SECTION A ANSWER ALL QUESTIONS . The purpose of financial markets is to: . Increase the price of common stocks. Lower the yield of bonds. Allocate savings efficiently. . Control ination. None of the above. WUOPU> . Financial intermediaries differ from other businesses in that both their assets and their liabilities are mostly . financial. owned by government. reaL . illiquid. regulated. WUOFdib . Long-term debt and equity instruments are traded in the . primary market. Secondary market. capital market. . money market. None of the above. WUOF> . An ordinary annuity is best defined by which one of the following? A. Increasing payments paid for a definitive period of time. B. Increasing payments paid forever. C. Equal payments paid at regular intervals over a stated time period. D. Equal payments paid at regular intervals of time on an ongoing basis. E. Unequal payments that occur at set intervals for a limited period of time. . A perpetuity is defined as: A. a limited number of equal payments paid in even time increments. B. payments of equal amounts that are paid irregularly but indefinitely. C. varying amounts that are paid at even intervals forever. D. unending equal payments paid at either equal or unequal time intervals. E. unending equal payments paid at equal time intervals. 6. What is the present value of a 4-year annuity, if the annual interest is 5%, and the annual payment is $ 1 000? A. 1 000. B. 4 200. C. 3 546. D. 3 645. E. None of the above. 7. If market interest rate falls below coupon rate then bond will be sold . below its par value. above its par value. equal to return rate. . seasoned price. None of the above. WUOFdib 8. A bond that makes no coupon payments (and thus is initially priced at a deep discount to par value) is called A. Treasury bond. B. Zero Coupon bond. C. Junk bond. D. Callable bond. E. None of the above. 9. Grand Adventure Properties offers a 5 percent coupon bond with annual payments. The yield to maturity is 7 percent and the maturity date is 5 years from today. What is the market price of this bond if the face value is $1 000? A. $ 918. B. $896. C. $941. D. $ 946. E. $969. 10. A share of common stock just paid a dividend of D0 = $1.00. If the constant growth rate is g = 5.4%, and the required rate of return is rs = 11.4%, what is the current stock price? A. $ 17.13. E. $ 17.57. C. $ 18.01. 11. 12. 13. 14. D. E. $ 16.70. $ 16.28. Stock that have priority of claim on assets? A. B. C. D. E. Common stock. Preferred stock. Share. Dividend discount model. None of the above. The dividend growth model: I. assumes that dividends increase at a constant rate forever. II. can be used to compute a stock price at any point in time. III. can be used to value zerogrowth stocks. IV. requires the growth rate to be less than the required return. A. B. C. D. E. I and III only. I and IV only. I, 1]] and IV only. I, II and IV only. I, II, III and IV. Which of the following statements concerning the NPV is not true? A. The NPV technique takes into account the time value of money. B. The NPV of a project is the sum of all the discounted cash flows associated with a project. C. The NPV technique takes into account all the cash flows associated with a project. D. If two competing projects are being considered, the one expected to yield the lowest NPV should be selected. E. None of the above. The payback period is A. The number of cash flow periods of a capital investment project. B. The number of periods required to recover the initial cost of an investment. C. The number of periods required to calculate the net present value of an investment project. D. The number of years that it takes to earn a prot on a capital investment project. E. None of the above. 15. A manager needs to decide whether the following project should be accepted or rejected based on the profitability index. The project requires an initial cash outflowr of Rs 40 000. It generates Rs 10 000, Rs 12 000, Rs 15 000, Rs 10 000 and Rs 7 000 in year 1, year 2, year 3, year 4 and year 5 respectively. Assume that the discount rate for the project is 13%. Which of the following statements is most accurate? A. The PI of the project is 1.088: accept the project. B. The PI of the project is 1.088: reject the project. C. The PI of the project 0.964: accept the project. D. The PI of the project is 0.964: reject the project. E. None of the above. 16. Which of the following is not a specic risk factor? A. Company Strike B. Bankruptcy of a major supplier. C. Unexpected entry if new competitor into the market. D. Industrial recession. E. None of the above. 17 The expected rate of return on a bond if bought at its current market price and held to maturity. yield to maturity current yield A B C. coupon yield D capital gains yield E None of the above. 18. The amount of risk reduction depends on A. The degree of correlation. B. The number of stocks in the portfolio. C. The market index movement. D. Both (a) and (b) above. E. None of the above. 19. Risk Return trade off implies A. Increasing the profit of the rm through increased production. B. Not granting credit to risky customers. C. Minimizing all risks. D. Taking decisions in such a way which optimizes the balance between risk and return . E. None of the above. 20. Beta Budget Brooms will pay a big $2 dividend next year on its common stock, which is currently selling at $50 per share. What is the market's required return on this investment if the dividend is expected to grow at 5% forever? A 4% B 5% C 7% D 9% E. None of the above. SECTION B , COMPULSORY Question 1 Part A The shares of Company X and Company Y are expected to provide the following returns in different scenarios: m Proba bility Company X Compa ny Y -_ -_ mm 20% 18% High Growth 0.3 (i) Calculate the expected return and risk of Company X' share. (4 Marks) (ii) Calculate the expected return and risk of Company Y's share. (4 Marks) (iii) Calculate the covariance between X and Y securities. [4 Marks) An investor decides to form a portfolio consisting of 55% of Company X's security and the remainder of Y shares. (iv) Calculate the expected return of the portfolio. (4 Marks) (v) What is the risk of the portfolio? {4 Marks) Part B QUESTION 4 There are two lotteries: L1 = (20, 175; 0.5, 0.5) and L2 = (75, 140; 0.5, 0.5) (i) Calculate the expected value of the two lotteries (4 Marks) Two individuals must choose between the two lotteries. Taking into consideration the following utility functions possessed by each individual: a) U(X) = 5X; b) U00 = X2 (ii) Graphically represent the utility functions and the two lotteries. (4 Marks) (iii) Calculate the expected utility for each lottery. (4 Marks) (iv) Give the lottery chosen by each individual and explain why they choose these lotteries. (4 Marks) (v) The certainty equivalent for each lottery. (4 Marks) SECTION C ANSWER ONLY ONE QUESTION Question 2 \"Efficient Market Hypothesis claim that Stock Prices vary randomly around their long run averages. However, there are noticeable patterns that can be observed in stock prices\". Discuss in relation to the forms and evidences supporting the Efcient Market Hypothesis. (20 marks) Question 3 Using relevant diagram(s), explain whether the existence of capital market increases welfare in an economy. (20 Marks)