1. Laura bought 100 shares of stock X for $50/share at the start of 2013. During that calendar year, each share paid 4 dividends of $.25 each, plus its price rose to $55. She still owns these shares. What does this imply?

a. Her dividend yield was 2% in 2013.

b. She should report $100 in dividends on her 2013 tax return.

c. She should report $500 in capital gains on her 2013 tax return.

d. Both a and b

e. a, b and c

2. Which of the following is a well-known stock market anomaly, with respect to rates of return?

a. Large-capitalization stocks tend to generate a higher return than predicted by CAPM

b. Stocks with high P/E ratios tend to generate a higher return than predicted by CAPM.

c. Stocks' returns tend to be better if they are purchased on Mondays, and sold on Fridays, than if those actions are taken on other days of the week.

d. Stocks that are purchased at the start of October, and sold at the start of November, tend to return more than predicted by CAPM.

e. All of the above.

3. Max sold his shares in Intel today, because he noticed a "head and shoulders" pattern was developing on the stock's price chart. What does this suggest about Mark's beliefs in the efficiency of markets?

a. He believes in the weak form of the efficient markets hypothesis.

b. He believes in the semi-strong form of the efficient markets hypothesis.

c. He believes is the strong form of the efficient markets hypothesis.

d. None of the above

4. Suppose Dollar Industries is a firm that operates a chain of discount stores, which sell overstocked or off-quality merchandise at very low prices. This firm's sales and cash flows tend to improve dramatically when the economy is weak, and weaken a great deal when the economy is strong. Imagine that the firm is all-equity financed. How do you think these characteristics might affect the firm's financial statistics?

a. The firm's stock probably has a low estimated b_d.

b. The firm's historical rate of return probably has a low s_d.

c. The stock's required rate of return is probably higher than the market average, R_mbar.

d. All of the above

e. None of the above.

5. If rates of return on the market portfolio become more variable over time, such that s_m rises, what is likely to occur as a result? a. Investors will probably increase their required market risk premium, (R_m^bar ? R_f)

b. Prices of stocks will tend to rise, especially for high-beta stocks.

c. The slope of the characteristic line for each individual stock will rise

d. All of the above

e. None of the above

6. Suppose that Firm Z's capital structure consists of $80 million worth of stock (all-equity financing). Based on its history of returns to date, the firm has an estimated beta of 0.8. What is likely to occur if the firm decides to sell $20 million worth of bonds, such that its new capital structure is $20 million debt and $80 million equity?

a. Its beta value will rise to 1.6

b. Its beta value will rise to 1.0

c. Its beta value will decline to .64

d. Its beta value will decline to 0.4

e. Its beta value will not be affected

7. On financial market data sites such as Yahoo finance, what does the abbreviation "ttm" stand for?

a. total market c. tracking the market

b. time to maturity d. trailing twelve month

8. What is an unusual aspect or paradox concerning the efficient markets hypothesis?

a. If every investor believed the hypothesis and acted accordingly, then markets wouldn't be efficient.

b. If every investor believed the hypothesis and acted accordingly, then it would not be possible to earn a positive return in the stock market.

c. If every investor believed the hypothesis and acted accordingly, then stocks and Treasury bills would have the same expected rate of return.

d. All of the above.

9. What is the relationship between Arbitrage Pricing Theory (APT) and the Capital Asset Pricing Model (CAPM)?

a. APT allows for several systematic risk factors, each with its own beta; while CAPM is a special case that assumes a single systematic risk factor with just one beta.

b. APT assumes that investors might be irrational and subject to fads, while CAPM assumes investors are rational decision-makers.

c. APT assumes returns vary in an asymmetrical way from their mean, while CAPM assumes returns are distributed symmetrically.

d. All of the above.

10. Laura invested 50% of her money in stock of her employer, firm X, and 50% in t-bills. Firm X has R_xbar = 8%, s_x = 6%, and b_x = 1. The risk-free rate is 2%, and the market std. dev. of return is s_m= = 4%. Assuming the CAPM model holds, what do you conclude?

a. Her expected rate of return is R_pbar = 5% d. a and c

b. Her portfolio sigma is s_p = 3% e. a, b and c

c. The market risk premium, (R_m^bar ? R_f), must be 6%.

