Financial Management

 Econ 134A Test 2 Fall 2015 Based on Form A Q1  Mozie Moxy Mac Inc. will pay out its ﬁrst annual dividend of $5 six months from today. The company will pay dividends forever, and each will be 10% higher than the previous one. What is the present value of this company if the eﬀect annual interest rate is 15%? Q2  In the ﬁconal country of San Luis Diego, the average bond return was 7.6% in 1953, followed by 7.8% in 1954, and 10.5% in 1955. The average return on stocks in theses years was 5.7%, 10.8%, and 14.5%, respecvely. What was the average equity risk premium in San Luis Diego over this three-year period? Use the arithmec mean. Q3  You ﬁnd two stocks that are perfectly negavely correlated on their returns. One stock’s returns have a standard deviaon of 30% and the other has a standard deviaon of 20%. If you can make a porolio mixing these two stocks in any combinaon you want, the lowest possible standard deviaon porolio possible has a standard deviaon of ? Q4  Three stocks have annual returns of 5%, 10%, and 15%. The standard deviaon of this sample is ? Q5  Zoe purchased a zero-coupon bond earlier today for $450. The bond will mature in two years, and will pay out $900. What is the yield to maturity for this bond? Q6  Blueberry Canyon muﬃns, Inc. pays dividends every six months forever. The next dividend will be paid in 4 months. What is the present value of this stock assuming a stated annual interest rate of 15%, compounded ﬁve mes per year? Q7  Marcel will invest in a porolio, with ¼ of money invested in Flat Tire Airlines, and ¾ of money in a risk-free bond. Flat Tire Airlines could have a rate of return each year of 40% or 10%, each with 50% probability. The risk-free bond has a rate of return of 15%.  a) If Flat Tire Airlines has a beta value of 3, what is the expected return of a stock with the same beta value as the market porolio? Q7  Marcel will invest in a porolio, with ¼ of money invested in Flat Tire Airlines, and ¾ of money in a risk-free bond. Flat Tire Airlines could have a rate of return each year of 40% or 10%, each with 50% probability. The risk-free bond has a rate of return of 15%.  b) What is the standard deviaon of Marcel’s porolio?

ECON | 134A and 234A | Financial Management | question bank |  Econ 134A Test 2 Fall 2015 B

Q1 • Use the growing annuity formula and solve for C. • Plug in PV=50, r=0.1, g=0.07, T=30. • C=4.06 Q2 • Use the variance of a porolio formula • Plug in values remembering covariance is zero, so the last term drops out. • Take the square root of the variance to ﬁnd the standard deviaon. [(0.7^2*0.03^2)+(0.3^2*0.08^2)]^0.5=0.0318 Q3 • Find risk premium of stocks my subtracng their returns to that of bonds. • Find average risk premium over these years by averaging it over three years using the formula • AvgRPs=(7.1+7.0+(-2.0))/3= 0.0403 Q4 • Find the present value at year 5 using the growing perpetuity formula with C=1, r=0.08, g=-0.1: • Discount this result to year zero by dividing it by (1+r)^5 • PV=1/(0.08+0.1)*1/(1.08)^5=3.78 Q5 • The formula for the expected return of a stock is • Solve for Rf and plug in for beta=3.5, Rs=0.31 and Rm=0.1 • Rf=(0.31-0.35)/(1-3.5)=0.016 Q6 • Find the rate of returns for each year using • The geometric average return is • Soluon: plug return values into formula and T=3, and you get 0.087 Q7 • Use PV formulas for discounted future cash ﬂows. The desired present value of the stock today is $40. The current value of the stock is the perpetuity paying $5 per period. Add an expression for an unknown dividend value x at the end of 8.5 periods, and solve for x. • 40=5/0.15 + x/1.15^8.5 • x=21.86 Q8 • Use PV formula: • Solve for r, and plug in FV=550, PV=200, t=6.5 • r= (550/200)^(1/6.5)-1= 0.1683 Q9 • Plug in those rates of return into the geometric average return formula for T=8: Q10 • The variance of a sample is: • In this case, the expected value of X is simply the arithmec average of the returns for those three years. Plug this value as E(x) and each years returns as the xi, and N=3. • Var=0.5(0.04-0.06)^2+(0.06-0.06)^2+(0.08- 0.06)^2=0.0004, Std=Var^0.5=0.02 Q11 • Use annuity PV formula for coupon payments and face value at date 15. • Adjust value by 3 months. Q12 • Change this problem to bi-yearly periods Q13 a) • If Beta=1, the formula shows that E(Rs)=E(Rm) • To ﬁnd the expected return of this stock, ﬁnd the expected return of the market porolio. • Solve for E(Rm) from the formula • Plug in E(R(HTD))=0.19, Rf=0.1, beta=1.9 • E(Rm)=0.28/1.9=0.147=E(Rs) for any stock s with Beta=1 Q13 b) • Use the formula for variance of a porolio • Note that the variance of a risk free bond is zero, there is no covariance either. So ﬁnd the square root of the ﬁrst term to ﬁnd the variance of the porolio. The variance of the risky asset is found with the following formula: • Std=0.333(0.5(0-0.19)^2+0.5(0.38-0.19^2))^(1/2)=0.063

ECON | 134A and 234A | Financial Management | exam | Q1 • Use the growing annuity f

Econ 134A John Hartman Test 2, Form B (9 am) lecture May 28, 2014 Instructions: YOU WILL TURN IN YOUR SCANTRON AND THE PROBLEMS PAGE. MAKE SURE ALL WORK AND ANSWERS ARE PROVIDED ON THESE. You have 40 minutes to complete this test, unless you arrive late. Late arrival will lower the time available to you, and you must finish at the same time as all other students. Cheating will not be tolerated during any test. Any suspected cheating will be reported to the relevant authorities on this issue. You are allowed to use a nonprogrammable four-function or scientific calculator that is NOT a communication device. You are NOT allowed to have a calculator that stores formulas, buttons that automatically calculate IRR, NPV, or any other concept covered in this class. You are NOT allowed to have a calculator that has the ability to produce graphs. If you use a calculator that does not meet these requirements, you will be assumed to be cheating. Unless otherwise specified, you can assume the following:  Negative internal rates of return are not possible.  Equivalent annual cost problems are in real dollars. You are allowed to turn in your test early if there are at least 10 minutes remaining. As a courtesy to your classmates, you will not be allowed to leave during the final 10 minutes of the test. Your test should have 5 multiple choice questions (10 points) and 2 problems (13 points). The maximum possible point total is 24 points. If your test is incomplete, it is your responsibility to notify a proctor to get a new test. For your reference, an example of a well-labeled graph is below: Grading: Filling in scantron correctly, putting name, perm #, and TA on problems page, & having photo ID ___ /1 ( automatic unless something is incorrect ) Multiple choice portion _____/10 Problems _____ /13 Total score _____/24 MULTIPLE CHOICE: Answer the following questions on your scantron. Each correct answer is worth 2 points. All incorrect or blank answers are worth 0 points. If there is an answer that does not exactly match the correct answer, choose the closest answer. 1. Stephanie owns a share of stock in CF134AA, Inc. The stock is expected to pay a $10 dividend six months from now, and will pay yearly dividends thereafter on the same date. Each dividend paid by this company is 8% higher than the previous one. What is the present value of this stock if the effective annual interest rate is 12% and if dividends are expected to be paid forever? A. $250 B. $255 C. $260 D. $265 E. $270 2. Stock X and Stock Y are perfectly positively correlated. Stock X has an expected return of 12% and a standard deviation of 14%. Stock Y has an expected return of 18% and a standard deviation of 16%. Which of the following could be the standard deviation of a portfolio that has a positive percentage of each of these two stocks? (Assume that no stocks other than X and Y can be invested in this portfolio.) A. 12% B. 14% C. 15% D. 16% E. 18%

ECON | 134A and 234A | Financial Management | exam | Econ 134A John Hartman Test 2 

Test3A_Fall2015.docx-Name_______________________________________ Perm #_______________________________ Econ 134A John

Name_______________________________________ Perm #_______________________________ Econ 134A John Hartman Test 3, Form A September 12, 2019 Instructions: YOU WILL TURN IN THE ENTIRE TEST. You have 80 minutes to complete this test, unless you arrive late. Late arrival will lower the time available to you, and you must finish at the same time as all other students. Cheating will not be tolerated during any test. Any suspected cheating will be reported to the relevant authorities on this issue. You are allowed to use a nonprogrammable four-function or scientific calculator that is NOT a communication device. You are NOT allowed to have a calculator that stores formulas, buttons that automatically calculate IRR, NPV, or any other concept covered in this class. You are NOT allowed to have a calculator that has the ability to produce graphs. If you use a calculator that does not meet these requirements, you will be assumed to be cheating. Unless otherwise specified, you can assume the following:  Negative internal rates of return are not possible.  Equivalent annual cost problems are in real dollars. You are allowed to turn in your test early if there are at least 10 minutes remaining. As a courtesy to your classmates, you will not be allowed to leave during the final 10 minutes of the test. Your test should have 7 problems, some with multiple parts. The maximum possible point total is 43 points. If your test is incomplete, it is your responsibility to notify a proctor to get a new test. For your reference, an example of a well-labeled graph is below: For the following problems, you will need to write out the solution. You must show all work to receive credit. Each problem (or part of problem) shows the maximum point value. Provide at least four significant digits to each answer or you may not receive full credit for a correct solution. Show all work in order to receive credit. You will receive partial credit for incorrect solutions in some instances. Clearly circle your answer(s) or else you may not receive full credit for a complete and correct solution. 1. (6 points) A stock is expected to pay a $10 dividend every 12 months, starting in 12 months. The risk-free in the market is 10%, and the market rate of return is 13%. Suppose that Boris own a European call option with an expiration date of today, and an exercise price of $82. For this stock, determine which beta (β) values will benefit Boris from exercising the option.

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