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

Question utilizing the concepts learned throughout the

Question: Utilizing the concepts learned throughout the course, write a Final Paper on one of the following scenarios: • Option One: You are a consultant with 10 years experience in the health care insurance industry. A ...

Discussion your initial discussion thread is due on day 3

Discussion: Your initial discussion thread is due on Day 3 (Thursday) and you have until Day 7 (Monday) to respond to your classmates. Your grade will reflect both the quality of your initial post and the depth of your r ...

Question financial ratios analysis and comparison

Question: Financial Ratios Analysis and Comparison Paper Prior to completing this assignment, review Chapter 10 and 12 in your course text. You are a mid-level manager in a health care organization and you have been aske ...

Grant technologies needs 300000 to pay its supplier grants

Grant Technologies needs $300,000 to pay its supplier. Grant's bank is offering a 210-day simple interest loan with a quoted interest rate of 11 percent and a 20 percent compensating balance requirement. Assuming there a ...

Franks is looking at a new sausage system with an installed

Franks is looking at a new sausage system with an installed cost of $375,000. This cost will be depreciated straight-line to zero over the project's five-year life, at the end of which the sausage system can be scrapped ...

Market-value ratios garret industries has a priceearnings

(?Market-value ratios?) Garret Industries has a? price/earnings ratio of 19.46X a. If? Garret's earnings per share is ?$1.65?, what is the price per share of? Garret's stock? b. Using the price per share you found in par ...

You are planning to make annual deposits of 4440 into a

You are planning to make annual deposits of $4,440 into a retirement account that pays 9 percent interest compounded monthly. How large will your account balance be in 32 years?  (Do not round intermediate calculations a ...

One year ago you bought a put option on 125000 euros with

One year ago, you bought a put option on 125,000 euros with an expiration date of one year. You paid a premium on the put option of $.05 per unit. The exercise price was $1.36. Assume that one year ago, the spot rate of ...

Common stock versus warrant investment tom baldwin can

Common stock versus warrant investment Tom Baldwin can invest $6,300 in the common stock or the warrants of Lexington Life Insurance. The common stock is currently selling for $30 per share. Its warrants, which provide f ...

Call optionnbspcarol krebs is considering buying 100 shares

Call option  Carol Krebs is considering buying 100 shares of Sooner Products, Inc., at $62 per share. Because she has read that the firm will probably soon receive certain large orders from abroad, she expects the price ...

  • 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

Why might a bank avoid the use of interest rate swaps even

Why might a bank avoid the use of interest rate swaps, even when the institution is exposed to significant interest rate

Describe the difference between zero coupon bonds and

Describe the difference between zero coupon bonds and coupon bonds. Under what conditions will a coupon bond sell at a p

Compute the present value of an annuity of 880 per year

Compute the present value of an annuity of $ 880 per year for 16 years, given a discount rate of 6 percent per annum. As

Compute the present value of an 1150 payment made in ten

Compute the present value of an $1,150 payment made in ten years when the discount rate is 12 percent. (Do not round int

Compute the present value of an annuity of 699 per year

Compute the present value of an annuity of $ 699 per year for 19 years, given a discount rate of 6 percent per annum. As