Final Exam Solutions 2009 3 Fall

FNAN 301, fall 2009, final, solutionsQuantitative: value of a growing perpetuity and return of a fixed perpetuity1. You own two investments, A and B, that have a combined total value of $1,!00."nvestment A is e#$ected to ma%e its ne#t monthl& $a&ment in 1 month.A's ne#t $a&ment is e#$ected to be $() and subse*uent $a&ments a+e e#$ected to ,+ow b& 0.2 $e+cent $e+ month fo+eve+.-he e#$ected +etu+n fo+ investment A is 1.0 $e+cent $e+ month."nvestment B is e#$ected to $a& $)! a month fo+eve+ and ma%e its ne#t $a&ment in 1 month..hat is the monthl& e#$ected +etu+n fo+ investment B/1. You own two investments, A and B, that have a combined total value of $1(,(00."nvestment A is e#$ected to ma%e its ne#t monthl& $a&ment in 1 month.A's ne#t $a&ment is e#$ected to be $() and subse*uent $a&ments a+e e#$ected to ,+ow b& 0.3 $e+cent $e+ month fo+eve+.-he e#$ected +etu+n fo+ investment A is 1.0 $e+cent $e+ month."nvestment B is e#$ected to $a& $) a month fo+eve+ and ma%e its ne#t $a&ment in 1 month..hat is the monthl& e#$ected +etu+n fo+ investment B/1. You own two investments, A and B, that have a combined total value of $1(,00."nvestment A is e#$ected to ma%e its ne#t monthl& $a&ment in 1 month.A's ne#t $a&ment is e#$ected to be $0 and subse*uent $a&ments a+e e#$ected to ,+ow b& 0.2 $e+cent $e+ month fo+eve+.-he e#$ected +etu+n fo+ investment A is 1.0 $e+cent $e+ month."nvestment B is e#$ected to $a& $)2 a month fo+eve+ and ma%e its ne#t $a&ment in 1 month..hat is the monthl& e#$ected +etu+n fo+ investment B/Quantitative: compute present value of two cash flows of different signs2. You 1ust bou,ht a new ca+ toda&..hat is the $+esent value of &ou+ cash flows if the discount +ate is 12.3 $e+cent, &ou will +eceive a +ebate of $2,000 f+om the deale+ in 2 &ea+s, and &ou will $a& $0,000 to the deale+ in&ea+s/Note2 the co++ect answe+ is less than 3e+o.2. You 1ust bou,ht a new ca+ toda&..hat is the $+esent value of &ou+ cash flows if the discount +ate is 13.3 $e+cent, &ou will +eceive a +ebate of $2,000 f+om the deale+ in 2 &ea+s, and &ou will $a& $(,000 to the deale+ in&ea+s/Note2 the co++ect answe+ is less than 3e+o.2. You 1ust bou,ht a new ca+ toda&..hat is the $+esent value of &ou+ cash flows if the discount +ate is 1.3 $e+cent, &ou will +eceive a +ebate of $2,000 f+om the deale+ in 2 &ea+s, and &ou will $a& $(0,000 to the deale+ in&ea+s/Note2 the co++ect answe+ is less than 3e+o.1FNAN 301, fall 2009, final, solutionsQuantitative: FV of annuity and payment associated with PV annuity3. 4alvin has nothin, in his +eti+ement account.5oweve+, he $lans to save $10,000 $e+ &ea+ in his +eti+ement account fo+ each of the ne#t 22 &ea+s.5is fi+st cont+ibution to his +eti+ement account is e#$ected in 1 &ea+.4alvin e#$ects to ea+n 9.0 $e+cent $e+ &ea+ in his +eti+ement account, both befo+e and du+in, his +eti+ement.4alvin $lans to +eti+e in 22 &ea+s, immediatel& afte+ ma%in, his last $10,000 cont+ibution to his +eti+ement account."n +eti+ement, 4alvin $lans to withd+aw $100,000 $e+ &ea+ fo+ as lon, as he can.5ow man& $a&ments of $100,000 can 4alvin e#$ect to +eceive in +eti+ement if he +eceives annual $a&ments of $100,000 in +eti+ement and his fi+st +eti+ement $a&ment is +eceived e#actl& 1 &ea+ afte+ he +eti+es/A. 9.)0 6$lus o+ minus .02 $a&ments7B. ).29 6$lus o+ minus .02 $a&ments74. 0.(0 6$lus o+ minus .02 $a&ments78. 4alvin can ma%e an infinite numbe+ of annual withd+awals of $100,000 in +eti+ement9. 8 is not co++ect and neithe+ A, B, no+ 4 is within .02 $a&ments of the co++ect answe+3. 4alvin has nothin, in his +eti+ement account.5oweve+, he $lans to save $10,000 $e+ &ea+ in his +eti+ement account fo+ each of the ne#t 2 &ea+s.5is fi+st cont+ibution to his +eti+ement account is e#$ected in 1 &ea+.4alvin e#$ects to ea+n 9.0 $e+cent $e+ &ea+ in his +eti+ement account, both befo+e and du+in, his +eti+ement.4alvin $lans to +eti+e in 2 &ea+s, immediatel& afte+ ma%in, his last $10,000 cont+ibution to his +eti+ement account."n +eti+ement, 4alvin $lans to withd+aw $100,000 $e+ &ea+ fo+ as lon, as he can.5ow man& $a&ments of $100,000 can 4alvin e#$ect to +eceive in +eti+ement if he +eceives annual $a&ments of $100,000 in +eti+ement and his fi+st +eti+ement $a&ment is +eceived e#actl& 1 &ea+ afte+ he +eti+es/A. 13.)3 6$lus o+ minus .02 $a&ments7B. !.)0 6$lus o+ minus .02 $a&ments74. 11.)) 6$lus o+ minus .02 $a&ments78. 4alvin can ma%e an infinite numbe+ of annual withd+awals of $100,000 in +eti+ement9. 8 is not co++ect and neithe+ A, B, no+ 4 is within .02 $a&ments of the co++ect answe+3. 