FI540 Investments
Sample Final, Spring 2006 (Answers at the end)
Important Note: This is only a sample test. Other type of problems could be in the final
exam.
STOCKS
1. [Discounting Future Earnings Method] Use Starbucks Value Line page for the needed data. Use 2005 as the current year. Furthermore use the following forecasts,
a) The projected rate of growth for total sales is 25% declining by 1 percent for the next 15 years.
b) The future net profit margin is 7 %.
c) The future shares outstanding is the same as the current shares outstanding .
d) The P/E ratio in 15 years will be equal to the market P/E of 20.
e) The required rate is 12 %
Find the Intrinsic Value of the company. Is the company overvalued or undervalued?
2. [EPS Computation] Synchronicity Inc. reports the following information from their last fiscal year. Sales $200 million, net profits $30 million, shares outstanding 20 million. The current market price is $40 per share. Analysts are forecasting sales to grow at 20 percent per year during the following five years. Similarly, they project net profit margins for five years from now to be 12 percent. Shares outstanding are not expected to change. Calculate the expected eps for five years from now.
3. [ P/E Approach to Valuation]
The current price per share of a company is $60. The current eps are $2.00. Earnings per share are expected to grow at the rate of 20 percent for the next five years. The P/E ratio at the end of the five years is forecasted to be 25. The company is expected to keep their dividend constant at $.50/share per year for the next five years. Given a required rate of return of 12 percent, find:
a) The intrinsic value of the firm per share.
b) The expected return or IRR.
c) Is the company a good buy at the current price?
BONDS
4.-[ytm, Holding Period Returns] Five years ago an investor acquired a 20-year Treasury bond with a coupon of 6 percent and a par value of $1000. The bond at the time had a price of $900. Today, five years later, the yield-to-maturity of the bond is 5 percent and the investor sells the bond.
a) Calculate the yield to maturity that existed five years ago when the bonds were purchased. (Use semiannual compounding)
b) Calculate the holding period annual return. (Use semiannual compounding)
5. –[Duration Use] A bond with a 6 percent coupon and a maturity of 10 years, is priced to have a yield-to-maturity of 8 percent. The face value of the bond is $1000. Assume its duration is 8 years.
a) Using duration, estimate the percentage price change if the yield to maturity of the bond changes from 8 to 9 percent (instantaneously).
b) Calculate the actual percentage price change using the appropriate prices and compare to the result in part a). (Use semiannual compounding)
6.- [Duration Computation] For a 5 year bond with an 8 percent coupon, a par of $1000 and a yield to maturity of 10 percent, assuming annual payments,
a) Find the duration.
b) Find the modified duration.
7. – [Reinvestment and Realized Rates] Assume that you have $100,000 to provide for a future need that will take place in 10 years. Assume further that you will buy bonds today and hold them until maturity. Bonds with 10 years to maturity have a yield-to-maturity of 8 percent per year. You will buy bonds with an 8 percent coupon, selling at par of $1000. Assume annual compounding to answer the following questions:
a)How many bonds do you need to buy?
b)What would be your terminal wealth if you reinvest the coupons at 0 percent? What would be your realized rate?
c)What would be your terminal wealth if you reinvest the coupons at 4 percent per year? What would be your realized rate?
d)If the reinvestment rate is 8 percent, what would be your terminal wealth? What would be your realized rate?
MUTUAL FUNDS
8.- [nav, Closed-end Funds] A closed-end fund has total assets of $400 million and liabilities of $50 million. There are 10 million shares of the fund outstanding. If the current price of the fund per share is $30, what is the percent premium or discount?
OPTIONS
9. – [Call Values and Profits] Assume you buy 5 call contracts (each involves 100 shares) of Macrotech stock. The strike price is $60, the stock price is currently at $63 and the premium of the call is currently at $5.
a)What is the time value of this call?
b)What is the intrinsic value?
c)What would be the price of the call if the stock is $65 at expiration? What would be your net profit?
d)What would be the price of the call if the stock is $50 at expiration? What would be your net profit?
e)Draw a profit-loss chart for different stock prices at expiration.
f)What is the breakeven point? The stock price at expiration at which you breakeven.
10. – [Put Values and Profits] You own 1000 shares of TelMex currently trading at $60. However, because you are concerned about a possible event in the next few months that would send the stock price down significantly, you will buy a ‘protective’ put. The put has a strike price of $55 and the premium is $2. You buy 10 contracts.
a)If the stock price drops to $40 by expiration, what is your net total gain/loss? (stock and put combined).
b)If the stock price actually increases to $65 by expiration, what is your net total gain/loss? (stock and put combined).
11. –[Futures Profits] Assume you are an experienced international economist and that after careful analysis you predict that the price of gold will increase significantly in the next few months. To profit from it, you buy 20 gold futures contracts (each contract involves 100 troy ounces). The current price of gold futures is $410/oz and the current spot price of gold is $400/oz. Find your profit/loss if at expiration the price of gold is:
a)$450/oz
b)$300/oz
ANSWERS
1. Value = $42.43
2. eps = 2.99/sh
3. IRR = 16.34%, Intrinsic Value = 72.40, Undervalued
4. a) ytm= 6.93%, b) Realized rate= 10.26%
- %chgP= -7.41%, b) Actual %chgP= -6.85%
- a)Duration=4.28, b)Modified= 3.89
- a) 100 bonds, b)Wealth= 180,000(rate=6.05%)
c) Wealth = 196,049 (rate=6.96%), d) Wealth= 215,892 (rate=8%)
- nav = 35, discount 14.28%
9. a)2, b)3, c)0, d)-2500, g)65
10. a)-7000, b) +3000
11. a) +80,000, b)-220,000