Accounting Final
Dividend yield=
income/beginning price or D1/P0
At the end of the yr you collect $2 dividend then you find out something occurred and now the growth will be 4% instead of 6%. The price falls from 33.33 to 26. What is the HPR now
$2+26-33.33/33.33 = -.1515 = 15%
If you buy the stock at $33.33 and you get the dividend of $2. You then expect it sell that stock at $35.33 (33.33(1.06). What is the HPR
$2+35.33-33.33/33.33 = .12 = 12%
Beta of the risk fee asset =
0
Beta of the market =
1
CAPM states that an asset has 3 components
1. Compensation for pure time value of money (as measured by the risk-free rate) 2. The reward for bearing systematic risk which depends on he markets risk premium 3. The amount of systematic risk as measured by beta
Sort the stocks from lowest risk to highest:
1. US treasury bills 2. US treasury bonds 3. Large company stocks 4. Small company stocks
If you invested in T-bills in 1926 you would earn
3.4% over time
Annuity A and B are exactly the same except that annuity A has 10 payments and annuity B has 8 payments, which one has the higher present value?
A
Annuity A and B are exactly the same except that annuity A has 10 payments and annuity B has 8 payments. Which one has the higher future value?
A
Annuity A and B are exactly the same except that annuity A has an interest rate of 4% and annuity B has an interest rate of 5%, which one has the higher present value?
A
Bond A has a coupon rate of zero. Bond B has a coupon rate of 4%. All else equal, which bond must have the lower price?
A
If you wait long enough, all negative unexpected returns will
Be offset by positive unexpected returns
Bond A has a price of $990 and a coupon rate of 7%. Bond B has a price of $1010 and a coupon rate of 7%. Which bond has the higher yield?
A
Company A does not pay dividends. Company B pays a dividend of $1. Both have a required return of 13%. Which company must have the higher capital gains yield?
A
Credit Card A compounds monthly. Credit Card B compounding daily. All else equal which credit card do you prefer?
A
Investment A offers 3 annual payments of $10,000 with the first payment made today. Investment B offers 3 annual payments of $10,000 with the first payment to be made in 1 year. Which investment is worth more?
A
Stock A gas a constant growth rate of 9% and Stock B has a constant growth rate of 6%. Both stocks have a dividend yield of 5%. Which stock has the higher required return?
A
Stock A has a dividend growth rate of 6%. Stock B has a dividend growth rate of 4%. Which stock should have the higher price. All else equal
A
Stock A has a price of $10 and a market capitalization of 20 billion. Stock B has a price of $100 and a market capitalization of $20 billion. Which stock has the greater number of shares?
A
Stock A has a required return of 14% and a dividend yield of 3%. Stock B has a required return of 14% and a dividend yield of 5%. Which stock has the higher dividend growth rate.
A
Stock A has an HPR of 14% and a fair return of 10%. Stock B has an HPR of 14% and a fair return of 16%. Which stock should you buy. All else equal
A
Stock A has an expected price of $40. Stock B has an expected price of $30. which stock should have the higher price. All else equal
A
Which of the following is FALSE about callable bonds?
A call feature gives the bondholder the right to sell the bond if rates go up
Bear market
A period of generally falling financial market prices
Bull market
A period of generally rising financial market prices
Bond A pays a $50 coupon twice a year. Bond B has a coupon rate of 10%. Both bonds have yield of 10%. Which bond has a higher price
A=B
Both A and B are accounts that pay 5% interest. Account A is a simple interest account. Account B is a compound interest account. If you invest your money for 1 year, which one do you choose?
A=B
Unsystematic events
Affect individual stocks
Systematic events
Affect the overall (whole) market
Annuity A and B are exactly the same except that annuity A has an interest rate of 4% and annuity B has an interest rate of 5%, which one has the higher future value?
B
Bond A has a rating of AA. Bond B has a rating of BB. Which bond should have the higher yield?
B
Both A and B are accounts that pay 5% interest. Account A is a simple interest account. Account B is a compound interest account. I you invest your money for 3 years. Which one do you choose
B
Investment A has a monthly rate of 1%. Investment B has a quarterly rate of 4%. All else equal which one has the highest EAR?
B
Stock A has a calculated value of $14 and you can buy it for $16. Stock B has a calculated value of $14 and you can buy it for $12. Which stock should you buy. All else equal
B
Stock A has a dividend of $2. Stock B has a dividend of $4. Which stock should have the higher price. All else equal.
B
Stock A has a required return of 11%. Stock B has a required return of 10%. Which stock should have the higher price. All else equal
B
Stock A has a required return of 14% and a capital gains yield of 3%. Stock B has a required return of 14% and a capital gains yield of 5%. Which stock has the higher dividend growth rate.
B
Stock A is a preferred stock. Stock B is a common stock. Which stock has the higher dividend growth rate.
B
Stock A is target stock, Stock B is Netflix stock. All else equal which stock most likely has the higher P/E?
B
Which of the following is FALSE about bond credit ratings?
Bond credit ratings are reliable and unbiased because they are determined by governing agencies
In general, one reason why a stock is riskier than a bond is bc cash flows from a bond are known and promised whereas
Cash flows from a stock are neither known nor promised
When investing for multiple periods, an investor prefers BLANK interest accounts
Compound
HPR=
D1+P1-P0/P0
A bond sells at BLANK when the coupon rate is less than the market yield to maturity
Discount
MRP- market risk premium
E(Rm) -Rf- the expected return on the market minus the risk free rate reward for bearing systematic risk
Target stock has a beta of 0.63. The yield on a T-bill on august 27, 2018 is 2.12%. Given an estimate of 5.34% or the market premium, what is the fair return on target's stock.
