United States: Nominal interest rate = (1.05)(1.06) – 1= 11.30% per yearSwitzerland: Nominal interest rate = (1.04)(1.06) – 1= 10.24% per yearMarkets are still not in equilibrium.d) United States: Nominal interest rate = (1.04)(1.06) – 1= 10.24% per yearSwitzerland: Nominal interest rate = (1.04)(1.08) – 1= 12.32% per year。