Brad is about to purchase an additional asset for his well-diversified portfolio. He notices that when he plots the historical returns of the asset against those of the market portfolio, the line of best fit tends to have a large amount of prediction error for each data point (the scatter plot is not very tight around the line of best fit). Do you think that this will have a large or a small impact on the beta of the asset? Explain your opinion?
> You know that the price of CFI, Inc., stock will be $12 exactly one year from today. Today the price of the stock is $11. Describe what must happen to the price of CFI, Inc., today in order for an investor to generate a 20 percent return over the next ye
> Trader Inc. is a $300 million company, as measured by asset value, and Horst Corp. is a $35 million company. Both are privately held corporations. Explain which firm more likely to go public and register with the SEC, and why?
> The financial information for Laurel Electronics referred to in Problem 3.5 is all at book value. Suppose marking to market reveals that the market value of the firm’s inventory is 20 percent below its book value, its receivables are 25 percent below the
> Suppose you own a security that you know can be easily sold in the secondary market, but the security will sell at a lower price than you paid for it. What does this imply for the security’s marketability and liquidity?
> How does the use of market-value accounting help managers?
> What is the difference between saver–lenders and borrower–spenders, and who are the major representatives of each group?
> Ruth Hornsby is looking to invest in a three-year bond that makes semiannual coupon payments at a rate of 5.875 percent. If these bonds have a market price of $981.13, what yield to maturity can she expect to earn?
> Northrop Real Estate Company management is planning to fund a development project by issuing 10-year zero coupon bonds with a face value of $1,000. Assuming semiannual compounding, what will be the price of these bonds if the appropriate discount rate is
> Ten-year zero coupon bonds issued by the U.S. Treasury have a face value of $1,000 and interest is compounded semiannually. If similar bonds in the market yield 10.5 percent, what is the value of these bonds?
> Diane Carter is interested in buying a five-year zero coupon bond with a face value of $1,000. She understands that the market interest rate for similar investments is 9 percent. Assume annual coupon payments. What is the current value of this bond?
> You are interested in investing in a five-year bond that pays a 7.8 percent coupon rate with interest to be received semiannually. Your required rate of return is 8.4 percent. What is the most you would be willing to pay for this bond?
> Kaaran made a friendly wager with a colleague that involves the result from flipping a coin. If heads comes up, Kaaran must pay her colleague $15; otherwise, her colleague will pay Kaaran $15. What is Kaaran’s expected cash flow, and what is the variance
> Regatta, Inc., has seven-year bonds outstanding that pay a 12 percent coupon rate. Investors buying these bonds today can expect to earn a yield to maturity of 8.875 percent. What is the current value of these bonds? Assume annual coupon payments.
> Zippy Corporation just sold $30 million of convertible bonds with a conversion ratio of 40. Each $1,000 bond is convertible into 25 shares of Zippy’s stock. a. What is the conversion price of Zippy’s stock? b. If the current price of Zippy’s stock is $15
> Rachette Corp. has18-year bonds outstanding. These bonds, which pay interest semiannually, have a coupon rate of 9.735 percent and a yield to maturity of 7.95 percent. a. Compute the current price of these bonds. b. If the bonds can be called in five yea
> Knight, Inc., has issued a three-year bond that pays a coupon rate of 6.10 percent. Coupon payments are made semiannually. Given the market rate of interest of 5.80 percent, what is the market value of the bond?
> The Maryland Department of Transportation has issued 25-year bonds that make semiannual coupon payments at a rate of 9.875 percent. The current market rate for similar securities is 11 percent. a. What is the current market value of one of these bonds?