4alvin has nothin, in his +eti+ement account.5oweve+, he $lans to save $10,000 $e+ &ea+ in his +eti+ement account fo+ each of the ne#t 2( &ea+s.5is fi+st cont+ibution to his +eti+ement account is e#$ected in 1 &ea+.4alvin e#$ects to ea+n 9.0 $e+cent $e+ &ea+ in his +eti+ement account, both befo+e and du+in, his +eti+ement.4alvin $lans to +eti+e in 2( &ea+s, immediatel& afte+ ma%in, his last $10,000 cont+ibution to his +eti+ement account."n +eti+ement, 4alvin $lans to withd+aw $100,000 $e+ &ea+ fo+ as lon, as he can.5ow man& $a&ments of $100,000 can 4alvin e#$ect to +eceive in +eti+ement if he +eceives annual $a&ments of $100,000 in +eti+ement and his fi+st +eti+ement $a&ment is +eceived e#actl& 1 &ea+ afte+ he +eti+es/A. 1).)! 6$lus o+ minus .02 $a&ments7B. 0.! 6$lus o+ minus .02 $a&ments74. 13.9( 6$lus o+ minus .02 $a&ments78. 4alvin can ma%e an infinite numbe+ of annual withd+awals of $100,000 in +eti+ement9. 8 is not co++ect and neithe+ A, B, no+ 4 is within .02 $a&ments of the co++ect answe+2FNAN 301, fall 2009, final, solutionsQuantitative: find PV of delayed annuity. :a+&land ;ha+maceuticals 6:;7 is develo$in, a new d+u, that it e#$ects to be,in sellin, in seve+al &ea+s.-he fi+st cash flow f+om the d+u, is e#$ected in ( &ea+s f+om toda& and is fo+ecast to be $100 million.:; e#$ects to +eceive $100 million $e+ &ea+ fo+ seve+al &ea+s.-he last of these annual $100 million cash flows is e#$ected in 12 &ea+s f+om toda&.Afte+ that, the d+u, willno lon,e+ be $atent73 B 0/1>3$he expected return for investment - is 0/1> percent per month19FNAN 301, fall 2009, final, solutions1. You own two investments, A and B, that have a combined total value of $1(,00."nvestment A is e#$ected to ma%e its ne#t monthl& $a&ment in 1 month.A's ne#t $a&ment is e#$ected to be $0 and subse*uent $a&ments a+e e#$ected to ,+ow b& 0.2 $e+cent $e+ month fo+eve+.-he e#$ected +etu+n fo+ investment A is 1.0 $e+cent $e+ month."nvestment B is e#$ected to $a& $)2 a month fo+eve+ and ma%e its ne#t $a&ment in 1 month..hat is the monthl& e#$ected +etu+n fo+ investment B/A/ 0/??3 4plus or minus /0( percentage point5B. 0.(0= 6$lus o+ minus .01 $e+centa,e $oint74. 1.03= 6$lus o+ minus .01 $e+centa,e $oint78. 0.00= 6$lus o+ minus .01 $e+centa,e $oint79. None of the above is within .01 $e+centa,e $oint of the co++ect answe+$o solve part a:(5 Find the value of investment A65 Find the value of investment - as the com&ined value of &oth A and - minus the value of A75 Find the expected return for -

(5 Find the value of investment A$he cash flows represent a growing perpetuity with the first payment in one monthFor a growing perpetuity8 PV 9 C(:4r ; g5 and r 9 4C(:PV5 < gC( 9 =A1r 9 /0(0g 9 /006PV 9 =A1 : 4/0(0 ; /0065 9 =A1 : /001 9 =?8000@nvestment A is worth =?800065 Find the value of investment - as the value of &oth A and - minus the value of AValue of - 9 value of A and - ; value of AValue of A and - 9 =(>8A00Value of A 9 =?8000Value of - 9 =(>8A00 ; =?8000 9 =C8A00 75 Find the expected return for - $he cash flows represent a fixed perpetuity with the first payment in one monthFor a fixed perpetuity8 PV 9 C:r and r 9 C:PVC 9 =?6PV 9 =C8A00r 9 ?6:C8A00 9 0/00??0 9 0/??03 B 0/??3$he expected return for investment - is 0/?? percent per month20FNAN 301, fall 2009, final, solutionsQuantitative: compute present value of two cash flows of different signs2. You 1ust bou,ht a new ca+ toda&..hat is the $+esent value of &ou+ cash flows if the discount +ate is 12.3 $e+cent, &ou will +eceive a +ebate of $2,000 f+om the deale+ in 2 &ea+s, and &ou will $a& $0,000 to the deale+ in&ea+s/Note2 the co++ect answe+ is less than 3e+o.A. /11#ear 7 CF: present value 9 0#ear A CF: * 9 AF FV 9 !A0000F @3 9 (6/7F P%$ 9 0F solve for PV 9 6>8(>0/(2so the present value of the cash flow 9 !6>8(>0/(2$otal present value of the cash flows 9 0 < 0 < (8>1>/11 < 0 < 4!6>8(>0/(25 9 !=678>?A/6C*ote that answers may differ slightly due to rounding21FNAN 301, fall 2009, final, solutions2. You 1ust bou,ht a new ca+ toda&..hat is the $+esent value of &ou+ cash flows if the discount +ate is 13.3 $e+cent, &ou will +eceive a +ebate of $2,000 f+om the deale+ in 2 &ea+s, and &ou will $a& $(,000 to the deale+ in&ea+s/Note2 the co++ect answe+ is less than 3e+o.A. >1/0(#ear 7 CF: present value 9 0#ear A CF: * 9 AF FV 9 !A>000F @3 9 (7/7F P%$ 9 0F solve for PV 9 628701/(Cso the present value of the cash flow 9 !628701/(C$otal present value of the cash flows 9 0 < 0 < (8>>1/0( < 0 < 4!628701/(C5 9 !