CAN YOU ANSWER THIS QUESITIONS WITH EXPLANTION: 1. A stock is expected to pay a

Question

CAN YOU ANSWER THIS QUESITIONS WITH EXPLANTION:

1. A stock is expected to pay a dividend of $10 next year, and this dividend is expected to grow by 5% each year thereafter. What should the price of the stock be if instruments of similar risk are paying 12%?

(a) $83.33 (b) $142.86 (c) $150 (d) $200

3. I am considering buying a Greek government bond that promises to pay $1210 in two years’ time. However, there is a possibility that the Greek government will default between now and the promised payment. If the government does default, the bond will only pay $500. The probability of default is 0.5. What should the price of the bond be if instruments of similar risk are paying 10%?

(a) $1000 (b) $706.62 (c) $413.22 (d) $303.68

5. A credit card company offers me a card with 20% APR, compounded daily. I make purchases of $3,000 on the card, and allow interest to accrue on those purchases for a year. Assuming each year has 365 days, the amount I will have to pay back is:

(a) $3,315 (b) $3,600 (c) $3,664 (d) $3,901

.30 Answer the next two questions with reference to this information: Analysts argue that two things can happen over the next year: the economy can continue as it is or it can go into recession. The returns of two stocks: General Electric (GE) and Cisco (CSCO) in each possible state are given below: State Return on GE Continue as-is 15 Recession 15 Return on CSCO 5 -1
The analysts estimate the probability of continuing as-is to be 0.8 , and the probability of a recession to be 0.2.

6. What is the expected return on a portfolio which is 120% in GE and 20% in CSCO?

(a) 10.04% (b) 8% (c) 2.55% (d) 0%

7. What is the variance of CSCO?

(a) 1.96%2 (b) 5.76%2 (c) 13%2 (d) 23.04%2 3

8. Alice can get a one-year loan at 5% at her bank, while no bank is willing to give Brad a one-year loan for less than 10%. Brad has just had surgery, and must pay the hospital $10,000 immediately, but he has no money today, though he will have money in one year. So Alice offers Brad a proposal: she will borrow $10,000 from her bank for one year on her own account, and Brad will repay this loan. In addition, he will pay Alice a sum of money today. What is the maximum amount that Brad should be willing to pay Alice up-front under this arrangement? Alice is not willing to consider borrowing more than $10,000. (2pts)

(a) $454.54 (b) $377.18 (c) $476.19 (d) $500

9. The risk-free interest rate today is 7%. One year ago, you bought an asset which is risk-free and would pay $100 two years from the date of purchase. The risk-free interest rate on the date of purchase was 10%. You sell the asset today. What is the rate of return (HPR) that you made?

(a) 13% (b) 10% (c) 7% (d) 15%

10. The correlation between Alcoa (AA) and American Express (AXP) is 0.3. You want to form a portfolio, investing 50% in each stock. What is the variance of your portfolio’s return? You have the following information: AA AXP 10 12 8 16
Expected return Standard deviation of return

(a) 85.76%2 (b) 99.2%2 (c) 121%2 (d) 144%2

11. If you can get an 8% return (annual effective) on a ten year CD from your local bank, would it be wise to invest in a 10 year bond which promises to make a single payment of $1000 at the end of its life? (Assume both are equally risky). This bond costs $475 now and will pay $1000 in ten years. 4

(a) Yes, the bond is better. (b) No, the bond is worse. (c) Can’t tell from information given

12. You are given the following information about portfolios of two risky assets, A and B: Weight in A Weight in B Std.dev. of portfolio 0 1 12 0.5 0.5 14 1 0 16 What is the covariance between A and B?

(a) 192%2 (b) 168%2 (c) 224%2 (d) Cannot be determined

13. A ï¬rm in a well-functioning capital market has the following projects available. The risk-free rate is 10%. Which should it invest in? NPV IRR X 10 15% Y 0.1 3% Z -5 22% OCC 22% 5% 6%
(a) X only (b) Z only (c) X and Y (d) X and Z (e) All three

Explanation / Answer

1.

Current Stock Price = Expected Dividend / (Required return - Growth rate)

= $10 / (12% - 5%)

= $10 / 7%

= $142.86

Current Stock price is $142,86.

2.

Expected Payoff in 2 year = ($1,210 × 50%) + ($500 × 50%)

= $605 + $250

= $855.

Expected payoff in 2 year is $855.

Required rate = 10%.

Current price of bond = $855 / (1 + 10% ) ^ 2

= $855 / 1.21

= $706.62.

Current price of bond is $706.62.

Option (B) is correct answer.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.