Finance 3507 - Final Exam SA

The following price quotations are for exchange-listed options on Primo Corporation common stock. Company Strike Expiration Call Put Primo 61.12 54 February 7.19 0.47 With transaction costs ignored, how much would a buyer have to pay for one call option contract. Assume each contract is for 100 shares.

Amount for one call option contract: $719

An investor buys a call at a price of $5.60 with an exercise price of $51. At what stock price will the investor break even on the purchase of the call?

Break even price: $56.60

A bond has a par value of $1,000, a time to maturity of 20 years, and a coupon rate of 7.00% with interest paid annually. If the current market price is $700, what will be the approximate capital gain of this bond over the next year if its yield to maturity remains unchanged? Capital gains:

Capital gains: $4.84 Explanation Using a financial calculator, input PV = −700, FV = 1,000, n = 20, PMT = 70. The YTM is 10.69%. In one year- Using a financial calculator, FV = 1,000, n = 19, PMT = 70, I/Y = 10.69. The new price will be 704.84. Thus, the capital gain is $4.84.

A bond with an annual coupon rate of 5.7% sells for $950. What is the bond's current yield?

Current yield: 6% Explanation Current yield = Annual coupon/Bond price = ($1,000 × 5.7%)/$950 = 6.00%

You purchase one Microsoft December $145 put contract for a premium of $8.10. What is your maximum possible profit? Assume each contract is for 100 shares.

Maximum possible profit: $13,690

Tri-coat Paints has a current market value of $39 per share with earnings of $3.84. What is the present value of its growth opportunities (PVGO) if the required return is 10%? PVGO:

PVGO: $0.60 Price = $39 = (E1/k) + PVGO = ($3.84/0.10) + PVGO ⇒ PVGO = $0.60

Jand, Incorporated, currently pays a dividend of $1.32, which is expected to grow indefinitely at 4%. If the current value of Jand's shares based on the constant-growth dividend discount model is $33.16, what is the required rate of return?

Required rate of return: 8.14% Explanation Intrinsic value = V0 = (D0 × (1 + g))/(k − g) : $33.16 = ($1.32 × 1.04)/(k − 0.04) ⇒ k = 0.081399 or 8.14%

A common stock pays an annual dividend per share of $2.40. The risk-free rate is 8% and the risk premium for this stock is 4%. If the annual dividend is expected to remain at $2.40, what is the value of the stock?

Stock value: $20 Explanation Cost of equity = rf + E(Risk premium) = 8% + 4% = 12% Because the dividends are expected to be constant every year, the price can be calculated as the no-growth-value per share: P0 = D/ke = $2.40/0.12 = $20

Consider a bond paying a coupon rate of 12.50% per year semiannually when the market interest rate is only 5.0% per half-year. The bond has three years until maturity. a. Find the bond's price today and six months from now after the next coupon is paid. Current price: Price after six months: b. What is the total rate of return on the bond? Total rate of return ______ % per six months

a. Current price: $1,063.45 Price after six months: $1,054.12 b. Total rate of return 6% per six months Explanation a. The bond pays $62.50 every six months. Use the following inputs: n = 6, FV = 1,000, I/Y= 5.0, PV = −937.50, PMT = 62.50, Solve for PV Current price: [$62.50 × Annuity factor(5.0%, 6)] + [$1,000 × PV factor(5.0%, 6)] = $1,063.45 Assuming the market interest rate remains 5.0% per half year, price six months from now. Use the following inputs: n = 5, FV = 1,000, I/Y= 5.0, PV = −938, PMT = 62.50, Solve for PV [$62.50 × Annuity factor(5.0%, 5)] + [$1,000 × PV factor(5.0%, 5)] = $1,054.12 b. Rate of return = ($62.50 + ($1,054.12 − $1,063.45))/$1,063.45 = ($62.50 − $9.33)/$1,063.45 = 0.0500 = 5.00% per six months.

Assume that you manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 43%. The T-bill rate is 4%. Your client chooses to invest 70% of a portfolio in your fund and 30% in a T-bill money market fund. Required: a. What are the expected return and standard deviation of your client's portfolio? (Round your answers to 1 decimal place.) b. Suppose your risky portfolio includes the following investments in the given proportions: Stock A27%Stock B36Stock C37 What are the investment proportions of your client's overall portfolio, including the position in T-bills? (Round your answers to 1 decimal place.) c. What is the reward-to-volatility ratio (S) of your risky portfolio and your client's overall portfolio? (Round your answers to 4 decimal places.)

a. expected return % standard deviation % b. c.

The stock of Business Adventures sells for $65 a share. Its likely dividend payout and end-of-year price depend on the state of the economy by the end of the year as follows: Dividend Stock Price Boom $2.40 $73 Normal economy 1.60 66 Recession 0.85 57 Required: a. Calculate the expected holding-period return and standard deviation of the holding-period return. All three scenarios are equally likely. (Do not round intermediate calculations. Round your answers to 2 decimal places.) b. Calculate the expected return and standard deviation of a portfolio invested half in Business Adventures and half in Treasury bills. The return on bills is 3%. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

a. expected return: % standard deviation: 11.05% b. expected return: 2.99% standard deviation: 5.52%

Miltmar Corporation will pay a year-end dividend of $5, and dividends thereafter are expected to grow at the constant rate of 4% per year. The risk-free rate is 5%, and the expected return on the market portfolio is 12%. The stock has a beta of 0.72. a. Calculate the market capitalization rate. b. What is the intrinsic value of the stock?

a. Market capitalization rate: 10.04% b. Intrinsic value: $82.78 Explanation a. Market capitalization rate = k = rf + β × [E(rM) − rf]= 0.05 + 0.72 × (0.12 − 0.05) = 0.1004 = 10.04% b. Intrinsic value = V0 = D1/(k − g) = $5/(0.1004 − 0.04) = $82.78

You establish a straddle on Walmart using September call and put options with a strike price of $88. The call premium is $7.40 and the put premium is $8.15. a. What is the most you can lose on this position? b. What will be your profit or loss if Walmart is selling for $94 in September? c-1. What is the Break-even price for lower bound? c-2. What is the Break-even price for upper bound?

a. Maximum loss: $15.55 b. Loss of $9.55 c-1. Break-even price for lower bound $72.45 c-2. Break-even price for upper bound $103.55

Sisters Corporation expects to earn $7 per share next year. The firm's ROE is 15% and its plowback ratio is 60%. The firm's market capitalization rate is 10%. a. Calculate the price with the constant dividend growth model. b. Calculate the price with no growth. c. What is the present value of its growth opportunities?

a. Price: $280 b. Price: $70 c. PVGO: $210 Explanation a.Given EPS = $7, ROE = 15%, plowback ratio = 0.60, and k = 10%, we first calculate the price with the constant dividend growth model: P0 = D1/(k − g) = (EPS × (1 − b))/(k − ROE × b) = ($7 × (1 − 0.60))/(0.10 − 0.15 × 0.60) = $2.80/(0.10 − 0.090) = $280 b. & c.Then, knowing that the price is equal to the price with no growth plus the present value of the growth opportunity, we can solve the following equation: Price = $280 = E1/k + PVGO = $7/0.10 + PVGO ⇒ PVGO = $280 − $70 = $210