=6>82>0/(1*ote that answers may differ slightly due to rounding22FNAN 301, fall 2009, final, solutions2. You 1ust bou,ht a new ca+ toda&..hat is the $+esent value of &ou+ cash flows if the discount +ate is 1.3 $e+cent, &ou will +eceive a +ebate of $2,000 f+om the deale+ in 2 &ea+s, and &ou will $a& $(0,000 to the deale+ in&ea+s/Note2 the co++ect answe+ is less than 3e+o.A. ?*ote that answers may differ slightly due to rounding23FNAN 301, fall 2009, final, solutionsQuantitative: FV of annuity and payment associated with PV annuity3. 4alvin has nothin, in his +eti+ement account.5oweve+, he $lans to save $10,000 $e+ &ea+ in his +eti+ement account fo+ each of the ne#t 22 &ea+s.5is fi+st cont+ibution to his +eti+ement account is e#$ected in 1 &ea+.4alvin e#$ects to ea+n 9.0 $e+cent $e+ &ea+ in his +eti+ement account, both befo+e and du+in, his +eti+ement.4alvin $lans to +eti+e in 22 &ea+s, immediatel& afte+ ma%in, his last $10,000 cont+ibution to his +eti+ement account."n +eti+ement, 4alvin $lans to withd+aw $100,000 $e+ &ea+ fo+ as lon, as he can.5ow man& $a&ments of $100,000 can 4alvin e#$ect to +eceive in +eti+ement if he +eceives annual $a&ments of $100,000 in +eti+ement and his fi+st +eti+ement $a&ment is +eceived e#actl& 1 &ea+ afte+ he +eti+es/A/ C/?1 4plus or minus /06 payments5B. ).29 6$lus o+ minus .02 $a&ments74. 0.(0 6$lus o+ minus .02 $a&ments78. 4alvin can ma%e an infinite numbe+ of annual withd+awals of $100,000 in +eti+ement9. 8 is not co++ect and neithe+ A, B, no+ 4 is within .02 $a&ments of the co++ect answe+,tep (: find how much money Calvin will have in 66 years,tep 6: find how many payments can &e produced &y the amount of money expected in 66 years,tep (: find how much money Calvin will have in 66 years@f the first investment is made in ( year and the last investment is made in 66 years8 then the amount of money accumulated in 66 years can &e found &y finding the future value of a 66!year annuity8 since the first payment will &e made in ( year8 there will &e 66 expected payments8 and all expected payments will &e equal/FV 9 C G DH4( years,tep (: find how much money Calvin will have in 6> years@f the first investment is made in ( year and the last investment is made in 6> years8 then the amount of money accumulated in 6> years can &e found &y finding the future value of a 6>!year annuity8 since the first payment will &e made in ( year8 there will &e 6> expected payments8 and all expected payments will &e equal/FV 9 C G DH4(9 (08000 G DH4(/0C056> ; (I : /0C0E 9 =1A28001/C?E*' modeEnter 6> C/0 0 !(08000* @3 PV P%$ FV,olve for 1A28001/C?Calvin expects to have =1A28001/C? saved for retirement in 6> years,tep 6: find how many payments can &e produced &y the amount of money expected in 6> years$he first withdrawal is made ( year after retirement/At retirement8 Calvin expects to have =1A28001/C?/$o find how many payments can &e produced8 we need to find the num&er of payments for an annuity with annual payments of =(0080008 a present value of =1A28001/C?8 and a discount rate of C/03/@t is an annuity8 since the first payment occurs one year after the reference point8 which is at retirement in 6> years/E*' modeEnter C/0 !1A28001/C? (008000 0* @3 PV P%$ FV,olve for (?/?2Calvin can expect to ma"e (?/?2 withdrawals in retirement2)FNAN 301, fall 2009, final, solutionsQuantitative: find PV of delayed annuity. :a+&land ;ha+maceuticals 6:;7 is develo$in, a new d+u, that it e#$ects to be,in sellin, in seve+al &ea+s.-he fi+st cash flow f+om the d+u, is e#$ected in ( &ea+s f+om toda& and is fo+ecast to be $100 million.:; e#$ects to +eceive $100 million $e+ &ea+ fo+ seve+al &ea+s.-he last of these annual $100 million cash flows is e#$ected in 12 &ea+s f+om toda&.Afte+ that, the d+u, willno lon,e+ be $atent ? 2 1 C (0 (( (6 (7CF 0 0 0 0 0 (00 (00 (00 (00 (00 (00 (00 (00 0$he cash flows represent an 1!year delayed annuity with =(00 million payments8 the first payment in > years8 and a discount rate of (0/03/@t is an 1!year annuity8 &ecause there are 1 payments 4in >8?8 28 18 C8 (08 ((8 and (6 years5/-ecause the cash flows from the drug start in > years8 we can value them as of year A 4( year &efore the first payment5 as a standard annuity/$herefore ta"e the following 6 steps to find the present value(5 find PVA as the value of an annuity65 find PV0 as PVA :4( :4($o get the present value as of today at 4PV0 at time 058 we need to discount PV> as PV0 9 PV> :4(PV0 9 A1?81A(8116:4(/(005> 9 =70686C08>0>%ode is not relevant8 since P%$ 9 0Enter > (0/0 0 A1?81A(8116* @3 PV P%$ FV,olve for !70686C08>0>$he present value of the drug to %P is =706/7 million*ote: the following 7 cash flow patterns have the same present value when r 9 (0/03$ime 0 ( 6 7 A > ? 