11. What is the typical relationship between EPS, dividend per share, and P/E ratio for a stock?

a. Stocks that pay out all or most of their EPS as a cash dividend are likely to have a higher- than- average P/E ratio.

b. Stocks that pay out all or most of their EPS as a cash dividend are likely to have a lower- than- average P/E ratio.

c. All stocks tend to have similar P/E ratios, regardless of whether they pay cash dividends or not.

12. A bond has a coupon rate of 5.5%, and is selling for $1100 today. What does this imply?

a. The YTM is

b. The YTM = 5% e. The YTM is >5.5%

c. The YTM is between 5% and 5.5% f. Can't tell without knowing years to maturity

13. How can we tell if investors view a firm as a going concern?

a. The firm's market value is greater than its book value

b. The firm's market value is greater than its liquidation value

c. The firm's market value equals its liquidation value

d. The firm's market value equals its book value.

14. Lance paid his daughter's $20,000 tuition in March 2000, 2001, 2002 and 2003. Which formula below represents today's value of these payments? (Assume it is March 2014)

a. 20,000*(PVIFA r, 4)*(1+r)^15 c. 20,000*(PVIFA r, 4)*(1+r)^14

b. 20,000*(FVIFA r, 4)*(1+r)^15 d. 20,000*(FVIFA r, 4)*(1+r)^14

15. At the start of 2013, three friends each invested $10000, as follows:

Bruce put all his money into a corporate bond fund with average duration of 5 years.

Sally put all her money into a market basket of stocks, such as SPY

Tyrone put his money, plus 10,000 more borrowed from his broker at the risk-free rate, into stocks such as SPY

Vanessa put all her money into 5-year TIPS

Given how economic conditions turned out in 2013, which friend had the most successful portfolio?

a. Bruce b. Sally c. Tyrone d. Vanessa

SECTION B. 50 points each

1. Find the present value of the following:

a.(10) A corporate bond with an 8% coupon rate, $1000 par value, semiannual interest payments, 10 years to maturity, and a required rate of return of r= 6%

b.(10) A zero-coupon Treasury security with 3 years to maturity and a required rate of return of r = 4.5%

(assume annual compounding).

c. (10) A stock whose dividend is expected to grow at 25% for the next two years, then at 6% thereafter, if last year?s annual dividend was $1.00 and investors? required rate of return is r = 7%.

d. (10) A preferred stock with dividend = $4.50, if r = 5%.

e.(10) A contract that pays $10,000/year each year for the first 10 years; then $20,000/year for the following 10 years. Assume the required return is 10%, and all payments are made at the end of each year.

2. Boris owns stock in two firms, Anderson Foods and Bridgeport Labs Based on past data, he has estimated the expected annual return and standard deviation of return for each stock as shown below.

Anderson Foods : R_Abar = 8% ?_A = 4%

Brigdeport Labs: R_Bbar= 14% ?_B = 10%

The correlation coefficient between these two stocks is: r_A,B = 0.2

Boris? portfolio consists of 40% Anderson stock and 60% Bridgeport.

a.(8) What is his expected portfolio return, R_P?

b.(16) What is the standard deviation of his portfolio return, ?_P ?

c.(20) Boris is a nervous person who dislikes risk, and he wonders whether his current portfolio weights could be adjusted to further reduce risk in his portfolio. Find the weights w_A and w_B that minimize his portfolio variance ?_P ² .

d (6) Based on your answer to (c), what portfolio weights would Boris never want to use? (That is, what combinations of stocks A and B are not on the efficient frontier?)

3. Gail?s portfolio consists of 30% Dollarmart stock (stock D) and 70% Gemworld (stock G).

Dollarmart is a discount store that tends to thrive when economic activity is weak, while Gemworld is a luxury jeweler whose performance rises during periods of strong economic growth. Gail believes that the probability of a strong economy is .4, while the probability of a weak economy is .6.

The firm?s returns are shown below:

stock	strong economy: prob. = .4	Weak economy: prob.= .6
Dollarmart	6%	10%
Gemworld	20%	-6%

a. (12) What is the expected return on Gail?s portfolio if a strong economy occurs? What is the expected return if a weak economy occurs?

b. (12) What is her overall (unconditional) expected return on this portfolio?

c.(26) What is the standard deviation of her portfolio's return?

4. Three friends each own portfolios consisting of a diversified stock index fund and short term risk-free Treasury bills. The risk-free rate of return is R_f = 4% and the stock market index fund has an expected return of R_mbar = 10% with a standard deviation of ?_m = 6%.

