Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Basic Finance Expert

2275_Scatter plot.jpg

1. The figure above is a scatter plot of the returns of two assets against the return of the market. Both assets have the same expected return and the same variance. Which asset would you prefer to hold if your portfolio contained many stocks? Asset 1 is on the left and Asset 2 on the right.

(a) Asset 1
(b) Asset 2

2. You have to pick one stock that will form your entire portfolio. Which stock will you not pick?

Stock Expected return    Std.Dev.

  A             10                    15
  B              9                     13
  C              5                     15
  D             10                    8

(a) Stock A

(b) Stocks A, B, and C

(c) Stock D

(d) Stocks B and C

Answer the next three problems with reference to this information

Form a portfolio of stocks X and Y and the risk-free asset, such that the standard deviation of my portfolio's return will be 13%. The correlation between these two assets is 0, and that the standard deviations of the two assets are 10% and 15% respectively. You know that the tangency portfolio of just these two risky assets invests 2/3 in asset X.

3. What is the standard deviation of the return of the tangency portfolio?

(a) 8.33%
(b) 11.11%
(c) 12%
(d) 13%

4. Assuming you invest a positive amount in the risky asset, what is the weight of the risky asset in your  final portfolio?

(a) -0.56
(b) 0.083
(c) 0.44
(d) 1.56

5. If you had $200 to invest, how many dollars would you invest in asset X?

(a) 133.33
(b) 192
(c) 200
(d) 208

6. You hold the market portfolio. there is a graph plotted Security Market Line (SML) below also plotted an asset, A (the black dot). According to the diagram:

2200_Security market line.jpg

(a) A is overpriced and you should not buy it, but you could short-sell it
(b) A is underpriced and you should buy it
(c) A is correctly priced and you are indifferent between buying and selling it

7. All investors like expected return and hate standard deviation. There are three stocks which are the only risky assets in the world. You have the following information:

Stock Number of shares outstanding Price per share

A 10000 $25
B 20000 $32

Construct the lowest-variance portfolio that has the same expected return as the market portfolio. What is the portfolio you choose?

(a) 1/3 in A, 2/3 in B
(b) .28 in A, .72 in B
(c) .41 in A, .59 in B
(d) Impossible to say, we would need the risk-free rate to tell.

8. There are no taxes. Empanada Mama is a New York-based restaurant chain that is thinking of expanding to California. It is entirely  financed with equity, and the beta of its equity is 1. The empanada business is significantly different in California:

Latin American food is much more common and the competition is fierce. There is an empanada chain, called LA Empanada, in Los Angeles, which is financed with $40 of debt and $100 of equity (book values). The debt is risk-free. LA Empanada has 30 shares outstanding, and the current price of its shares is $2. The beta of its equity is 2. What is the beta you will use to find out the NPV of Empanada Mama's venture in California?

(a) 1
(b) 1.2
(c) 1.43
(d) 2

9. What is the YTM on a 1 year, semiannual payment 10% coupon bond with face value $1000 and price $900?

(a) 5.63%
(b) 10.82%
(c) 21.64%
(d) 22.81%

10. A one-year zero coupon bond has face value $5,000. The issuer may default, and the probability of default is 0.1. In default, the bond pays nothing. Instruments of similar risk pay 6% (e
ective annual). What is the YTM on this bond, expressed as an APR with annual compounding?

(a) 6%
(b) 12%
(c) 13.01%
(d) 17.78%

Answer the following two problems with respect to this information A firm's equity had a book value of $400M last year. ROE is 10% and it retains one-fourth of its earnings. Instruments of the same risk as the equity pay 12%.

11. Assuming it maintains its ROE and payout ratios, what is the expected total dividend next year in $M?

(a) 10
(b) 10.25
(c) 30
(d) 30.75

12. What should the market value of the equity be?

(a) $323.68M
(b) $315.79M
(c) $256.25M

Answer the following four problems with respect to this information There are no taxes or other frictions. Two companies, GOOG and YHOO, have the same assets. They will both last only one period. GOOG is all-equity, but YHOO has zero-coupon risk-free debt with face value $105,000. The companies can have three possible values of EBITDA next year: $105,000, $200,000 and $500,000 with equal probability for each. The beta of the cash flows is 0.6, the risk-free rate is 5% and the market risk premium is 7%. 13. What is the value of GOOG's equity?

