Financial Management

4. (8 points) Benyamin is quoted a price for a bond of $800. This bond has a face value of $790 and pays a 14% coupon once per year. Three coupons will be paid. One coupon will be paid later today, one will be paid a year from today, and one will be paid two years from today. If the bond matures two years from today, what is the yield on this bond (expressed as an effective annual rate)? 5. (9 points) Zach buys four shares of stock at a price of $130 (per share) today, and three call options with an exercise price of $150 (per share) three months from now. (In other words, the expiration date of the option is three months from now.) Each call option is for buying one share. For simplicity in this problem, you can assume that the discount rate is 0%. Draw a well-labeled graph that shows the value of a combination of the four shares of stock and the three call options as a function of the value of the stock at expiration. The vertical intercept should have the value of the combination of the four shares of stock and the three call options. The horizontal intercept should have the value of the stock on the expiration date. Make sure to label your intercepts and other relevant numbers on each axis, where relevant. (Hint: You may want to look at the front page of the test to see a well-labeled graph.) Explain your answer in words, math, and/or using additional graphs. 6. (8 points) Rydenapolis, Inc., produces race cars. This company has distributed 5,000 bonds with current value $60 each. This company also has distributed 16,000 shares of stock with current value of $25 each. (There is no other debt incurred or ownership in the company besides what is mentioned here.) The required return on equity is 12%, and the weighted average cost of capital is 8%. What is the cost of debt for Rydenapolis?

ECON | 134A and 234A | Financial Management | exam | 4. (8 points) Benyamin is quot

Econ 134A-100 (9:30 am) Winter 2013, Test 1 Soluon sketches Eber Extravagant Eber Extravagant has just purchased $50,000 in furnishings for his living room. To do so, he charged all $50,000 spent on his American Slowpoke credit card, which charges 21% stated annual interest, compounded monthly. Aﬅer geng home, he ﬁnds he has just been approved for a new U

Test1_solution_sketches_Winter2013am.pptx-Econ 134A-100 (9:30 am) Winter 2013,

Test 1 solution sketches Note for multiple-choice questions: Choose the closest answer 1) Interest rate conversions  If the eﬀective annual discount rate is 12%, what is the stated annual discount rate if compounded monthly?  (1 + r/12) 12 = 1.12  1 + r/12 = 1.0094888  r/12 = .0094888  r = .1138656 2) PV of future payments  Mauricio will receive $900 three mo

Winter14Test1Solutions.pptx-Test 1 solution sketches Note for

Test 3 Solution Sketches Note for mulple-choice quesons: choose the closest answer. Exam date: 5 December 2016 Econ 134A, John Hartman 1 . A bond pays a coupon of 9% every year, starng one year from today unl the date the bond matures. If the bond matures four years from today, has a 5% eﬀecve annual discount rate, and currently has a value of $1000, what is the face value? 2 . If inﬂaon is 3% over the next year, 5% the year aﬅer that, and 10% the following year, what is the price of a product three years from today if its current price is $800? 3 . Don invested $100 in a company 30 years ago. This investment is worth $800 today. What is the geometric average annual return on this investment? 4. If the loan is amortized such that the amount of principal reduced each month is constant, how much is the first payment? Sally is ready to buy a new house. In order to do so, she will need to take a loan out today of $540,000. She will pay back the loan over 360 months, starting in one month. The stated annual interest rate being charged to Sally is 4.2%, compounded monthly. • Monthly rate: • Principal reducon: • Interest: • Total payment amount: 5. If the loan is amortized such that all payments are constant, how much is the first payment? Sally is ready to buy a new house. In order to do so, she will need to take a loan out today of $540,000. She will pay back the loan over 360 months, starting in one month. The stated annual interest rate being charged to Sally is 4.2%, compounded monthly. 6. If the loan is amortized such that the amount of principal reduced each month is constant, how much is the last payment? Sally is ready to buy a new house. In order to do so, she will need to take a loan out today of $540,000. She will pay back the loan over 360 months, starting in one month. The stated annual interest rate being charged to Sally is 4.2%, compounded monthly. • Monthly rate: • Principal reducon: • Interest: • Total payment amount: 7 . A sample of four stocks’ returns in a given year is 9%, 12%, 35%, and –8%. What is the standard deviaon of this sample? 8 . A new machine has a purchase price of $900 today, but also has maintenance costs of $500 two years from today and $800 four years from today. What is the equivalent annual cost of owning this machine if it lasts for 7 years and the eﬀecve annual interest rate is 18%? PV of costs: Let be EAC: Then 9. What is the probability that the value of the stock will be higher four days from now? Allegro Super Style Soft Drinks stock prices change consistent with a random walk, with each day’s movement in price independent of the previous day’s price change. Every day, the stock can either go up or down by $4, each with 50% probability. The stock is currently valued at $100. • The value must move Up at least 3 of the 4 days for the value to be strictly higher in four days. • There are four combinaons of 3 Up and 1 Down: • Could also count the combinaons: UUUD, UUDU, UDUU, DUUU.

ECON | 134A and 234A | Financial Management | question bank | Test 3 Solution Sketches Note 

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