MGTD75 Investments. Mid-Term Examination Winter 2008

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Albert Ernest Briggs
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1 MGTD75 Investments Mid-Term Examination Winter 2008 Time Allowed: 1 hour 45 minutes Instructions 1. Write your First/Last Name and Identification # (student number) on the General Purpose Answer Sheet (Scantron) and fill the corresponding ovals. Use a No.2 pencil. 2. Write your name and student number on the cover page of the examination answer book. 3. You are allowed to bring a hand-written letter size crib sheet. 4. Financial calculator is allowed. 5. There are 5 pages in this question paper. Part A: Answer all 15 multiple choice questions on the General Purpose Answer Sheet by filling the ovals with a No. 2 pencil. Part B: Answer all 3 questions in the examination answer book with a Black/Blue pen. Show all your steps. 1

2 Part A: Answer all 15 questions by choosing the best answer, 3% each. 1. The sale of a mortgage portfolio by setting up mortgage pass-through securities is an example of. A) credit enhancement B) securitization C) unbundling D) derivatives 2. If the market prices of each of the 30 stocks in the Dow Jones Industrial Average (DJIA) all change by the same percentage amount during a given day, which stock will have the greatest impact on the DJIA? A) The stock trading at the highest dollar price per share. B) The stock with total equity has the higher market value. C) The stock having the greatest amount of equity in its capital structure. D) The stock having the lowest volatility. E) All will have an equal impact. 3. You purchased XYZ stock at $50 per share. The stock is currently selling at $65. Your gains may be protected by placing a. A) stop-loss order B) limit-buy order C) stop-buy order D) limit-sell order 4. Which one of the following statements regarding orders is false? A) A market order is simply an order to buy or sell a stock immediately at the prevailing market price. B) A limit sell order is where investors specify prices at which they are willing to sell a security. C) If stock ABC is selling at $50, a limit-buy order may instruct the broker to buy the stock if and when the share price falls below $45. D) A day order expires at the close of the trading day. 5. The asked bank discount yield on a T-bill is 5 percent. What is the asked price of the bill if it matures in 60 days and has a face value of $10,000? A) $9, B) $9, C) $9, D) $8, E) $9,

3 6. You sell short 100 shares of Loser Co. at a market price of $45 per share. Your maximum possible loss is A) $4,500. B) unlimited. C) zero. D) $9,000. E) Cannot tell from the information given. 7. The current yield on a bond is equal to. A) the internal rate of return B) the yield to maturity C) annual interest divided by the par value D) annual interest divided by the current market price 8. Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 10%, A) both bonds will increase in value, but bond A will increase more than bond B. B) both bonds will increase in value, but bond B will increase more than bond A. C) both bonds will decrease in value, but bond A will decrease more than bond B. D) both bonds will decrease in value, but bond B will decrease more than bond A. 9. You have just purchased a 10-year zero-coupon bond with a yield to maturity of 10% and a par value of $1,000. What would your rate of return at the end of the year be if you sell the bond? Assume the yield to maturity on the bond is 11% at the time you sell. A) 10.00% B) 20.42% C) 13.8% D) 1.4% 10. A trin ratio of less than 1.0 is considered as a. A) bearish signal B) bullish signal C) bullish signal by some fundamentalists D) bearish signal by some technical analysts and a bullish signal by other technical analysts E) C and D 3

4 11. The is the fraction of earnings reinvested in the firm. A) dividend payout ratio B) retention rate C) debt/equity ratio D) current ratio 12. You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $2.50 in dividends and $28 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is if you wanted to earn a 15% return. A) $23.91 B) $24.11 C) $26.52 D) $ A firm has a (net profit/pretax profit ratio) of 0.625, a leverage ratio of 1.2, a (pretax profit/ebit) of 0.9, an ROE of 17.82%, a current ratio of 8, and a return on sales ratio of 8%. The firm's asset turnover is. A) 1.3 B) 2.3 C) 3.3 D) A support level is. A) a level beyond which the market is unlikely to rise B) a level below which the market is unlikely to fall C) an equilibrium price level justified by characteristics such as earnings and cash flows D) the through of a market wave or cycle 15. You wish to earn a return of 12% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends is 9% for stock A and 10% for stock B. The intrinsic value of stock A. A) will be greater than the intrinsic value of stock B B) will be the same as the intrinsic value of stock B C) will be less than the intrinsic value of stock B D) may be greater or less than the intrinsic value of stock B E) Cannot be calculated without knowing the rate of return on the market portfolio. 4

5 Part B: Answer all three questions. Show all your steps. Question 1 (15%) Stock P 0 Q 0 P 1 A $ $50 B C D Assume the market only has the above four stocks. a) What is the single-period return on the price-weighted index constructed from the four stocks? (5%) b) What is the single- period return on the value-weighted index constructed from the four stocks using a divisor of 100? (5%) c) If Stock C were to split 2 for 1 after period 0, what would be the divisor for the priceweighted index? (5%) Question 2 (20%) Suppose a no-growth firm had a required rate of return and a ROE of 12% and a stock price of $40. a) If the firm is able to increase the ROE to 15% with a retention ratio of 50%, what is the present value of growth opportunities now? (15%) b) Now assume the ROE remains at 12% with a retention ratio of 75%, what is the present value of growth opportunities now? (5%) Question 3 (20%) Consider two annual coupon bonds, each with two years to maturity. Bond A has an 8% coupon and a price of $ Bond B has a 10% coupon and sells for $1, Find the one-period forward rate that must hold for these bonds. END 5

Problem Set 1. Daniel Andrei To be solved on March 2

Problem Set 1. Daniel Andrei To be solved on March 2 Problem Set 1 Daniel Andrei To be solved on March 2 Exercise 1. The value of a derivative security. a. depends on the value of the related primitive security b. affects the value of the related primitive