> Peabody Corp. has seven-year bonds outstanding. The bonds pay a coupon of 8.375 percent semiannually and are currently worth $1,063.49. The bonds can be called in three years at price of $1,075. a. What is the yield to maturity of these bonds? b. What is
> Showbiz, Inc., has issued eight-year bonds with a coupon of 6.375 percent and semiannual coupon payments. The market’s required rate of return on such bonds is 7.65 percent. a. What is the market price of these bonds? b. If the above bond is callable af
> Pullman Corp issued 10-year bonds four years ago with a coupon rate of 9.375 percent. At the time of issue, the bonds sold at par. Today bonds of similar risk and maturity must pay an annual coupon of 6.25 percent to sell at par value. Assuming semiannua
> You bought a six-year bond issued by Runaway Corp. four years ago. At that time, you paid $974.33 for the bond. The bond pays a coupon rate of 7.375 percent, and coupon payments are made semiannually. Currently, the bond is priced at $1,023.56. What yiel
> Trevor Price bought 10-year bonds issued by Harvest Foods five years ago for $936.05. The bonds make semiannual coupon payments at a rate of 8.4 percent. If the current price of the bonds is $1,048.77, what is the yield that Trevor would earn by selling
> Dynamo Corp. is expecting annual payments of $34,225 for the next seven years from a customer. What is the present value of this annuity if the discount rate is 8.5 percent?
> Prepare a common-size balance sheet from the following information for Abercrombie Supply Company. Abercrombie Supply Company Balance Sheet as of June 30, 2017 ($ thousands) Liabilities and Equity: Accounts payable Notes payable Assets: Cash and mark
> Brown & Co. issued seven-year bonds two years ago that can be called after two years. The bonds make semiannual coupon payments at a coupon rate of 7.875 percent. Each bond has a market value of $1,053.40, and the call price is $1,078.75. If an investor
> Adrienne Dawson is planning to buy 10-year zero coupon bonds issued by the U.S. Treasury. If these bonds have a face value of $1,000 and are currently selling at $404.59, what is the expected return on them? Assume that interest compounds semiannually on
> Serengeti Corp. has five-year bonds outstanding that pay a coupon of 8.8 percent. If these bonds are priced at $1,064.86, what is the yield to maturity on these bonds? Assume semiannual coupon payments. What is the effective annual yield?
> Electrolex, Inc., has four-year bonds outstanding that pay a coupon rate of 6.6 percent and make coupon payments semiannually. If these bonds are currently selling at $914.89, what is the yield to maturity that an investor can expect to earn on these bon
> Pierre Dupont just received a cash gift from his grandfather. He plans to invest in a five-year bond issued by Venice Corp. that pays an annual coupon rate of 5.5 percent. If the current market rate is 7.25 percent, what is the maximum amount Pierre shou
> Rockinghouse Corp. management plans to issue seven-year zero coupon bonds. It has learned that these bonds will sell today at a price of $439.76. Assuming annual coupon payments, what is the yield to maturity on these bonds?
> Kintel, Inc., management wants to raise $1 million by issuing six-year zero coupon bonds with a face value of $1,000. The company’s investment banker states that investors would use an 11.4 percent discount rate to value such bonds. At what price would t
> Nanotech, Inc., has a bond issue maturing in seven years that is paying a coupon rate of 9.5 percent (semiannual payments). Management wants to retire a portion of the issue by buying the securities in the open market. If it can refinance at 8 percent, h
> Rockne, Inc., has outstanding bonds that will mature in six years and pay an 8 percent coupon semiannually. If you paid $1036.65 today and your required rate of return was 6.6 percent, did you pay the right price for the bond?
> Marshall Company is issuing eight-year bonds with a coupon rate of 6.5 percent and semiannual coupon payments. If the current market rate for similar bonds is 8 percent, what will be the bond price? If company management wants to raise $1.25 million, how
> Becky Scholes has $150,000 to invest. She wants to be able to withdraw $12,500 every year forever without using up any of her principal. What interest rate would her investment have to earn in order for her to be able to do so?
