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intermediate financial management

Questions and Answers of Intermediate Financial Management

b. What is the expected value of option price at expiration, assuming that the option is held to this time? Why does it differ from the option value determined in part a?
1. Loco Baking Company's common stock has a present market price per share of$28. A 6-month call option has been written on the stock with an exercise price of $30. Presently the option has a market
B. MCELROY"S, orting Out Risks Using Known APT Factors," Financial Analysts Journal, 44(March-April 1988), 29-42.BRENNAN, MICHAEL J., TARUNC HORDMa,n d AVANDIDHAR SURRAHMANY"AAMlte, rnative Factor
b. Portfolio expected return with one-third invested in Montana Leather Company and two-thirds in Bozeman Enterprises:The return may be higher or lower because we cannot reduce unsystematic risk to
3. (E)R,, = .06 + .09(.5) - .03(.4) + .04(1.2) = 14.1%(E)R,, = .06 + .09(.7) - .03(.8) + .04(.2) = 10.7%a. Portfolio expected return where the two investments are equally weighted:
2. The expected return for Hendershott Hinge stock using a factor model is
b. The dividend yield for Rubinstein Robotics Corporation is $1.28/$32 = 4.00%.The equation implies that dividend income is not as attractive as capital gains. Therefore, a higher return is required
9. How does the arbitrage pricing theory (APT) differ from the capital asset pricing model (CAPM)? What are the similarities of the two models?100 Part I Foundations of Finance 1.a. R, = .08 +
8. The expected return for Sawyer Coding Company's stock is described by the Roll-Ross model. Sawyer's reaction coefficients are as follows:b, = 1.4,b, = 2.0,b, = .7,b, = 1.2, andb, = .8. Using the
b. As an arbitrager, what would you do and for how long?
a. (1) Which securities are overpriced in the sense of the required return being more than the expected return? (2) Which are underpriced?
7. Based on their present share prices and expected future dividends, Bosco Enterprises, Target Markets, Inc., and Selby Glass Company have expected returns of 16 percent, 14 percent, and 20 percent,
6. Security returns are generated by factors according to the following formula:Assume R, = 5 percent, F, = 6 percent, F, = 7 percent, and F, = 8 percent. Assume also the following for two
b. Now suppose that we wish to solve for the expected return. If the riskfree rate is 8 percent, A, = 4 percent, A, = 2 percent, and A, = 6 percent, what is the stock's expected return?
a. Suppose that the n term for the stock is 14 percent and that for the period the unanticipated change in factor l is 5 percent, factor 2 minus 2 percent, and factor 3 minus 10 percent. If the error
5. Leeny Kelly Company's stock is related to the following factors with respect to actual return:Chapter 4 Multivariable and Factor Valuation 99
4. Fullerton-Bristol, Inc., has a beta of .90, a market price per share of $27.20, and earnings per share of $3.40. The risk-free rate is 6 percent, the price/eamings ratio for the market portfolio
b. Cooper Chemical Company has a beta of 1.12 and is in the ninth decile with respect to size. What is the expected return of this company's stock? Why does it differ from that of Tobias Tire Company?
a. Tobias Tire Company has a beta of 1.10 and is in the second decile with respect to market capitalization size. What is its expected return?
3. Suppose the expected return for a stock were a function of beta and size according to the following formula:fS = Rf + .08(!3,) - .002 (size decile)where size is the decile in which security j
b. In words, what would happen if negative instead of positive covariance occurred?
a. What is the stock's expected return?
2. Norway Fiord Boat Company has a beta of 1.40. The risk-free rate is presently 8 percent, and the inflation extension to the CAPM, Eq. (4-4), holds. The b coefficient in the equation is .075, and
b. What would happen if the b coefficient were .08 and the d coefficient were .25? Under what circumstances would this occur?
a. What is the expected return for the company's stock if the equation holds?
1. Perez Paint Company pays a dividend of $3 per share and share price is $40.Presently the risk-free rate is 5 percent and the expected return on the market portfolio is 12 percent. The company's
What would be the expected return on your portfolio if you were to invest (a)equally in the two securities? (b) one-third in Montana Leather Company and two-thirds in Bozeman Enterprises?98 Part I
3. Suppose a three-factor APT model holds and the risk-free rate is 6 percent.There are two stocks in which you have a particular interest: Montana Leather Company and Bozeman Enterprises. The
2. The return on Hendershott Hinge Company's stock is related to factors 1 and 2 as follows:where .6 and 1.3 are sensitivity, or reaction, coefficients associated with each of the factors as defined
c. The price/earnings ratio for the market portfolio is 11, the p coefficient in Eq. (4-5) is -.006, and the b coefficient is ,075. What is the stock's expected return if that equation holds?
b. If dividends increase the required return on stocks with the result that the t coefficient in Eq. (4-2) is .10 while the b coefficient is ,075, what is the stock's expected return if we assume the
a. What is the expected return using the CAPM without extension?