For each friend, find the portfolio weights for each investment (w_m and w_rf ), the expected portfolio rate of return, and the portfolio standard deviation of return.

a (12). Tanya has $50,000 to invest. She purchases $30,000 in stocks, and puts the rest into T-bills.

b. (12) Bruce has $25,000 to invest. He borrows an extra $20,000 from his broker at the risk-free rate, and puts all the funds into stocks.

c. (12) Camille has $9000 to invest. She puts all her funds in risk-free T-bills.

d. (14) Suppose after the friends invest, a recession occurs and the actual stock market return is -20%. What rate of return will each friend actually earn in this circumstance? Whose portfolio performed best?

5. Steve owns shares of stock in Spectron Corp., a manufacturer of microscopes. Spectron has a beta value of b_s = 1.9. Currently the overall stock market?s expected rate of return is R_m= 10%, and the risk-free rate of return is R_f = 4%.

a. (5) What is the market risk premium at this time?

b.(10) What is the required rate of return on Spectron Corp. stock?

c. (15) If the stock?s most recent dividend was $1.50 and its growth in dividends is expected to remain constant at 4%, what is the stock?s market price?

d. (20) Steve learns that Spectron?s management plans to begin marketing its product line in China. Steve believes that this change in marketing strategy will cause Spectron?s beta value to rise to b_s = 2.2, and its growth rate in dividends to rise to 7%. If he is correct, what is the new required rate of return for this stock? What will the new stock price be? Should he sell his shares now before this marketing change occurs, or buy more shares ?

6. Branford Foods has the following capital structure: $140,000,000 common stock (equity)

20,000,000 preferred stock

40,000,000 long term bonds (debt)

The firm's beta value, estimated from market data, is 1.2

The risk-free rate is 1%, and the market risk premium is 9%

Investors' required rate of return on the preferred stock is 7%, and the required rate of return on the bonds is 7.5%. The firm's marginal tax rate is 25%.

a. (6) Find the weights we, wps and wd that reflect this firm's capital structure.

b. (32) Find the firm's weighted average cost of capital (W.A.C. C.)

c. (12) The firm is considering purchasing a mixing machine that costs $50,000 today. This asset will yield an annual cash flow of $7,000 per year, at the end of each year, for 10 years. Find the NPV of this asset, using your answer from part b as needed. Should the firm proceed with purchasing this asset?