2 1 C (0 (( (6 (7CF 0 0 0 0 0 0 (00 (00 (00 (00 (00 (00 (00 0CF 0 0 0 0 0 A1?/1 0 0 0 0 0 0 0 0CF 706/7 0 0 0 0 0 0 0 0 0 0 0 0 020FNAN 301, fall 2009, final, solutions. :a+&land ;ha+maceuticals 6:;7 is develo$in, a new d+u, that it e#$ects to be,in sellin, in seve+al &ea+s.-he fi+st cash flow f+om the d+u, is e#$ected in ! &ea+s f+om toda& and is fo+ecast to be $100 million.:; e#$ects to +eceive $100 million $e+ &ea+ fo+ seve+al &ea+s.-he last of these annual $100 million cash flows is e#$ected in 13 &ea+s f+om toda&.Afte+ that, the d+u, willno lon,e+ be $atent ? 2 1 C (0 (( (6 (7CF 0 0 0 0 0 0 0 (00 (00 (00 (00 (00 (00 (00$he cash flows represent a 2!year delayed annuity with =(00 million payments8 the first payment in 2 years8 and a discount rate of (0/03/@t is a 2!year annuity8 &ecause there are 2 payments 4in 28 18 C8 (08 ((8 (68 and (7 years5/-ecause the cash flows from the drug start in 2 years8 we can value them as of year ? 4( year &efore the first payment5 as a standard annuity/$herefore ta"e the following 6 steps to find the present value(5 find PV? as the value of an annuity65 find PV0 as PV? :4( as the value of an annuityPV? 9 4C G D4(:r5 ; (:Hr4(8000 !(8A1C/?6 0* @3 PV P%$ FV,olve for (/((6/ Find the EA of a loan with the monthly rate from step (EA9 D4( years G (6 months 9 ?0 months$he present value is =2080008 &ecause thatLs the amount of the loanE*' %odeEnter ?0 208000 !(8?(6/1? 0* @3 PV P%$ FV,olve for (/(76/ Find the EA of a loan with the monthly rate from step (EA9 D4( years and > years G (6 months 9 ?0 months$he present value is =2>80008 &ecause thatLs the amount of the loanE*' %odeEnter ?0 2>8000 !(82A6/0( 0* @3 PV P%$ FV,olve for (/(?6/ Find the EA of a loan with the monthly rate from step (EA9 D4( 9 '( G 4(!( 9 '( G 4(5A 9 1/>0PA 9 =1/>0 : 4/(70 ; /06>59 =1/>0 : /(0>9 =10/C>Answers may differ slightly due to rounding8 especially with respect to the expected dividend39FNAN 301, fall 2009, final, solutions0. .anin, :oon 4o+$. $a&s an annual dividend on its common stoc% that is e#$ected to ,+ow b&2.( $e+cent a &ea+ fo+eve+.-he ne#t dividend is due in 1 &ea+ and is e#$ected to be $0.!0."f the e#$ected +etu+n on .anin, :oon common stoc% is 1.0 $e+cent $e+ &ea+, then what is the $+ice of the stoc% e#$ected to be in&ea+s/A/ =17/>( 4plus or minus =0/(05B. $01.! 6$lus o+ minus $0.1074. $0(.(9 6$lus o+ minus $0.1078. $)0.(9 6$lus o+ minus $0.1079. None of the above is within $0.10 of the co++ect answe+0 ( 6 7 A >'iv '0'( '6 '7 'A '>'iv '0'( '( G 4(5AExpected annual return 9 /(A0,ince the dividends are expected to grow at a constant rate forever as of year > 4actually starting sooner58 the expected value of the stoc" in A years can &e found using the constant!growth dividend discount model/PA 9 '> : 4 ; g5 is the annual return expected on the stoc" divided &y the num&er of possi&le dividends per year 9 /(A0 J ( 9 /(A0g 9 /06>@n A years from today8 the next dividend is expected in > years from today/'> 9 '( G 4(!( 9 '( G 4(5A 9 =C/?0PA 9 =C/?0 : 4/(A0 ; /06>59 =C/?0 : /((>9 =17/A1Answers may differ slightly due to rounding8 especially with respect to the expected dividend0FNAN 301, fall 2009, final, solutions0. .anin, :oon 4o+$. $a&s an annual dividend on its common stoc% that is e#$ected to ,+ow b&2.( $e+cent a &ea+ fo+eve+.-he ne#t dividend is due in 1 &ea+ and is e#$ected to be $9.)0."f the e#$ected +etu+n on .anin, :oon common stoc% is 1).0 $e+cent $e+ &ea+, then what is the $+ice of the stoc% e#$ected to be in&ea+s/A/ =21/AC 4plus or minus =0/(05B. $!).(0 6$lus o+ minus $0.1074. $00.) 6$lus o+ minus $0.1078. $)).23 6$lus o+ minus $0.1079. None of the above is within $0.10 of the co++ect answe+0 ( 6 7 A >'iv '0'( '6 '7 'A '>'iv '0'( '( G 4(5AExpected annual return 9 /(?0,ince the dividends are expected to grow at a constant rate forever as of year > 4actually starting sooner58 the expected value of the stoc" in A years can &e found using the constant!growth dividend discount model/PA 9 '> : 4 ; g5 is the annual return expected on the stoc" divided &y the num&er of possi&le dividends per year 9 /(?0 J ( 9 /(?0g 9 /06>@n A years from today8 the next dividend is expected in > years from today/'> 9 '( G 4(!( 9 '( G 4(5A 9 =(0/?0PA 9 =(0/?0 : 4/(?0 ; /06>59 =(0/?0 : /(7>9 =21/>6Answers may differ slightly due to rounding8 especially with respect to the expected dividend1FNAN 301, fall 2009, final, solutionsQuantitative: find expected price &ased on current price and expected dividend9. -he common stoc% of 9lect+ic ;u+$le 4o+$o+ation $a&s an annual dividend, has an e#$ected annual +etu+n of 1).