> Lopez Information Systems management is planning to issue 10-year bonds. The going market yield for such bonds is 8.125 percent. Assume that coupon payments will be made semiannually. Management is trying to decide between issuing an 8 percent coupon bon
> The International Publishing Group is raising $10 million by issuing 15-year bonds with a coupon rate of 8.5 percent. Coupon payments will be made annually. Investors buying the bonds today will earn a yield to maturity of 8.5 percent. At what price will
> Four years ago, Lisa Stills bought six-year, 5.5 percent coupon bonds issued by the Fairways Corp. for $947.68. If she sells these bonds at the current price of $894.52, what will be her realized yield on the bonds? Assume similar coupon-paying bonds mak
> Josh Kavern bought 10-year, 12 percent coupon bonds issued by the U.S. Treasury three years ago at $913.44. If he sells these bonds, for which he paid the face value of $1,000, at the current price of $804.59, what is his realized yield on the bonds? Ass
> Rudy Sandberg wants to invest in four-year bonds that are currently priced at $868.43. These bonds have a coupon rate of 6 percent and make semiannual coupon payments. What is the current market yield on this bond?
> BA Corp is issuing a 10-year bond with a coupon rate of 8 percent. The interest rate for similar bonds is currently 6 percent. Assuming annual payments, what is the value of the bond?
> Describe how investing in more than one asset can reduce risk through diversification?
> What was the average annual return that Tanner earned over the 2012 through 2015 period (see problem 7.6)?
> Stocks A, B, and C have expected returns of 15 percent, 15 percent, and 12 percent, respectively, while their standard deviations are 45 percent, 30 percent, and 30 percent, respectively. If you were considering the purchase of each of these stocks as th
> Describe the general relation between risk and return that we observe in the historical bond and stock market data?
> Mike White is planning to save up for a trip to Europe in three years. He will need $7,500 when he is ready to make the trip. He plans to invest the same amount at the end of each of the next three years in an account paying 6 percent. What is the amount
> You have been provided the following data on the securities of three firms and the market: Assume the CAPM and SML are true and fill in the missing values in the table. Would you invest in the stock of any of the three firms? If so, which one(s) and why
> If the CAPM describes the relation between systematic risk and expected returns, can both an individual asset and the market portfolio of all risky assets have negative expected real rates of return? Why or why not?
> Draw the Security Market Line (SML) for the case where the market risk premium is 5 percent and the risk-free rate is 7 percent. Now suppose an asset has a beta of –1.0 and an expected return of 4 percent. Plot it on your graph. Is the security properly
> Explain why investors who have diversified their portfolios will determine the price and, consequently, the expected return on an asset?
> In order to expect that it will fund her retirement, Glenda needs her portfolio to have an expected return of 12 percent per year over the next 30 years. She has decided to invest in Stocks 1, 2, and 3, with 25 percent in Stock 1, 50 percent in Stock 2,
> Peter knows that the covariance in the return on two assets is –0.0025. Without knowing the expected return of the two assets, explain what that covariance means?
> You have chosen biology as your college major because you would like to be a medical doctor. However, you find that the probability of being accepted to medical school is about 10 percent. If you are accepted to medical school, then your starting salary
> Evaluate the following statement: “By fully diversifying a portfolio, such as by buying every asset in the market, we can completely eliminate all types of risk, thereby creating a synthetic Treasury bill”?
> Write out the equation for the covariance in the returns of two assets, Asset 1 and Asset 2. Using that equation, explain the easiest way for the two asset returns to have a covariance of zero?
> The Ellicott City Ice Cream Company management has just completed an assessment of the company’s assets and liabilities and has obtained the following information. The firm has total current assets worth $625,000 at book value and $519,000 at market valu
> You have constructed a diversified portfolio of stocks such that there is no unsystematic risk. Explain why the expected return of that portfolio should be greater than the expected return of a risk-free security?
> Emmy is analyzing a two-stock portfolio that consists of a utility stock and a commodity stock. She knows that the return on the utility stock has a standard deviation of 40 percent and the return on the commodity stock has a standard deviation of 30 per
> Using the information from Problems 7.17, 7.18, and 7.19, calculate the coefficient of variation for each of the investments in those problems?
