Johnson's have the following investment accounts: 200 shares of Amarillo Fund, an open-end international investment company. The Fund has a beta of 1.10 and a standard deviation of 19%. The Johnsons purchased the fund for $19.80 per share. 200 shares of Austin Corp. common stock, a software company listed on the NASDAQ. The stock has a beta of 1.7 and standard deviation of 21%, and a 5-year average rate of return of 22%. The stock has a P/E of 19, cost basis of $30 per share, current market price of $44 per share, and an expected growth rate of 12% per year for the foreseeable future. The Johnson's wrote (sold) two contracts of $40 call options on this stock that expire today. The option premium was $0.50 per share. 200 shares of Dumas Corp. common stock, an international conglomerate that trades on the NYSE. With a current market price of $52 and P/E of 12, the company issued a dividend of $3.20 in the current year, and has announced that it plans to grow its dividend at 5% perpetually. The stock has a beta of 0.9, a standard deviation of 8%, and a 5-year average rate of return of 12%. The Johnsons determined they require 10% rate of return on this stock given the associated risk. 10 zero coupon bonds issued by Humble Corp. with a 12-year maturity. 400 shares of an investment grade corporate bond fund that tracks the Large Bank Aggregate Bond Index. The bonds all mature within 5 to 10 years. An Orange Corp. 10-year, non-callable, 7.5% bond, purchased for $1,100 yesterday. A San Marcos Corp. 5-year, 9% bond, purchased yesterday for $1,070. A 6-month U.S. Treasury bill purchased yesterday for $1,995.80 and a face value of $2,000. $5,000 face value of 5-year, U.S. Treasury bond, 4.0% coupon, trading at par, purchased 6 months ago. $15,000 face value of 10-year, U.S. Treasury bond, 4.5% coupon, trading at par, purchased 6 months ago.

1) What would be the most likely result of the options the Johnsons have on the Austin corp stock?

a) The options will expire worthless

b) 200 shares will be called at $44

c) 2 shares of Austin Corp stock will be called at $40

d) 200 shares will be called at $40

2) What will be the Johnson's profit percentage before taxes if the Austin Corp. options are exercised today?

a) 37%

b) 35%

c) 35%

d) 33%

3) Which of the following investments has the greatest reinvestment risk?

a) Investment grade corporate bond fund

b) San Marcos Corp bond

c) Orange Corp bond

d) Humble Corp bond

4) Using a one-stage dividend discount model, what is the fair price of the Dumas stock?

a) $66.32

b) $53.04

c) $67.20

d) $51.75