1. Calculate the HPY on a bond that is currently selling for 105-15 (priced as % of 100% par, in 32nds), has 9 years left to maturity, carries a 7% coupon (paid semiannually), coupons can be reinvested at 4%, and your interest rate model expects an 70% probability of interest rates rising 200 basis points and a 30% probability of interest rates falling 100 basis points over a 3-year holding period.

2.      Following are return expectations on the S&P 500 index for the upcoming year with the corresponding probabilities:

Expectation                                   Return                                     Probability
Low                                               3.5%                                        25%
Most Likely                                   7%                                           45%
High                                              13.5%                                      30%

Calculate the 95% confidence interval of returns.

3.      The Fed announced a lowering of the federal funds rate by 25 basis points (0.25%). To implement this, what action would the Fed take through the Federal Open Market Committee (FOMC)? SUPPORT YOUR ANSWER.

4.      Your daughter is a beginning freshman in high school. By the time she enters her freshman year in college, you would like to have savings accumulated to pay her tuition for her next four years of college. Assuming the annual tuition is paid at the beginning of the college year and you expect her freshman annual tuition to be $25,000 and to grow at an inflation rate of 5% for each of the remaining 3years, calculate the lump sum required today (beginning high school) to achieve your investment goals (round to nearest dollar). Assume an average 8% annual yield over the entire period. Your daughter will begin college the following fall after high school graduation. (Hint: create a time line to visualize the timing of the cash flows.)

5.      As the cash manager of your company, you wish to buy $1,000,000 in 30-day Treasury bills. You obtain the following bid/ask quotes from three dealers:
                              Bid                  Ask
Dealer A                3.01                 3.00
Dealer B                3.02                 3.01
Dealer C                2.99                 2.98

Which dealer should be selected? State the appropriate quote and calculate the price. 

6.      You are a value investor analyzing a stock with a beta of 0.78. The historical market risk premium is 4.8% and the 3-month Treasury bill is 2%. The stock is currently priced to yield 7.5%. Would you purchase the stock? Why or why not? 

7.      Last year Nymphe Technologies had $500 million of sales and $270 million of fixed assets, so its FA/Sales ratio was 60%.  However, its fixed assets were used at only 72% of capacity.  While forecasting the results for the next year, the company wants to set its target Fixed Assets/Sales ratio at the level it would have realizedhad it been operating at full capacity.  What target FA/Sales ratio should the company set? 

8.   Maghrabi Enclosure follows a moderate current asset investment policy, but it is

considering whether to shift to a different strategy.  The firm’s annual sales are $500,000; its fixed assets are $180,000; its target capital structure calls for 60% debt and 40% equity; its EBIT is $55,000; the interest rate on its debt is 9%; and its tax rate is 40%.  With a conservative policy, current assets will be 18% of sales, while under an aggressive policy they will be 30% of sales.  What is the difference in the projected ROEs between the conservative and aggressive policies? 

9.   Marbela Corporation's stock had a required return of 10.75% last year, when the risk-free rate was 5.4% and the market risk premium was 5.5%.  Now suppose the market risk premium declines by 1.5%.  The risk-free rate and Marbela's beta remain unchanged.  What is the company's new required return?  (Hint: First calculate the beta, and then find the required return.) 

10.  The Bim-Bom Company is expected to pay a dividend of $3.10 per share at the end of the year, and that dividend is expected to grow at a constant rate of 5.00% per annum.  The company's beta is 1.25, the market risk premium is 4.20%, and the risk-free rate is 3.75%.  What is the company's current stock price? 

11.      Chu ChuTrain Systems is expected to pay a $3.25 annual dividend (D₁ = $3.25), the dividend is expected to grow at a constant rate of 6.50% a year, and the common stock currently sells for $65.75 a share.  The before-tax cost of debt is 5.50%, and the tax rate is 40%.  The target capital structure consists of 40% debt and 60% common equity.  What is the company’s WACC if all equity is from retained earnings?