E(Rtgt)=Rf +B(MRP) = 2.12%+0.63(5.34%)= 2.12%+3.3642% = 5.484%
A credit card with a 12% rate that compounds monthly will have an Annual percentage rate (APR) that is BLANK to a credit card with 12% rate that compounds daily
Equal to. APR does not capture the effect of compounding
True or False. A bond with a rating of BBB has a lower default risk than a bond with a rating of AAA
False
True or False. A stock with a P-E of 30 must have higher price than a stock with a p-e of 3
False
True or False. A stock with a beta of .5 and a standard deviation of 32% must have a higher return than a stock with a beta of 1.5 and a standard deviation of 23%, according to CAPM
False
True or False. Historically, small company stocks have had the highest risk and the lowest return since 1926
False
True or False. When interest rates fall, the value of investments will fall
False- there is an inverse relationship between value and interest rates. When rates fall, values rise.
True or False. A stock that is valued at $82 must have a higher dividend than a stock that is valued at $28.
False. A higher price does not necessarily means a higher dividend, since the stock also depends on required return and expected growth
Investors that pay BLANK tax rates prefer municipal bonds
High
Risky assets must offer a return that is
Higher than the risk free rate
You would expect that TESLA stock would have a BLANK beta than Ford stock
Higher- less established
Investors buy stocks when they expect the stock's price to
Increase
US Treasury Bonds
Long term US gov debt. The portfolio consisted of US federal gov bonds w/ 20 years to maturity
A stock with a P-E of 25 and a PEG of 2 is likely to have a BLANK growth rate than with a P-E of 25 and a PEG of .2
Lower
A credit card with a 12% rate that compounds monthly will have an effective annual rate (EAR) that is BLANK to a credit card with a 12% rate that compound daily
Lower than - one with the greater number of compounding periods (m) will have the higher EAR
The primary goal of a financial manager is to BLANK
Maximize stock price
Which of the following is TRUE about municipal bonds
Municipal bonds are often preferred by wealthy investors with a high tax rate
A security whose return lies below the SML is
Overrated (price and return are inversely related), so the price of the security must all until the return lies on the SML
Constant growth rate
P(1+r)
Capital Gains Yield=
P1-P0/P0
A stock is expected to pay a dividend of $2 next year and those dividends are expected to grow at 6% forever. Given the expected return of 12%. Calculate the value of the stock today using the constant growth model.
Po=D1/(k-g) = $2/(.12-.06) = $33.33
Higher returns always comes with the
Possibility of lower downside returns
The total value of the dividend payments plus the future price
Present value of all of the future cash flows related to the stock
The total value of a bond is equal to the:
Present value of all the future cash flows related to that bond
The actual (or realized) return on an investment is
R= expected return + unexpected return R=E(R)+U
R=E(R)+U
R=actual return E(R)= expected return U= unexpected return
The CAPM calculates the fair return on an asset. If the asset has a return that is not equal to the CAPM return that means the
Return and therefore the price is not fair. To determine if a stock's return (and price) are fair, we can compare the CAPM return to the assets HPR
E(R)=Rf+B(MRP)
Rf=risk today B=beta MRP= market risk premium
US Treasury Bills
Short term US Gov. debt. The portfolio consists of US gov debt w/ maturity of 3 months. A proxy for the risk-free asset
When borrowing for multiple periods, an investor prefers BLANK interest accounts
Simple
The CAPM states that your risk premium depends on the BLANK risk of an asset
Systematic
Trump imposes tariffs on remaining Chinese imports. Will this be a systematic or unsystematic event
Systematic leading to decrease in all stock prices
The CAPM is the equation of a line and the security market line (SML) ->
The SML illustrates the relationship between expected return and beta of an individual security or portfolio
A beta < 1 implies
The asset has less systematic risk than the overall market
A beta > 1 implies
The asset has more systematic risk than the overall market
A beta of 1 implies
The asset has the same systematic risk as the overall market
According to the constant dividend growth model, which of the following is true?
The capital gains yield is the same as the constant dividend growth rate
Risk
The chance that our actual, or realized, return will be different from what we expect.
Which of the following is FALSE about the coupon rate on a bond?
The coupon rate is the bond's annual interest payment dividend by the bond's price
The difference between the return that you realized and what you expected. We call this
The difference between the expected return (E(R)) and the actual return (R), the unexpected return (U)
Which of the following is true about stock returns?
The dividend yield can never be negative
Systematic risk principle
The expected return on an asset depends only on the asset's systematic risk
E(Rm)
The expected return on the market
Risk premium
The extra return provided on risky assets to compensate for risk. The difference between risky return and risk free return
Two primary sources of returns when investing in anything:
The portion of the return that comes from periodic cash flows and the portion of the return that comes from the change in price of the investment -> call the portion that comes from income the income yield- stocks called the dividend yield -> portion that comes from the change in price of the investment is called the capital gains yield
Beta measures
The responsiveness of the movements of the security to movements in the market
A stock that is priced at $100 and has 1 million shares is worth {BLANK} as a stock that is priced at $50 and has 2 million shares
The same (price per share * number of shares)
T or F. A stock with a high p/e and a low PEG is a better value than a stock with a low p/e and a high PEG
True
True or False. A bond that is callable should have a higher return than a bond that is not callable.
True
Global oil prices jump on drone strike on Saudi Aramco facilities. Will this be a systematic or unsystematic event
Unsystematic event leading to a decrease in Aramco facilities
Tesla car catches fire in Hong Kong parking lot. Will this be a systematic or unsystematic event
Unsystematic event leading to a decrease in Tesla stock
HPR can be described as
What you get minus what you paid divided by what you paid-
Diversification
reducing investment risk by putting money in several different types of stocks