> John is watching an old game show rerun on television called Let’s Make a Deal in which the contestant chooses a prize behind one of two curtains. Behind one of the curtains is a gag prize worth $150, and behind the other is a round-the-world trip worth
> Ben would like to invest in gold and is aware that the returns on such an investment can be quite volatile. Use the following table of states, probabilities, and returns to determine the expected return and the standard deviation of the return on Ben&aci
> Barbara is considering investing in a company’s stock and is aware that the return on that investment is particularly sensitive to how the economy is performing. Her analysis suggests that four states of the economy can affect the retur
> The distribution of grades in an introductory finance class is normally distributed, with an expected grade of 75. If the standard deviation of grades is 7, in what range would you expect 95 percent of the grades to fall?
> Describe the Capital Asset Pricing Model (CAPM) and what it tells us?
> If the expected rate of return for the market is not much greater than the risk-free rate of return, what does this suggest about the general level of compensation for bearing systematic risk?
> Describe and justify what the value of the beta of a U.S. Treasury bill should be?
> Amit Patel is planning to invest $10,000 in a bank certificate of deposit (CD) for five years. The CD will pay interest of 9 percent. What is the future value of Amit’s investment?
> Susan is expecting the returns on the market portfolio to be negative in the near term. Since she is managing a stock mutual fund, she must remain invested in a portfolio of stocks. However, she is allowed to adjust the beta of her portfolio. What kind o
> Describe the difference between a total holding period return and an expected return?
> Robert Hobbes plans to invest $25,000 a year at the end of each year for the next seven years in an investment that will pay him a rate of return of 11.4 percent. How much money will Robert have at the end of seven years?
> Dynamics Telecommunications Corp. has made an investment in another company that will guarantee it a cash flow of $22,500 each year for the next five years. If the company uses a discount rate of 15 percent on its investments, what is the present value o
> An investment opportunity requires a payment of $750 for 12 years, starting a year from today. If your required rate of return is 8 percent, what is the value of the investment to you today?
> Biogenesis Inc. management expects the following cash flow stream over the next five years. They discount all cash flows using a 23 percent discount rate. What is the present value of this cash flow stream? 1 2 4 5 Year -$1,133,676 -$978,452 $275,455
> Jeremy Fenloch borrowed some money from his friend and promised to repay him $1,225, $1,350, $1,500, $1,600, and $1,600 over the next five years. If the friend normally discounts investments at 8 percent annually, how much did Jeremy borrow?
> Assume you are now 21 years old and will start working as soon as you graduate from college. You plan to start saving for your retirement on your 25th birthday and retire on your 65th birthday. After retirement, you expect to live at least until you are
> The Yan family buying a new 3,500-square-foot house in Muncie, Indiana, and will borrow $237,000 from Bank One at a rate of 6.375 percent for 15 years. What will be their monthly loan payment? Prepare an amortization schedule using Excel.
> Trevor Diaz wants to purchase a Maserati Qattroporte sedan, which has an invoice price of $121,737 and a total cost of $129,482. Trevor plans to put down $20,000 and will pay the rest by taking on a 5.75 percent five-year bank loan. What is the monthly p
> You are given the following information about Clarkesville Plumbing Company. Revenues in 2017 totaled $896, depreciation expenses $75, costs of goods sold $365, and interest expenses $54. At the end of the year, current assets were $121 and current liabi
> Saul Cervantes has just purchased some equipment for his landscaping business. For this equipment he must pay the following amounts at the end of each of the next five years: $10,450, $8,500, $9,675, $12,500, and $11,635. If the appropriate, what is the
> You are now 50 years old and plan to retire at age 65. You currently have a stock portfolio worth $150,000, a 401(k) retirement plan worth $250,000, and a money market account worth $50,000. Your stock portfolio is expected to provide annual returns of 1
> Babu Baradwaj is saving for his son’s college tuition. His son is currently 11 years old and will begin college in seven years. Babu has an index fund investment of $7,500 that is earning 9.5 percent annually. Total expenses at the University of Maryland
> At what interest rate would you be indifferent between the cash and annual payment options in problem 6.36?