( $e+cent, is cu++entl& $+iced at $(0.00 $e+ sha+e, and 1ust $aid its annual dividend.-he followin, is some info+mation on the e#$ected $+ice and e#$ected annual dividend fo+ 9lect+ic ;u+$le stoc% as of seve+al $oints in time.Note that the followin, info+mation is not com$+ehensive, as e#$ected $+ices and e#$ected dividends fo+ the stoc% as of man& $oints in time in the futu+e a+e not ,iven.-he stoc% is e#$ected to $a& a dividend of $(.)0 in 1 &ea+-he stoc% is e#$ected to $a& a dividend of $0.(0 in 2 &ea+s-he stoc% is e#$ected to be $+iced at $(0.00 in 3 &ea+sBiven the $+ecedin, info+mation, what is the $+ice of 9lect+ic ;u+$le stoc% e#$ected to be in 1 &ea+/A/ =>6/?> 4plus or minus =0/0>5B. $!.!3 6$lus o+ minus $0.0(74. $(0.21 6$lus o+ minus $0.0(78. $(0.00 6$lus o+ minus $0.0(79. None of the above is within $0.0( of the co++ect answe+.e want to determine the value of P( *ote that some of the given information is not necessarily needed or relevant,ince we "now P08 '( and 8 we can find P( from P0 9 4'( < P(5 : 4( < 5 9 0/(?>'( 9 >/?0'6 9 1/>0P0 9 >0/00P7 9 >0/00*ote that '6 and P7 are irrelevantP0 9 4'( < P(5 : 4( < 5 >0/00 9 4>/?0 < P(5 : (/(?> >0/00 G (/(?> 9 4>/?0 < P(5 P( 9 4>0/00 G (/(?>5 ; >/?09 =>6/?>2FNAN 301, fall 2009, final, solutions9. -he common stoc% of 9lect+ic ;u+$le 4o+$o+ation $a&s an annual dividend, has an e#$ected annual +etu+n of 1).( $e+cent, is cu++entl& $+iced at $)0.00 $e+ sha+e, and 1ust $aid its annual dividend.-he followin, is some info+mation on the e#$ected $+ice and e#$ected annual dividend fo+ 9lect+ic ;u+$le stoc% as of seve+al $oints in time.Note that the followin, info+mation is not com$+ehensive, as e#$ected $+ices and e#$ected dividends fo+ the stoc% as of man& $oints in time in the futu+e a+e not ,iven.-he stoc% is e#$ected to $a& a dividend of $).10 in 1 &ea+-he stoc% is e#$ected to $a& a dividend of $0.(0 in 2 &ea+s-he stoc% is e#$ected to be $+iced at $)0.00 in 3 &ea+sBiven the $+ecedin, info+mation, what is the $+ice of 9lect+ic ;u+$le stoc% e#$ected to be in 1 &ea+/A/ =?7/10 4plus or minus =0/0>5B. $().! 6$lus o+ minus $0.0(74. $(0.00 6$lus o+ minus $0.0(78. $)0.00 6$lus o+ minus $0.0(79. None of the above is within $0.0( of the co++ect answe+.e want to determine the value of P( *ote that some of the given information is not necessarily needed or relevant,ince we "now P08 '( and 8 we can find P( from P0 9 4'( < P(5 : 4( < 5 9 0/(?>'( 9 ?/(0'6 9 1/>0P0 9 ?0/00P7 9 ?0/00*ote that '6 and P7 are irrelevantP0 9 4'( < P(5 : 4( < 5 ?0/00 9 4?/(0 < P(5 : (/(?> ?0/00 G (/(?> 9 4?/(0 < P(5 P( 9 4?0/00 G (/(?>5 ; ?/(09 =?7/103FNAN 301, fall 2009, final, solutions9. -he common stoc% of 9lect+ic ;u+$le 4o+$o+ation $a&s an annual dividend, has an e#$ected annual +etu+n of 1).( $e+cent, is cu++entl& $+iced at $!0.00 $e+ sha+e, and 1ust $aid its annual dividend.-he followin, is some info+mation on the e#$ected $+ice and e#$ected annual dividend fo+ 9lect+ic ;u+$le stoc% as of seve+al $oints in time.Note that the followin, info+mation is not com$+ehensive, as e#$ected $+ices and e#$ected dividends fo+ the stoc% as of man& $oints in time in the futu+e a+e not ,iven.-he stoc% is e#$ected to $a& a dividend of $!.0 in 1 &ea+-he stoc% is e#$ected to $a& a dividend of $0.(0 in 2 &ea+s-he stoc% is e#$ected to be $+iced at $!0.00 in 3 &ea+sBiven the $+ecedin, info+mation, what is the $+ice of 9lect+ic ;u+$le stoc% e#$ected to be in 1 &ea+/A/ =2A/(> 4plus or minus =0/0>5B. $)). 6$lus o+ minus $0.0(74. $)!.30 6$lus o+ minus $0.0(78. $!0.00 6$lus o+ minus $0.0(79. None of the above is within $0.0( of the co++ect answe+.e want to determine the value of P( *ote that some of the given information is not necessarily needed or relevant,ince we "now P08 '( and 8 we can find P( from P0 9 4'( < P(5 : 4( < 5 9 0/(?>'( 9 2/A0'6 9 1/>0P0 9 20/00P7 9 20/00*ote that '6 and P7 are irrelevantP0 9 4'( < P(5 : 4( < 5 20/00 9 42/A0 < P(5 : (/(?> 20/00 G (/(?> 9 42/A0 < P(5 P( 9 420/00 G (/(?>5 ; 2/A09 =2A/(>