1. Rubinstein Robotics Corporation has a beta of 1.25. The risk-free rate is 8 percent and the expected return on the market portfolio is 15 percent. Share price is $32, earnings per share $2.56, and
b. If the risk-free rate is 8 percent and the expected retum on the market portfolio is 14 percent, what will be the portfolio's expected return?
. If you invest 20 percent of your funds in each of the first four securities, and 10 percent in each of the last two, what is the beta of your
11. Corliss Services, Inc., provides maintenance services to commercial buildings.Presently, the beta on its stock is 1.08. The risk-free rate is now 10 percent; the expected return for the market
b. Assume now that you are able to borrow and lend at a risk-free rate of 6 percent. Which portfolio is preferred? Would you borrow or lend at the risk-free rate to achieve a desired position? What
a. Assume that you can invest in only one of these portfolios; that is, it is not possible to mix portfolios. Plot the risk-return trade-off. Which portfolio do you prefer?
c. If the correlation coefficient were .70, what would happen to the diversification effect and to the minimum variance portfolio?
b. (1) Approximately what is the minimum variance portfolio? (2) What is the efficient set?
a. What portfolio expected returns and standard deviations arise from investing varying proportions of your funds in these two stocks? Vary your proportions in increments of .lo, going from 1.00 in
3. Dot Thermal Controls Company's common stock has an expected return of 20 percent and a standard deviation of 22 percent. Sierra Nevada Electric Company's stock has an expected retum of 12 percent
What is the expected return and standard deviation of a portfolio composed of equal investments in each?
3. The common stocks of Blatz Company and Stratz, Inc., have expected returns of 15 percent and 20 percent, respectively, while the standard deviations are 20 percent and 40 percent. The expected
b. What is the stock's present market price per share, assuming this required return?
a. What is the stock's required rate of return according to the CAPM?
2. Zwing-Zook Enterprises has a beta of 1.45. The risk-free rate is 6 percent and the expected return on the market portfolio is 10 percent. The company presently pays a dividend of $2 a share and
c. AU wealth is invested in the market portfolio. Furthermore, you borrow an additional one-third of your wealth to invest in the market portfolio.
b. One-third is invested in the risk-free asset and two-thirds in the market portfolio.
a. All wealth is invested in the risk-free asset.
1. You are able to both borrow and lend at the risk-free rate of 9 percent. The market portfolio of securities has an expected return of 15 percent and a standard deviation of 21 percent. Determine
b. (1) For a zero or less return, standardizing the deviation from the expected value of return one obtains (0 - 20%)/16.43% = -1.217 standard deviations. Turning to Table C at the back of the book,
5.a. By visual inspection of a symmetrical distribution, the expected value of return is seen to be 20 percent. (This can easily be confirmed mathematically.)The standard deviation is
c. P = $100/(1.07)6 = $66.63
b. (1) Setting up this problem again in keeping with Eq. (2-15) and solving for price, we find it to be $104.92. (2) In this case, price is found to be $97.65. (3) Price equals the face value of $100
2.a. (1) Setting up the problem in keeping with Eq. (2-15) and solving for r, the yield to maturity is found to be 12.36 percent. The yield is less than the coupon rate when the bond trades at a
b. What is the probability that the return will be greater than (1) 10 percent?(2) 20 percent? (3) 30 percent? (4) 40 percent? (5) 50 percent?
a. What are the chances that the investment will result in a negative return?
18. Shirley Batavia is analyzing an investment in a shopping center. The expected return on investment is 20 percent. The probability distribution of possible returns is a normal bell-shaped
Zachery Zorro Company presently pays a dividend of $1.60 per share and the market price per share is $30. The company expects to increase the dividend at a 20 percent annual rate the first 4 years,
c. Integrating into retail stores will increase the dividend growth rate to 9 percent and increase the required rate of return to 13 percent.From the standpoint of market price per share, which
b. Expanding timber holdings and sales will increase the expected dividend growth rate to 10 percent but will increase the risk of the company.As a result, the rate of return required by investors
a. Continuing the present strategy will result in the expected growth rate and required rate of return shown.
c. What would be its common stock and paid-in capital accounts after the financing?The stock of the Health Corporation is currently selling for $20 and is expected to pay a $1 dividend at the end of
b. If the company were able to sell stock at $19 per share, what would be the maximum amount it could raise under its existing authorization, including Treasury shares?
a. How many shares are now outstanding?
