26) A 1-year gold futures contract is selling for $1,645. Spot gold prices are $

Question

26) A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%.    Based on the above data, which of the following set of transactions will yield positive riskless arbitrage profits?

a. Buy gold in the spot with borrowed money, and sell the futures contract.

b. Buy the futures contract, and buy the gold spot using borrowed money.

c. Buy gold spot with borrowed money, and buy the futures contract.

d. Buy the futures contract, and sell the gold spot and invest the money earned.

44) The market capitalization rate for Admiral Motors Company is 7%. Its expected ROE is 10% and its expected EPS is $5. If the firm’s plowback ratio is 60%.

a. $18.14          b. $16.14           c. $17.14         d. $7.07

37) Miltmar Corporation will pay a year-end dividend of $5, and dividends thereafter are expected to grow at the constant rate of 5% per year. The risk-free rate is 6%, and the expected return on the market portfolio is 12%. The stock has a beta of 0.75.

Calculate the market capitalization rate. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

What is the intrinsic value of the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

a. Calculate the growth rate. (Input your answer as a nearest whole percent.)

Explanation / Answer

26. answer is a. Buy gold in the spot with borrowed money, and sell the futures contract. F0 =$$1,645 which is overpriced so sell future contract and buy gold with borrowed money.

49. answer c.17.14

37.

= 0.1050 or 10.5%

Using constant growth DDM, the intrinsic value of the stock is

D1 (1+growth rate)/ Market Capitalisation rate- growth rate = $5(1.05)/10.5%-5% = $95.45

PVGO = P0 -(E1/r) g= .20*.15 = 0.03 P =$3-($3*0.2)/0.07-0.03= $60 PVGO = $60 -$3/0.07 = $17.14

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