Assignment

Key points for Conceptual and calculation questions:

1. What are the first and secondary stock markets in the U.S.? What is the difference between first and secondary market?

2. What are the stock market indices? What do they measure? How do we measure stock market return?

3. What are the EAR and APR? What's the difference between EAR and APR? Which one is the quoted interest rate? Which one is the real interest rate? How to convert APR to EAR under different frequencies of compounding?

4. The relation between interest rate and pricing of financial securities.

5. What's the purpose of building investment portfolios? Differentiate firm's specific risk and market risk. Which one is diversifiable? Which risk is systematic risk? Which one could be reduced by forming portfolio? How does the diversification work, including high or low correlated stocks?

6. What are the two parts in total return? What is the reward for taking risk? How does the market reward risk-taking investment? Does the efficient financial market compensate for taking firm's specific risk? Can you distinguish stock market return and market risk premium?

7. What does standard deviation measure? What is the interpretation of standard deviation? We should have several ways to phrase the answer to this question.

8. What does the beta in CAPM measure? (Firm's total risk, firm's specific risk, or firm's market risk?) What does CAPM calculate for? If we break down the CAPM, what is each part (Rf, Rm, Rm-Rf, beta)?

9. Structure of the income statement. How to get to EBIT and Net Income from the top Revenue?

10. Distinguish single cash flow/multiple cash flow/annuity/annuity due/perpetuity. How to calculate the P.V. and PMT for mortgage/loan.

11. Bond pricing. Bond's quote. Bond's cash flow. What is bond's coupon rate/yield to maturity if bond is selling at par value? Rate of return of trading a bond.

12. Stock pricing. Dividend growth. If I know one dividend, with growth rate, can I calculate or other dividend payments? CGM model for stock pricing. How to calculate the sustainable growth rate in CGM model?

Practice for Calculation questions:

13. You borrow $1,000,000 with annual payments at a 3.25% interest rate for 15 years. What are your annual payments?

14. What is the EAR for a 14% APR if interest is daily compounding?

15. A bond is selling at $1170. It pays semi-annual coupon at 6% coupon rate. Time to maturity is 8 years. What is the yield to maturity (YTM) of this bond?

16. You plan to finance a house that sells for $399,500 with a loan that carries a 4.35% APR for 30 years. What is your monthly payment if payments? What if the annuity payment is an annuity due?

17. You invest $20,000 in Delta, $50,000 in KEY, and $30,000 in Dell. If the expected returns for Delta, KEY and Dell are 9%, 10% and 15%, respectively, then what is the portfolio's expected return?

18. You receive a loan $6,000 today. You are required to pay back $30,000 in seven years. What is the annual interest rate of your loan?

19. Jay is considering the purchase of a rental home. He plans to hold the house forever (leave it to his heirs). He forecasts that he will receive rent of $5,000 every month forever. How much should Jay pay for the rental property if his cost of capital in APR is 18% annually?

20. Trans American forecasted dividend for next year is $5.66 per share. The company's ROE is 11% and its plowback ratio is 40%. If Trans American's required return is 15% then what is the company's current stock price?

21. Amazon has a Beta of 2. The risk-free rate is 4% and the market return is 9%. What is Amazon's risk premium and expected rate of return?

Long Questions:

Requirements for long questions:

a. Draw the time line of the question. Put down all T.V.M factors: Size of cash flows, time, and interest rate.
b. Show the formula you should use to solve the problems, and the corresponding numbers in the formula.
c. Show all the financial calculators inputs and outputs.

1. You are holding 2 portfolios. At the beginning of January you owned $7,000 of Dollar Rental, $9,000 of Quarter Rental, and $15,000 of Dime Rental in your portfolio. During the month the three company's returns were -12.5%, 20.4%, and 5.8%, respectively.

a. What is your portfolio 1's return in January? For the next 3 months (Feb, March, and April), the returns of portfolio 1 are 7%, -9%, and 14%, respectively. What is the risk of your portfolio 1?

b. In this question, you need to find out the portfolio that is not on the efficient frontier. (You've done this in the class and quiz)

2. Calculate WACC. Go over the slides of WACC. Do the last sample question as practice.

3. Given project's cash flows, calculate NPV, IRR, and PB.