Exam 29: Basic Financial Tools: a Review

The market value of any real or financial asset,including stocks,bonds,or art work purchased in hope of selling it at a profit,may be estimated by determining future cash flows and then discounting them back to the present.

Consider the following information and then calculate the required rate of return for the Universal Investment Fund,which holds 4 stocks.The market's required rate of return is 13.25%,the risk-free rate is 7.00%,and the Fund's assets are as follows: Stock Investment Beta A \ 200,000 1.50 B \ 300,000 -0.50 C \ 500,000 1.25 D \ 1,000,000 0.75

JG Asset Services is recommending that you invest $1,500 in a 5-year certificate of deposit (CD)that pays 3.5% interest,compounded annually.How much will you have when the CD matures?

You have a portfolio P that consists of 50% Stock X and 50% Stock Y.Stock X has a beta of 0.7 and Stock Y has a beta of 1.3.The standard deviation of each stock's returns is 20%.The stocks' returns are independent of each other,i.e.,the correlation coefficient,r,between them is zero.Given this information,which of the following statements is CORRECT?

The Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1)stock is zero.

Assume that the risk-free rate remains constant,but the market risk premium declines.Which of the following is most likely to occur?

The present value of a future sum decreases as either the discount rate or the number of periods per year increases,other things held constant.

For bonds,price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.

Assume that the risk-free rate is 5%.Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Macintosh Lumber believes the following probability distribution exists for its stock.What is the coefficient of variation on the company's stock? Probability Stock's State of of State Expected the Economy Occurring Return Boom 0.45 25\% Normal 0.50 15\% Recession 0.05 5\%

Your aunt wants to retire and has $375,000.She expects to live for another 25 years and to earn 7.5% on her invested funds.How much could she withdraw at the end of each of the next 25 years and end up with zero in the account?

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%.Which of the following statements is CORRECT?

Fiske Roofing Supplies' stock has a beta of 1.23,its required return is 11.75%,and the risk-free rate is 4.30%.What is the required rate of return on the market? (Hint: First find the market risk premium.)

Stocks X and Y have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT? Price \ 25 \ 25 Expected dividend yield 5\% 3\% Required return 12\% 10\%

Your 75-year-old grandmother expects to live for another 15 years.She currently has $1,000,000 of savings,which is invested to earn a guaranteed 5% rate of return.If inflation averages 2% per year,how much can she withdraw (to the nearest dollar)at the beginning of each year and keep the withdrawals constant in real terms,i.e.,growing at the same rate as inflation and thus enabling her to maintain a constant standard of living?

Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%,but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year.What is the effective annual rate on the loan?

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

Brodkey Shoes has a beta of 1.30,the T-bill rate is 3.00%,and the T-bond rate is 6.5%.The annual return on the stock market during the past 3 years was 15.00%,but investors expect the annual future stock market return to be 13.00%.Based on the SML,what is the firm's required return?

You are in negotiations to make a 7-year loan of $25,000 to DeVille Corporation.To repay you,DeVille will pay $2,500 at the end of Year 1,$5,000 at the end of Year 2,and $7,500 at the end of Year 3,plus a fixed but currently unspecified cash flow,X,at the end of each year from Year 4 through Year 7.You are confident the payments will be made,since DeVille is essentially riskless.You regard 8% as an appropriate rate of return on a low risk but illiquid 7-year loan.What cash flow must the investment provide at the end of each of the final 4 years,that is,what is X?