> The top prize for the state lottery is $100,000,000. You have decided it is time for you to take a chance and purchase a ticket. Before you purchase the ticket, you must decide whether to choose the cash option or the annual payment option. If you choose
> Gary Kornig is 30 years old and wants to retire when he is 65. So far he has saved (1) $6,950 in an IRA account in which his money is earning 8.3 percent annually and (2) $5,000 in a money market account in which he is earning 5.25 percent annually. Gary
> Tirade Owens, a professional athlete, currently has a contract that will pay him a large amount in the first year of his contract and smaller amounts thereafter. He and his agent have asked the team to restructure the contract. The team, though reluctant
> You have been offered the opportunity to invest in a project which is expected to provide you with the following cash flows: $4,000 in one year, $12,000 in two years, and $8,000 in three years. If the appropriate interest rates are 6 percent for the firs
> You are considering three alternative investments: (1) A three-year bank CD paying 7.5 percent compounded quarterly; (2) A three-year bank CD paying 7.3 percent compounded monthly; and (3) A three-year bank CD paying 7.75 percent compounded annually. Whi
> Which of the following investments has the highest effective annual interest rate (EAR)? a. A bank CD that pays 8.25 percent compounded quarterly. b. A bank CD that pays 8.25 percent compounded monthly. c. A bank CD that pays 8.45 percent compounded annu
> You lent $100 to a friend for one year at a nominal rate of interest of 3 percent. Inflation during that year was 2 percent. Did you experience an increase or decrease in the purchasing power of your money? How much did it increase or decrease?
> Find the effective annual interest rate (EAR) on each of the following: a. 6 percent compounded quarterly. b. 4.99 percent compounded monthly. c. 7.25 percent compounded semiannually. d. 5.6 percent compounded daily.
> You are a freshman in college and are planning a trip to Europe when you graduate from college at the end of four years. You plan to save the following amounts annually, starting today: $625, $700, $700, and $750. If you can earn 5.75 percent annually, h
> Calculate the present value of the following perpetuities: a. $1,250 discounted to the present at 7 percent b. $7,250 discounted to the present at 6.33 percent c. $850 discounted to the present at 20 percent
> Suppose that the networking company in problem 6.27 will not start paying you until the first of new systems that uses your software is sold in two years. What is the present value of that annuity? Assume that the appropriate interest rate is still 6 per
> You wrote a piece of software that does a better job of allowing computers to network than any other program designed for this purpose. A large networking company wants to incorporate your software into its systems and is offering to pay you $500,000 tod
> Sharon Kabana has won a state lottery and will receive a payment of $89,729.45 every year, starting today, for the next 20 years. If she invests the proceeds at a rate of 7.25 percent, what is the present value of the cash flows that she will receive? Ro
> Grant Productions borrowed some money from the California Finance Company at a rate of 17.5 percent for a seven-year period. The loan calls for a payment of $1,540,862.19 each year beginning today. How much did Grant borrow?
> Jeremy Denham plans to save $5,000 every year for the next eight years, starting today. At the end of eight years, Jeremy will turn 30 years old and plans to use his savings toward the down payment on a house. If his investment in a mutual fund will earn
> Modern Energy Company owns several gas stations. Management is looking to open a new station in the western suburbs of Baltimore. One possibility that managers at the company are evaluating is to take over a station located at a site that has been leased
> Gary Whitmore is a high school sophomore. He currently has $7,500 in a savings account that pays5.65 percent annually. Gary plans to use his current savings plus what he can save over the next four years to buy a car. He estimates that the car will cost
> The Huntington Rain Gear Company had $633,125 in taxable income in the year ending September 30, 2017. Calculate the company’s tax using the tax schedule in Exhibit 3.6?