FNAN 301, fall 2009, final, solutionsConceptual: pro)ect ris" and discount rate 10. -he mana,e+s of ?o,ical Balance Financial have evaluated five $otential $+o1ects.9ach $+o1ect has conventional cash flows and would +e*ui+e an initial investment of $1 million.Based on the info+mation ,iven in this $a+a,+a$h and $+esented in the table, which one of the $+o1ects is the +is%iest/;+o1ect4ost ofca$ital 6in =7Net $+esentvalue 6in $ millions7;a&bac%$e+iod6in &ea+s78iscounted$a&bac%$e+iod6in &ea+s7"nte+nal +ateof +etu+n6in =7A 11.0 0.2 !.) 0.1 11.1B !.1 (3.3 (.) 0.! 13.(4 13.2 12.) 2. 3.2 13.8 ).! 0.9 (.0 0.2 1.39 9.2 4plus or minus =(005B. $!3,200 6$lus o+ minus $10074. $11,200 6$lus o+ minus $10078. $2,9)! 6$lus o+ minus $10079. None of the above is within $100 of the co++ect answe+CF from asset sale 9 sales price of asset ; taxes paid on sale of asset$axes on asset sale 9 4sales price of asset ; &oo" value of asset5 G tax rate 9 taxa&le gain G tax rate -oo" value 9 initial price of asset ; accumulated depreciationAccumulated depreciation equals depreciation in year ( < depreciation in year 6 < depreciation in year 7'epreciation in year ( 9 77/773 G ?108000 9 66?8?AA'epreciation in year 6 9 AA/AA3 G ?108000 9 7068(C6'epreciation in year 7 9 (A/163 G ?108000 9 (00822?Accumulated depreciation 9 66?8?AA < 7068(C6 < (00822? 9 ?6C8?(6-oo" value 9 ?108000 ; ?6C8?(6 9 >08711$axes on sale of asset 9 4(668000 ; >087115 G 0/A0 9 2(8?(6 G 0/A0 9 618?AA/10CF from asset sale 9 (668000 ; 618?AA/10 9 C787>>/60(FNAN 301, fall 2009, final, solutions12. .hat is the afte+? < (0C8??1 9 ?1>8(??-oo" value 9 2A08000 ; ?1>8(?? 9 >A817A$axes on sale of asset 9 4(768000 ; >A817A5 G 0/A0 9 228(?? G 0/A0 9 7081??/A0CF from asset sale 9 (768000 ; 7081??/A0 9 (0(8(77/?0((FNAN 301, fall 2009, final, solutions12. .hat is the afte+78701'epreciation in year 6 9 AA/AA3 G 2?08000 9 77282AA'epreciation in year 7 9 (A/163 G 2?08000 9 ((68?76Accumulated depreciation 9 6>78701 < 77282AA < ((68?76 9 2078?1A-oo" value 9 2?08000 ; 2078?1A 9 >?87(?$axes on sale of asset 9 4(>68000 ; >?87(?5 G 0/A0 9 C>8?1A G 0/A0 9 718627/?0CF from asset sale 9 (>68000 ; 718627/?0 9 ((7826?/A0()FNAN 301, fall 2009, final, solutionsConceptual: ethics and legality of insider trading13. Acco+din, to the class ove+heads and basic ethics, which one of the followin, asse+tions about inside+ t+adin,, which is a,ainst the law, is t+ue/A. "nside+ t+adin, is le,al and should be conside+ed as a $otential a$$+oach to investin,B. "nside+ t+adin, is le,al and should not be conside+ed as a $otential a$$+oach to investin,4. "nside+ t+adin, is ille,al and should be conside+ed as a $otential a$$+oach to investin,'/ @nsider trading is il legal and should not &e considered as a potential approach to investing(!FNAN 301, fall 2009, final, solutionsQuantitative: find ris" premium from expected return and ris"!free return1. "f -+easu+& Bills have a +etu+n of (.)2= and the e#$ected +ate of +etu+n fo+ "mmunit& "dol "nco+$o+ated stoc% is 12.3=, what is the +is% $+emium on "mmunit& "dol "nco+$o+ated stoc%/A/ ?/263 4plus or minus 0/0> percentage points5B. 1!.9)= 6$lus o+ minus 0.0( $e+centa,e $oints74. ).3)= 6$lus o+ minus 0.0( $e+centa,e $oints78. 10.)(= 6$lus o+ minus 0.0( $e+centa,e $oints79. None of the above is within 0.0( $e+centa,e $oints of the co++ect answe+is" premium for stoc" 9 expected return for stoc" ; return on ris"!free asset 9 /(67A ; /0>?6 9 /0?26 9 ?/263(0FNAN 301, fall 2009, final, solutions1. "f -+easu+& Bills have a +etu+n of (.02= and the e#$ected +ate of +etu+n fo+ "mmunit& "dol "nco+$o+ated stoc% is 13.2(=, what is the +is% $+emium on "mmunit& "dol "nco+$o+ated stoc%/A/ 2/A73 4plus or minus 0/0> percentage points5B. 19.0!= 6$lus o+ minus 0.0( $e+centa,e $oints74. !.02= 6$lus o+ minus 0.0( $e+centa,e $oints78. 19.0= 6$lus o+ minus 0.0( $e+centa,e $oints79. None of the above is within 0.0( $e+centa,e $oints of the co++ect answe+is" premium for stoc" 9 expected return for stoc" ; return on ris"!free asset 9 /(76> ; /0>16 9 /02A7 9 2/A73(9FNAN 301, fall 2009, final, solutions1. "f -+easu+& Bills have a +etu+n of !.92= and the e#$ected +ate of +etu+n fo+ "mmunit& "dol "nco+$o+ated stoc% is 1.2)=, what is the +is% $+emium on "mmunit& "dol "nco+$o+ated stoc%/A/ ?/7A3 4plus or minus 0/0> percentage points5B. 22.10= 6$lus o+ minus 0.0( $e+centa,e $oints74. (.0!= 6$lus o+ minus 0.0( $e+centa,e $oints78. 23.31= 6$lus o+ minus 0.0( $e+centa,e $oints79. None of the above is within 0.0( $e+centa,e $oints of the co++ect answe+is" premium for stoc" 9 expected return for stoc" ; return on ris"!free asset 9 /(A6? ; /02C6 9 /0?7A 9 ?/7A3)0FNAN 301, fall 2009, final, solutionsConceptual: li"ely actual return from good or &ad news &ased on expectations 1(. Al$ha Beta 9lect+onics has inc+eased its annual dividend b& 3.( $e+cent a &ea+ fo+ each of the $ast 32 &ea+s.5oweve+, the com$an& has been ,+owin, +a$idl& in +ecent months, so, as of this mo+nin,, 1ust befo+e the com$an&'s monthl& $+ess confe+ence, ma+%et e#$e+ts and investo+s antici$ated that the fi+m would announce that its mana,e+s e#$ected the fi+m's dividends to inc+ease b& ).2 $e+cent a &ea+ fo+eve+.At the $+ess confe+ence, Al$ha Beta announced that its mana,e+s e#$ected dividends to inc+ease b& (.