AGEC $424$ EXAM 2 (123 points)
Spring 2010
Name______
Show your work for all questions. Logically correct work, including calculator inputs and outputs when appropriate, must be shown to receive credit for your answers. I did not write “show your work here” on the questions, but you still must show your work!
- (8 points) Carol Pasca just had her fifth birthday. As a birthday present, her uncle promised to contribute $300 per month to her education fund until she turns 18 and starts college. Carol’s parents estimate college will cost $2,500 per month for four years, but don’t think they’ll be able to save anything toward it for five years. How much will Carol’s parents need to contribute to the fund each month starting on her tenth birthday to pay for her college education? Assume the fund earns 6% compounded monthly?
- What are the monthly mortgage payments on a 30-year loan for $150,000 at 8% compounded monthly?
a. (4 points) Show work and calculate the monthly payment
b. (10 points) Construct an amortization table for the first two months of the loan.
Month Beg Bal Payment Interest Prin. Reduction End Balance
3. (4 points) First Bank offers you a car loan at an annual interest rate of 10% compounded monthly. What effective annual interest rate is the bank charging you?
a. / 10.38%b. / 10.42%
c. / 10.45%
d. / 10.47%
4. (4 points) What interest rates are implied by the following lending arrangements?
a. You borrow $500 and repay $555 in one year.
b. You lend $750 and are repaid $1,114.46 in five years with quarterly compounding.
5. (4 points) You want to purchase a boat that costs $40,000. You want to finance as much of the purchase as possible with a 5-year bank loan at 12% compounded monthly, but can only afford loan payments of $750 per month. How much will you need as a down payment to buy the boat?
6. (5 points) Jackrabbit Inc. has an outstanding semiannual, 8% coupon, $1000 face value bond with 12 years to maturity. What is this bond worth assuming the market is currently requiring a 6% rate of return on bonds of this risk?
7. (5 points) Wildman Products Inc. has an outstanding semiannual, 9% coupon, $1000 face value bond priced at $1075. The bond has 5 years to maturity. What is this bond’s YTM?
8. (4 points) What is the current yield of the above Wildman Products bond?
9. (5 points) Jake’s Inc. has an outstanding semiannual, 13% coupon, $1000 face value bond that is selling for $1185 and has 10 years to maturity. What is the YTM?
- (5 points) Assume the Jake’s Inc. bond in #4 is callable in 5 years with a $50 call premium. What is the YTC?
11. (5 points) Undue Perversity Inc. has a 10 year, callable, semiannual, $1000 face value, 12% coupon bond for sale. It is callable in 3 years with a $100 call premium. If comparable bonds of this risk yield 6% and you expect this bond to be called, what is its value?
12. (5 points) The Spinnaker Company has paid an annual dividend of $2 per share for some time. Recently, however, the board of directors voted to grow the dividend by 6% from now on. What is the most you would be willing to pay for a share of Spinnaker if you expect a 10% return on your stock investments and believe the 6% growth will occur indefinitely?
13. (5 points) Sharbaugh Inc.’s most recent dividend was $2.00 per share. The dividend is expected to grow at a rate of 4% per year for the foreseeable future. If the market return is 13% on investments with comparable risk, what should the stock sell for today?
14. (14 points) Cantaloupe Growers Corp. is expanding into a new geographic area. Management expects the new market to fuel growth of 22% for three years. After that normal growth of 6% will resume. Cantaloupe’s most recent annual dividend was $1.25. Other fruit companies have been returning about 12% lately. How much should a share of Cantaloupe be worth?
15. (8 points) Charlie Dobbs is considering investing in Astrotech. His research has revealed the following:
The market is returning 11%.; Three month treasury bills are yielding 5%.
Astrotech’s beta is 1.2.; Astrotech recently paid a dividend of $1.50.
Analysts expect Astrotech to grow at 4% indefinitely.
How much should Charlie be willing to pay for a share of Astrotech?
a. / $19.02b. / $12.00
c. / $10.26
d. / $18.29
16. (2 points) The return on an investment in stock:
a. / is subject to risk but is generally non-negative like a savings account.b. / has a standard deviation that has historically been small relative to its average value.
c. / consists of dividend and capital gains yields.
d. / is always very risky.
17. (2 points) The risks associated with owning a single stock are called:
a. / systematic risk because all stocks in the system are affected.b. / market risk because the stocks are purchased in the stock market.
c. / stand-alone risk because the stock stands alone outside of any portfolio.
d. / business risk because the stocks represent businesses.
18. (2 points) Risk in finance:
a. / is variability in return.b. / can be decomposed into business-specific and market components.
c. / will be accepted by some investors if higher expected returns are offered in compensation.
d. / all of the above
19. (2 points) The underlying principles of portfolio theory include:
a. / diversifying business-specific risk away.b. / basing decisions on stocks’ risk/return characteristics in a portfolio context rather than on a stand-alone basis.
c. / getting the highest available return for the amount of risk the investor is comfortable with.
d. / all of the above
20. (2 points) Portfolio theory can be dangerous to a small investor because:
a. / he or she doesn’t have much money to lose.b. / beta, the theoretical measure of risk, ignores business-specific risk, which is significant to an investor who doesn’t have a large enough portfolio to diversify it away.
c. / it makes investing seem more scientific than it really is.
d. / the stock market is very unforgiving.
21. (2 points) Which of the following statements is false?
a. / Beta is meaningful only if an investor holds a well-diversified portfolio.b. / You can completely eliminate risk if you hold a well diversified portfolio.
c. / A portfolio composed of only one stock will not be well diversified.
d. / A wise investor diversifies to capture the high average return of stocks while avoiding as much risk as possible.
e. / All of the above statements are correct.
22. (4 points) Assume the following facts about a single product firm:
Selling price per unit / = $25.00Variable costs per unit / = $20.00
Total annual fixed costs / = $30,000
What is the firm’s annual breakeven volume in sales revenues?
a. / $6,000b. / $250,000
c. / $150,000
d. / $1,500
23. (4 points) Porter Productions sells videotapes for $15.00 each. Their variable cost per unit is $9.00. In addition, they incur $180,000 in fixed costs each year. At 40,000 units of sale, what is Porter’s degree of operating leverage (DOL)?
a. / 1.33b. / 2.50
c. / 3.00
d. / 4.00
e. / 6.00
24. (4 points) A firm has EBIT of $3.6M and debt of $15M on which it pays 8% interest. What is its Degree of Financial Leverage (DFL)?
25. (4 points) A firm’s degree of financial leverage is 2 and the degree of operating leverage is 2.5. What is their degree of total leverage?
a. / 6.0b. / 4.5
c. / 5.0
26. (4 points) Illinois Tool Company’s degree of total leverage (DTL) is 3.00 at a sales volume of $9 million. Determine ITC’s percentage change in earnings per share (EPS) if forecasted sales increase by 20 percent to $10,800,000.
27. (4 points) Harris Inc. has EBIT of $1,500 and debt of $5,000 on which it pays 12% interest. Its EPS is currently $2.35 per share. Management anticipates a difficult period ahead and fears EBIT could decline by as much as 20%. What will the new EPS be if that happens?
a. / $1.88b. / $1.41
c. / $1.57
d. / Can’t tell from the information given
28. (4 points extra credit) Conestoga Ltd. has the following estimated probability distribution of returns.
Return Probability
4% .20
12% .50
14% .30
Calculate Conestoga’s expected return, the variance, standard deviation, and coefficient of variation.
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