What is the bond's yield to maturity if a semiannual convention to valuation is employed?Caroline Islands Resorts has 1,750,000 shares of authorized common stock having a $1 par value. Over the years
b. What would be the yield to maturity if the market price were (1) $110?(2) $94?Kerby Manufacturing Corporation sells a zero coupon bond for $38 with 8 years to maturity. At maturity the company
a. What is the bond's market price if the yield to maturity is (1) 11.6 percent?(2) 9.2 percent?
9. Barquez Mines, Inc., is considering investing in Chide. It makes a bid to the government to participate in the development of a mine, the profits of which will be realized at the end of 5 years.
8. Establish a loan amortization schedule for the following loan to the nearest cent. (See Table 2-3 for an example.) This problem should be done only with a< , -, spreadsheet program. Situation: A
b. Of each payment, what is (1) the amount of interest? (2) the amount of principal?
7. You borrow $10,000 at 14 percent for 4 years. The loan is repayable in four equal installments at year ends., -)a. What is the annual payment that will completely amortize the loan over 4 years?
6. On a contract, you have a choice of receiving $25,000 six years from now or$50,000 twelve years hence. What is the implied discount rate that equates these two amounts?
c. If Cohen had $30,000 to put into an annuity, how much would he receive each year if the insurance company used (1) a 5 percent interest rate in its calculations? (2) a 10 percent rate?
b. What would be the purchase price if the interest rate were 10 percent?
a. If Monument Life uses an interest rate of 5 percent in its calculations, what must Cohen pay at the outset for an annuity providing him$10,000 per year? (Assume annual payments are at the end of
5. Selyn Cohen is 70 years old and recently retired. He wishes to provide retirement income for himself and is considering an annuity contract with Monument Life Insurance Company. Such a contract
4. Graph the present value of $1 per year for 5,10,15,20, and 25 years at 0,10, 20,30, and 40 percent rates of discount. Explain the difference in the slopes of the curves.
c. An investment of $1,000 today will return $1,000 at the end of 1 year,$500 at the end of 2 years, and $100 at the end of 3 years. What is its IRR?d. An investment of $1,000 will return $60 per
b. An investment of $1,000 today will return $500 at the end of each of the next 3 years. What is its IRR?
3. The following are exercises on internal rates of return (IRRs).a. An investment of $1,000 today will return $2,000 at the end of 10 years. What is its IRR?
e. Compare your solutions in part c with those in part d and explain the reason for the differences.
d. $1,000 is to be received at the end of 1 year, $500 at the end of 2 years, and $100 at the end of 3 years. What is the aggregate present value of these receipts, assuming a discount rate of (1) 4
b. What is the aggregate present value of $500 received at the end of each of the next 3 years, assuming a discount rate of (1) 4 percent? (2)25 percent?c. $100 is received at the end of 1 year, $500
a. $100 at the end of 3 years is worth how much today, assuming a dis-, -> count rate of (1) 10 percent? (2) 100 percent? (3) 0 percent?
d. At the end of 10 years, how much is an initial deposit of $100 worth, assuming an interest rate of 10 percent compounded (1) annually?(2) semiannually? (3) quarterly? (4) continuously?2. The
c. Why does your answer to part b differ from that to part a?
b. At the end of 3 years, how much is an initial deposit of $100 worth, assuming a quarterly compounded interest rate of (1) 10 percent? (2) 100 percent?
a. At the end of 3 years, how much is an initial deposit of $100 worth, assuming an annual interest rate of (1) 10 percent? (2) 100 percent? (3) 0 percent?
1. The following are exercises in terminal values.
b. Assume that the parameters in part a pertain to a normal probability distribution. What is the probability the return will be (1) zero or less?(2) less than 10 percent? (3) more than 40 percent?
a. What are the expected return and standard deviation?
4. For Delphi Products Corporation in Problem 3, suppose the company were expected to have a price/earnings ratio of 8 times at the end of year 6. Moreover, earnings per share in year 7 are expected
b. Would your valuation change if you expected to hold the stock only 3 years?
a. What value would you place on the stock if an 18 percent rate of return were required?
3. Delphi Products Corporation currently pays a dividend of $2 per share and this dividend is expected to grow at a 15 percent annual rate for 3 years, then at a 10 percent rate for the next 3 years,
c. Instead of a coupon bond, suppose it were a zero coupon, pure discount instrument. If the yield were 14 percent, what would be the market price? (Assume semiannual compb~ndin~.)
b. (1) If the bond's yield were 12 percent, what would be its price? (2) if it were 15 percent? (3) if it were 14 percent?
a. (1) If the market price of the bond is $104, what is the yield to maturity?(2) If it were $97, what would be the yield? (3) if it were $loo?

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