( $e+cent a &ea+ fo+eve+, which would be hi,he+ than an& annual dividend inc+ease in the com$an&'s histo+&.-he amount of the e#$ected dividend inc+ease was not %nown b& the $ublic befo+e the announcement at the $+ess confe+ence, so the announcement should be conside+ed the +elease of newinfo+mation to the $ublic.No othe+ news was +eleased to the $ublic toda& e#ce$t fo+ the e#$ected dividend inc+ease.9#$ectations about the stoc%'s +is% +emained unchan,ed all da& and the stoc% ma+%et is semi/> percent forever8 which would &e a company record8 the growth is less than the ?/6 percent that was expected &y investors &efore the announcement/$herefore8 even though the firm will increase the dividend growth rate8 it is actually &y a smaller amount than expected8 which is &ad news8 which is li"ely to lead to an actual return that is less than the expected return/@n semi!strong form mar"ets8 prices reflect all pu&lic information/-efore the announcement8 the stoc" price reflected expected dividend growth of ?/6 percent8 &ut after the announcement8 the stoc" price reflected expected dividend growth of >/> percent8 which is lower and would &e associated with a lower price and an actual return less than the expected return/)1FNAN 301, fall 2009, final, solutions1(. Al$ha Beta 9lect+onics has inc+eased its annual dividend b& 3.( $e+cent a &ea+ fo+ each of the$ast 32 &ea+s.5oweve+, the com$an& has been ,+owin, +a$idl& in +ecent months, so, as of this mo+nin,, 1ust befo+e the com$an&'s monthl& $+ess confe+ence, ma+%et e#$e+ts and investo+s antici$ated that the fi+m would announce that its mana,e+s e#$ected the fi+m's dividends to inc+ease b& ).2 $e+cent a &ea+ fo+eve+.At the $+ess confe+ence, Al$ha Beta announced that its mana,e+s e#$ected dividends to inc+ease b& (.( $e+cent a &ea+ fo+eve+, which would be hi,he+ than an& annual dividend inc+ease in the com$an&'s histo+&.-he amount of the e#$ected dividend inc+ease was not %nown b& the $ublic befo+e the announcement at the $+ess confe+ence, so the announcement should be conside+ed the +elease of newinfo+mation to the $ublic.No othe+ news was +eleased to the $ublic toda& e#ce$t fo+ the e#$ected dividend inc+ease.9#$ectations about the stoc%'s +is% +emained unchan,ed all da& and the stoc% ma+%et is semi/> percent forever8 which would &e a company record8 the growth is less than the ?/6 percent that was expected &y investors &efore the announcement/$herefore8 even though the firm will increase the dividend growth rate8 it is actually &y a smaller amount than expected8 which is &ad news8 which is li"ely to lead to an actual return that is less than the expected return/@n semi!strong form mar"ets8 prices reflect all pu&lic information/-efore the announcement8 the stoc" price reflected expected dividend growth of ?/6 percent8 &ut after the announcement8 the stoc" price reflected expected dividend growth of >/> percent8 which is lower and would &e associated with a lower price and an actual return less than the expected return/)2FNAN 301, fall 2009, final, solutions1(. Al$ha Beta 9lect+onics has inc+eased its annual dividend b& 3.( $e+cent a &ea+ fo+ each of the $ast 32 &ea+s.5oweve+, the com$an& has been ,+owin, +a$idl& in +ecent months, so, as of this mo+nin,, 1ust befo+e the com$an&'s monthl& $+ess confe+ence, ma+%et e#$e+ts and investo+s antici$ated that the fi+m would announce that its mana,e+s e#$ected the fi+m's dividends to inc+ease b& ).2 $e+cent a &ea+ fo+eve+.At the $+ess confe+ence, Al$ha Beta announced that its mana,e+s e#$ected dividends to inc+ease b& (.( $e+cent a &ea+ fo+eve+, which would be hi,he+ than an& annual dividend inc+ease in the com$an&'s histo+&.-he amount of the e#$ected dividend inc+ease was not %nown b& the $ublic befo+e the announcement at the $+ess confe+ence, so the announcement should be conside+ed the +elease of newinfo+mation to the $ublic.No othe+ news was +eleased to the $ublic toda& e#ce$t fo+ the e#$ected dividend inc+ease.9#$ectations about the stoc%'s +is% +emained unchan,ed all da& and the stoc% ma+%et is semi/> percent forever8 which would &e a company record8 the growth is less than the ?/6 percent that was expected &y investors &efore the announcement/$herefore8 even though the firm will increase the dividend growth rate8 it is actually &y a smaller amount than expected8 which is &ad news8 which is li"ely to lead to an actual return that is less than the expected return/@n semi!strong form mar"ets8 prices reflect all pu&lic information/-efore the announcement8 the stoc" price reflected expected dividend growth of ?