Questions 2

QUESTION 1:

Answer C (11%)

Expected return = 50% * 30% + 25% * 9 % + 25% * -25% = 11%

QUESTION 2:

Answer B (10.5%)

Beta = 1.2

Risk free rate =4.5%

Market risk premium = 5%

Rate of return = risk free rate + (risk premium*beta)

1/19

Questions 2

Rate of return = 4.5% + (5*1.2)

Rate of return = 4.5% + (6)

Rate of return = 10.5%

QUESTION 3:

Answer C (1.1)

= (1.2+1.0)/2 = (2.2)/1=1.1

QUESTION 4:

Answer A (14.5%)

R =13%

Risk free = 7%

2/19

Questions 2

Market risk premium = 4%

What if market risk increases by 2%?

rate of return = risk free rate +(risk premium*beta)

13% = 7% + (risk premium*beta)

Risk premium*beta=5

4*beta=5

Beta = 5/4

New market risk increases by 2%, therefore new value = 4+2=6

Rate of return = risk free rate + (risk premium*beta)

Rate of return = 7 %+( 6*5/4) = 7.5% + 7% = 14.5%

3/19

Questions 2

QUESTION 5:

Answer A

Treasury bills have the lowest risk with small company stocks having the greatest risk.

QUESTION 6:

Answer B

The beta value for the market is 1, given that stock a beta value equals that of the market then the required rate of return is market risk premium plus risk free rate, for stock B if market prices fall by 4% then this stock with a beta value of 2 will have a price decline of 8%. If market premium = 5, then required rate of return of a = 5 + 6 = 11%

QUESTION 7:

4/19

Questions 2

Answer C

Nominal rate of return:

Total dividends after one year = 2.5 *4 = 10

Current price = 50

Nominal rate of return = 10/50 = 0.2

Nominal rate of return = 20%

QUESTION 8:

Answer D

QUESTION 9:

5/19

Questions 2

Answer A

QUESTION 10:

Answer D (9.14286%)

Rate of return = risk free rate +(risk premium*beta)

Parr Paper

Beta =1.40

Required return = 13.00%

Risk-free rate = 4.00%

13.00%= 4.00 %+(risk premium*1.4)

(risk premium*1.4)=9

6/19

Questions 2

Risk premium=6.428571

Clover Dairy’s

beta = 0.80

Rate of return = risk free rate +(risk premium*beta)

Rate of return = 4 +(6.428571*0.8)

Rate of return =9.14286

QUESTION 11:

Answer D (15.1%)

Risk free rate= 2.50%

Inflation rate=3.5%

7/19

Questions 2

Market risk premium = 5.50%

Beta = 1.40

Market risk premium = 5.50% + 3.5%=9%

Rate of return = 2.5% + (9%*1.4)

Rate of return = 15.1%

QUESTION 12:

Answer C (10.8%)

r = (d0/p) +g

Where d0/p is the dividend yield

This year price = 40 + 2 = 42

8/19

Questions 2

Next year

r = (d1/p1) +g

r = (2/42) +6

r = 10.8%

QUESTION 13:

Answer A (16.67)

Rate of return = 11%,

Dividend = \$1

g = 5%

Price = d/ (r-g)

9/19

Questions 2

Price = 1/ (11%-5%)

Price = 1/ (6%)

Price =16.666667

QUESTION 14:

Answer C (9.15)

Rate of return = 11%,

Dividend = 0.45

g = 4%

t = 10

Price = d/ (r-g)

10/19

Questions 2

n

dividend

growth

P

1

14.285714

0.45

4%

6.428571

2

11/19

Questions 2

14.735714

0.468

4%

6.685714

3

15.203714

0.48672

4%

6.953143

4

15.690434

12/19

Questions 2

0.506189

4%

7.231269

5

16.196623

0.526436

4%

7.520519

6

16.723059

0.547494

13/19

Questions 2

4%

7.82134

7

17.270553

0.569394

4%

8.134194

8

17.839947

0.592169

4%

14/19

Questions 2

8.459561

9

18.432116

0.615856

4%

8.797944

10

19.047972

0.64049

4%

9.149862

15/19

Questions 2

QUESTION 15:

Answer C (20)

Dividend = \$1

g = 5%

Price = d/ (r-g)

Price = 1/ (11%-6%)

Price = 1/ (5%)

Price =20

16/19

Questions 2

QUESTION 16:

Answer C

QUESTION 17:

Answer A

QUESTION 18:

Answer D

QUESTION 19:

17/19

Questions 2

Answer D(118.35)

Npv = 118.35

QUESTION 20

ANSWER B

A proxy in finance is an agent appointed by a shareholder to vote and attend meetings, a proxy fight therefore is a case where shareholders oppose management or directors and therefore use their proxy to achieve management change.

QUESTION 21

Answer D

QUESTION 22

18/19

Questions 2

Answer D

19/19