1. Laura bought 100 shares of stock X for $50/share at the start of 2013. During that calendar year, each share paid 4 dividends of $.25 each, plus its price rose to $55. She still owns these shares. What does this imply? a. Her dividend yield was 2% in 2013. b. She should report $100 in dividends on her 2013 tax return. c. She should report $500 in capital gains on her 2013 tax return. d. Both a and b e. a, b and c 2. Which of the following is a well-known stock market anomaly, with respect to rates of return? a. Large-capitalization stocks tend to generate a higher return than predicted by CAPM b. Stocks with high P/E ratios tend to generate a higher return than predicted by CAPM. c. Stocks' returns tend to be better if they are purchased on Mondays, and sold on Fridays, than if those actions are taken on other days of the week. d. Stocks that are purchased at the start of October, and sold at the start of November, tend to return more than predicted by CAPM. e. All of the above. 3. Max sold his shares in Intel today, because he noticed a "head and shoulders" pattern was developing on the stock's price chart. What does this suggest about Mark's beliefs in the efficiency of markets? a. He believes in the weak form of the efficient markets hypothesis. b. He believes in the semi-strong form of the efficient markets hypothesis. c. He believes is the strong form of the efficient markets hypothesis. d. None of the above 4. Suppose Dollar Industries is a firm that operates a chain of discount stores, which sell overstocked or off-quality merchandise at very low prices. This firm's sales and cash flows tend to improve dramatically when the economy is weak, and weaken a great deal when the economy is strong. Imagine that the firm is all-equity financed. How do you think these characteristics might affect the firm's financial statistics? a. The firm's stock probably has a low estimated d. b. The firm's historical rate of return probably has a low d. c. The stock's required rate of return is probably higher than the market average, R mbar. d. All of the above e. None of the above. 5. If rates of return on the market portfolio become more variable over time, such that m rises, what is likely to occur as a result? a. Investors will probably increase their required market risk premium, (Rmbar - Rf) b. Prices of stocks will tend to rise, especially for high-beta stocks. c. The slope of the characteristic line for each individual stock will rise d. All of the above e. None of the above 6. Suppose that Firm Z's capital structure consists of $80 million worth of stock (all-equity financing). Based on its history of returns to date, the firm has an estimated beta of 0.8. What is likely to occur if the firm decides to sell $20 million worth of bonds, such that its new capital structure is $20 million debt and $80 million equity? a. Its beta value will rise to 1.6 b. Its beta value will rise to 1.0 c. Its beta value will decline to .64 d. Its beta value will decline to 0.4 e. Its beta value will not be affected 7. On financial market data sites such as Yahoo finance, what does the abbreviation "ttm" stand for? a. total market c. tracking the market b. time to maturity d. trailing twelve month 8. What is an unusual aspect or paradox concerning the efficient markets hypothesis? a. If every investor believed the hypothesis and acted accordingly, then markets wouldn't be efficient. b. If every investor believed the hypothesis and acted accordingly, then it would not be possible to earn a positive return in the stock market. c. If every investor believed the hypothesis and acted accordingly, then stocks and Treasury bills would have the same expected rate of return. d. All of the above. 9. What is the relationship between Arbitrage Pricing Theory (APT) and the Capital Asset Pricing Model (CAPM)? a. APT allows for several systematic risk factors, each with its own beta; while CAPM is a special case that assumes a single systematic risk factor with just one beta. b. APT assumes that investors might be irrational and subject to fads, while CAPM assumes investors are rational decision-makers. c. APT assumes returns vary in an asymmetrical way from their mean, while CAPM assumes returns are distributed symmetrically. d. All of the above. 10. Laura invested 50% of her money in stock of her employer, firm X, and 50% in t-bills. Firm X has R xbar = 8%, x = 6%, and x = 1. The risk-free rate is 2%, and the market std. dev. of return is m= = 4%. Assuming the CAPM model holds, what do you conclude? a. Her expected rate of return is Rpbar = 5% d. a and c b. Her portfolio sigma is p = 3% e. a, b and c bar c. The market risk premium, (Rm - Rf), must be 6%. 11. a. b. c. What is the typical relationship between EPS, dividend per share, and P/E ratio for a stock? Stocks that pay out all or most of their EPS as a cash dividend are likely to have a higher- than- average P/E ratio. Stocks that pay out all or most of their EPS as a cash dividend are likely to have a lower- than- average P/E ratio. All stocks tend to have similar P/E ratios, regardless of whether they pay cash dividends or not. 12. A bond has a coupon rate of 5.5%, and is selling for $1100 today. What does this imply? a. The YTM is 5.5% c. The YTM is between 5% and 5.5% f. Can't tell without knowing years to maturity 13. How can we tell if investors view a firm as a going concern? a. The firm's market value is greater than its book value b. The firm's market value is greater than its liquidation value c. The firm's market value equals its liquidation value d. The firm's market value equals its book value. 