(a) 245,726
(b) 191,933
(c) 105,110

14. What is the value of YHOO's debt?

(a) $100,000
(b) $105,000
(c) $90,000

15. What is the value of YHOO's equity?

(a) $100,000
(b) $145,726
(c) $200,116

16. What does the CAPM say the expected return on YHOO's equity should be?

(a) 11.125%
(b) 12.08%
(c) 14.11%

Answer the following three problems with respect to this information Two companies, One and Two, have the same assets, and will make the same EBITDA of $20 for certain each period forever. They have no depreciation. The tax rate is 40%. Company One has perpetual risk-free debt worth $100. The risk-free interest rate is 4%.

17. What is the coupon on Company One's debt?

(a) $10
(b) $4
(c) $5

18. What is the value of Company Two's equity?

(a) $200
(b) $300
(c) $400

19. What is the value of Company One's equity?

(a) $180
(b) $200
(c) $240
(d) $300

20. The tax rate is 0%, and the risk-free interest rate is 10%. Assume all betas are 0. An all-equity financed  firm lasts for one period and has a value of $100. It is thinking of changing its capital structure, without changing its assets. If it takes on $50 worth of debt (market value), its equity would be worth $48. This means that the expected value of bankruptcy costs next period is:

(a) $2
(b) $2.2
(c) $4
(d) $5.5

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M92022

Have any Question? 


Related Questions in Basic Finance

Grace carter purchased 100 shares of the stock of rock

Grace Carter purchased 100 shares of the stock of Rock Securities one year ago. Last year the price of the stock was $50 per share. In the year, Rock Securities paid a dividend of $2.40 per share. The price of the stock ...

Wiggle pools has total equity of 358200 and net income of

Wiggle Pools has total equity of $358,200 and net income of $47,500. The debt-equity ratio is .68 and the total asset turnover is 1.2. What is the profit margin?

The table below shows the expected return and standard

The table below shows the expected return and standard deviation for two stocks. Is the pattern shown in the table possible? Explain your answer. Stock Beta Std. Dev. #1 1.5 22% #2 0.9 35%

1 distinguish between the two types of balloon mortgages2

1. Distinguish between the two types of balloon mortgages. 2. What is the difference between a permanent and temporary buydown mortgage? 3. Discuss the advantages and disadvantages found in shorter-term mortgage loans. 4 ...

A firm has previously issued fixed rate noncallable debt

A firm has previously issued fixed rate noncallable debt. Because interest rates are perceived to be temporarily high, the firm would like to have the flexibility of calling the debt later when rates are expected to fall ...

Check and revise sentences for parallel structuredetermine

Check and revise sentences for parallel structure Determine whether the following sentences use parallel structure. Revise sentences as needed to make the structure parallel. a. The executive at Ernst & Young writes repo ...

In problem 1012 how far upstream does the flow from the

In Problem 10.12, how far upstream does the flow from the source reach? Problem 10.12 For the case of a source at the origin with a uniform free stream plot the streamline ψ = 0.

1 what would cause the rate of return for an investor that

1. What would cause the rate of return for an investor that purchases real estate and leases it to the corporation to differ from the rate of return earned by the corporation on the incremental investment in owning versu ...

1 briefly discuss the three objectives for developing and

1. Briefly discuss the three objectives for developing and implementing performance measurement systems. 2. Compare and contrast the various metrics for product availability. Why is the order fill rate considered the mos ...

Explain why interest rate swaps are more widely used than

Explain why interest rate swaps are more widely used than currency and equity swaps? Explain how swaps are similar to but different from forward contracts? Suppose that a party engages in a swap, but before the expiratio ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro