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FIN500 (Spring 2019)

Take home final exam

INDIVIDUAL ASSIGNMENT (100 points - 20% of the course grade)

Due date: 8am on Fri., May 10, 2019

This is an individual assignment. Please, do not collaborate with anybody or share any of your

work. Both word-processed and handwritten assignments are acceptable. Print your name &

NetID (NOT UIN) on front page of the assignment. No late assignments will be accepted.

LABEL YOUR ANSWERS CLEARLY TO RECEIVE CREDIT.

Problem 1 (20 pts):

Stock A has generated the following monthly rates of return over the preceding 6 months:

3%, 11%, 2%, 5%, -1%, 6% (annualized rates).

You have estimated the stock's beta to be 1.3. The risk-free rate is 1% and the market risk

premium 8%. What is the expected rate of return on the stock in the next month? Find the stock's

Jensen's alpha. Would you recommend buying or shorting this stock?

Problem 2 (20 pts):

The rates of return of Stock A and B are distributed as follows:

StateProbabilityReturn on AReturn on B

10.315%5%

20.59%7%

30.2-1%12%

Suppose you have invested $1000 in stock A and $2000 in Stock B. Please, find this portfolio's

expected return and total risk.

Problem 3 (20 pts):

Corporation X common stock is trading at $200 a share and it has 1 million shares outstanding.

The stock's beta is 1.2, the risk-free rate 2%, and the market portfolio is expected to return 9%.

Their debt consists of two issues of bonds:

IssueMaturity (years)Coupon (%)Market value (% of par)Amount outstanding (million $)

A158%10150

B2510%10240

Assuming Corporation X is subject to a 21% corporate tax rate, please find its WACC.

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Problem 4 (20 pts):

Corporation Y has never made any dividend payments. You project the following dividend

payments in the next 5 years:

t (years)Dividend

1$0.00

2$0.00

3$2.00

4$2.50

5$3.00

You assume that beginning at the end of year 5, the dividends will grow at the sustainable

growth rate. The firms ROE is 15% and its plowback ratio 30%. The cost of equity capital is

10%. Please, find the theoretical value of a single share of their common stock.

Problem 5 (20 pts):

Given the following spot rates:

1year CD: 1%

2year CD: 1.5%

3year CD: 2%

4year CD: 2.5%

5year CD: 3.1%

6-year CD: 3.5%

Compute the rate on 3-year CDs 2 years forward. Show all work and state your answer as a

percentage with 3 digits after the decimal point.