/6 percent8 &ut after the announcement8 the stoc" price reflected expected dividend growth of >/> percent8 which is lower and would &e associated with a lower price and an actual return less than the expected return/)3FNAN 301, fall 2009, final, solutionsConceptual and quantitative: find portfolio - &eta and compare to mar"et &eta and understand unsystematic ris" and diversification1). ;o+tfolio A is a well8000 : =((8000QA$ 9 0/7Q'$ 9 (/2For portfolio -: Qp 9 D4?8000:((80005 G 0/7E < D4>8000:((80005 G (/2E 9 /(?7? < /2262 9 /C7?(QA 9 (/00 R Q- 9 0/C7?(8 so portfolio A has more systematic ris" than portfolio -Onsystematic ris":Portfolio A is well!diversified with >8000 stoc"s8 so it has no unsystematic ris"Portfolio - only has 6 stoc"s8 which are &oth technology stoc"s8 so it is not very well!diversified/$herefore8 portfolio - is li"ely to have unsystematic ris"8 so portfolio A is li"elyto have less unsystematic ris" than portfolio -Answer: '/ Portfolio A has more systematic ris" and less unsystematic ris" than portfolio - )FNAN 301, fall 2009, final, solutions1). ;o+tfolio A is a well8000 < =A8000 9 =C8000.eight for Alpha stoc" 9 xA$ 9 =>8000 : =C8000 .eight for 'elta stoc" 9 x'$ 9 =A8000 : =C8000QA$ 9 0/AQ'$ 9 (/?For portfolio -: Qp 9 D4>8000:C80005 G 0/AE < D4A8000:C80005 G (/?E 9 /666 < /2(( 9 /C77QA 9 (/00 R Q- 9 0/C778 so portfolio A has more systematic ris" than portfolio -Onsystematic ris":Portfolio A is well!diversified with >8000 stoc"s8 so it has no unsystematic ris"Portfolio - only has 6 stoc"s8 which are &oth technology stoc"s8 so it is not very well!diversified/$herefore8 portfolio - is li"ely to have unsystematic ris"8 so portfolio A is li"elyto have less unsystematic ris" than portfolio -Answer: -/ Portfolio A has more systematic ris" and less unsystematic ris" than portfolio - )(FNAN 301, fall 2009, final, solutions1). ;o+tfolio A is a wellFor portfolio -: Qp 9 D4A8000:280005 G 0/>E < D478000:280005 G (/>E 9 /61? < /?A7 9 /C6CQA 9 (/00 R Q- 9 0/C6C8 so portfolio A has more systematic ris" than portfolio -Onsystematic ris":Portfolio A is well!diversified with >8000 stoc"s8 so it has no unsystematic ris"Portfolio - only has 6 stoc"s8 which are &oth technology stoc"s8 so it is not very well!diversified/$herefore8 portfolio - is li"ely to have unsystematic ris"8 so portfolio A is li"elyto have less unsystematic ris" than portfolio -Answer: C/ Portfolio A has more systematic ris" and less unsystematic ris" than portfolio - ))FNAN 301, fall 2009, final, solutionsQuantitative: find expected return from CAP% 1!. Acco+din, to the 4a$ital Asset ;+icin, :odel 64A;:7, what is the e#$ected +etu+n of the common stoc% of B+and Boblet, "nc. if the stoc% has a beta of 0.00, the e#$ected +etu+n on the ma+%et is 1!.0 $e+cent, and the +is%/763 4plus or minus /(0 percentage points5B. 12.32= 6$lus o+ minus .10 $e+centa,e $oints74. 1!.9)= 6$lus o+ minus .10 $e+centa,e $oints78. 1.9)= 6$lus o+ minus .10 $e+centa,e $oints79. None of the above answe+s is within 0.10 $e+centa,e $oints of the co++ect answe+E4i5 9 f < 4Qi G DE4%5 ; fE5E4i5 9 /070 < 40/11 G D/(20 ; /070E5 9 /070 < 40/11 G /(A05 9 /070 < /(676 9 /(>76 9 (>/763)!FNAN 301, fall 2009, final, solutions1!. Acco+din, to the 4a$ital Asset ;+icin, :odel 64A;:7, what is the e#$ected +etu+n of the common stoc% of B+and Boblet, "nc. if the stoc% has a beta of 0.00, the e#$ected +etu+n on the ma+%et is 10.0 $e+cent, and the +is%A 4plus or minus =(05B. Bamma 4o+$. should $u+sue the $+o1ect because the $+o1ect's N;H is $1,31.00 6$lus o+ minus $1074. Bamma 4o+$. should not $u+sue the $+o1ect because the $+o1ect's N;H is 05E < D608000:4(/(A>056E < D(08000:4(/(A>057E9 !=(8116/6( S 08 so Kamma should not pursue the pro)ectnpv4(A/>08!>00008H700008600008(0000I5 !(8116/6(!1FNAN 301, fall 2009, final, solutions10. A numbe+ of com$anies, includin, >me,a "nc. and Bamma 4o+$., a+e conside+in, unde+ta%in, a $+o1ect that is believed b& all to have a level of +is% that is e*ual to that of the ave+a,eme,a "nc.-he $+o1ect would +e*ui+e an initial investment of $(0,000 and would then $+oduce e#$ected cash flows of $30,000 in 1 &ea+, $20,000 in 2 &ea+s, and $10,000 in 3 &ea+s.-he wei,htedme,a "nc. is 1(.(0 $e+cent, the wei,htedA7/?( 4plus or minus =(05B. Bamma 4o+$. should $u+sue the $+o1ect because the $+o1ect's N;H is $1,31.00 6$lus o+ minus $1074. Bamma 4o+$. should not $u+sue the $+o1ect because the $+o1ect's N;H is