14. Lance paid his daughter's $20,000 tuition in March 2000, 2001, 2002 and 2003. Which formula below represents today's value of these payments? (Assume it is March 2014) a. 20,000*(PVIFA r, 4)*(1+r)^15 c. 20,000*(PVIFA r, 4)*(1+r)^14 b. 20,000*(FVIFA r, 4)*(1+r)^15 d. 20,000*(FVIFA r, 4)*(1+r)^14 15. At the start of 2013, three friends each invested $10000, as follows: Bruce put all his money into a corporate bond fund with average duration of 5 years. Sally put all her money into a market basket of stocks, such as SPY Tyrone put his money, plus 10,000 more borrowed from his broker at the risk-free rate, into stocks such as SPY Vanessa put all her money into 5-year TIPS Given how economic conditions turned out in 2013, which friend had the most successful portfolio? a. Bruce b. Sally c. Tyrone d. Vanessa SECTION B. 50 points each 1. Find the present value of the following: a.(10) A corporate bond with an 8% coupon rate, $1000 par value, semiannual interest payments, 10 years to maturity, and a required rate of return of r= 6% b.(10) A zero-coupon Treasury security with 3 years to maturity and a required rate of return of r = 4.5% (assume annual compounding). c. (10) A stock whose dividend is expected to grow at 25% for the next two years, then at 6% thereafter, if last year's annual dividend was $1.00 and investors' required rate of return is r = 7%. d. (10) A preferred stock with dividend = $4.50, if r = 5%. e.(10) A contract that pays $10,000/year each year for the first 10 years; then $20,000/year for the following 10 years. Assume the required return is 10%, and all payments are made at the end of each year. 2. Boris owns stock in two firms, Anderson Foods and Bridgeport Labs Based on past data, he has estimated the expected annual return and standard deviation of return for each stock as shown below. Anderson Foods : Brigdeport Labs: RAbar = 8% RBbar= 14% A = 4% B = 10% The correlation coefficient between these two stocks is: r A,B = 0.2 Boris' portfolio consists of 40% Anderson stock and 60% Bridgeport. a.(8) What is his expected portfolio return, RP? b.(16) What is the standard deviation of his portfolio return, P ? c.(20) Boris is a nervous person who dislikes risk, and he wonders whether his current portfolio weights could be adjusted to further reduce risk in his portfolio. Find the weights wA and wB that minimize his portfolio variance P 2 . d (6) Based on your answer to (c), what portfolio weights would Boris never want to use? (That is, what combinations of stocks A and B are not on the efficient frontier?) 3. Gail's portfolio consists of 30% Dollarmart stock (stock D) and 70% Gemworld (stock G). Dollarmart is a discount store that tends to thrive when economic activity is weak, while Gemworld is a luxury jeweler whose performance rises during periods of strong economic growth. Gail believes that the probability of a strong economy is .4, while the probability of a weak economy is .6. The firm's returns are shown below: stock strong economy: prob. = .4 Weak economy: prob.= .6 Dollarmart 6% 10% Gemworld 20% -6% a. (12) What is the expected return on Gail's portfolio if a strong economy occurs? What is the expected return if a weak economy occurs? b. (12) What is her overall (unconditional) expected return on this portfolio? c.(26) What is the standard deviation of her portfolio's return? 4. Three friends each own portfolios consisting of a diversified stock index fund and short term risk-free Treasury bills. The risk-free rate of return is R f = 4% and the stock market index fund has an expected return of Rmbar = 10% with a standard deviation of m = 6%. For each friend, find the portfolio weights for each investment (w m and wrf ), the expected portfolio rate of return, and the portfolio standard deviation of return. a (12). Tanya has $50,000 to invest. She purchases $30,000 in stocks, and puts the rest into T-bills. b. (12) Bruce has $25,000 to invest. He borrows an extra $20,000 from his broker at the risk-free rate, and puts all the funds into stocks. c. (12) Camille has $9000 to invest. She puts all her funds in risk-free T-bills. d. (14) Suppose after the friends invest, a recession occurs and the actual stock market return is -20%. What rate of return will each friend actually earn in this circumstance? Whose portfolio performed best? 5. Steve owns shares of stock in Spectron Corp., a manufacturer of microscopes. Spectron has a beta value of s = 1.9. Currently the overall stock market's expected rate of return is R m= 10%, and the risk-free rate of return is Rf = 4%. a. (5) What is the market risk premium at this time? b.(10) What is the required rate of return on Spectron Corp. stock? c. (15) If the stock's most recent dividend was $1.50 and its growth in dividends is expected to remain constant at 4%, what is the stock's market price? d. (20) Steve learns that Spectron's management plans to begin marketing its product line in China. Steve believes that this change in marketing strategy will cause Spectron's beta value to rise to s = 2.2, and its growth rate in dividends to rise to 7%. If he is correct, what is the new required rate of return for this stock? What will the new stock price be? Should he sell his shares now before this marketing change occurs, or buy more shares ? 6. Branford Foods has the following capital structure: $140,000,000 common stock (equity) 20,000,000 preferred stock 40,000,000 long term bonds (debt) The firm's beta value, estimated from market data, is 1.2 The risk-free rate is 1%, and the market risk premium is 9% Investors' required rate of return on the preferred stock is 7%, and the required rate of return on the bonds is 7.5%. The firm's marginal tax rate is 25%. a. (6) Find the weights we, wps and wd that reflect this firm's capital structure. b. (32) Find the firm's weighted average cost of capital (W.A.C. C.) c. (12) The firm is considering purchasing a mixing machine that costs $50,000 today. This asset will yield an annual cash flow of $7,000 per year, at the end of each year, for 10 years. Find the NPV of this asset, using your answer from part b as needed. Should the firm proceed with purchasing this asset