Dear buffcode,
Answers follow. My work isn't complete until you're 100% satisfied, so if
you have any concerns at all, please advise me through a Clarification
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leapinglizard
1. If a stock's P/E ratio 13.5 at a time when earnings are $3 per
year, what is the stock's current price?
a. $4.50
b. $18.00
c. $22.22
d. $40.50
P/E = 13.5
=> P = 13.5 * E
= 13.5 * $3
= $40.50
The answer is D.
2. The decision rule for net present value is to:
a. accept all projects with cash inflows exceeding initial cost.
b. reject all projects with rates of return exceeding the opportunity
cost of capital.
c. accept all projects with positive net present values.
d. reject all projects lasting longer than 10 years.
The answer is C.
3. How much could NPV be affected by a worst-case scenario of 25%
reduction from the $3 million in expected annual cash flows on a
five-year project with 10% cost of capital?
a. $2,843,090
b. $3,750,000
c. $4,578,825
d. $6,155,274
year 1: $750,000.00 / 1.10 = $681,818.18
year 2: $681,818.18 / 1.10 = $619,834.71
year 3: $619,834.71 / 1.10 = $563,486.10
year 4: $563,486.10 / 1.10 = $512,260.09
year 5: $512,260.09 / 1.10 = $465,690.99
-----------
total = $2,843,090.08
The answer is A.
4. If a share of stock provided a 14.0% nominal rate of return over
the previous year while the real rate of return was 6.0%, then the
inflation rate was:
a. 1.89%
b. 7.55%
c. 8.00%
d. 9.12%
nominal - inflation = real
=> inflation = nominal - real
= 14% - 6%
= 8%
The answer is C.
5. If a stock consistently goes down (up) by 1.6% when the market
portfolio goes down (up) by 1.2% then its beta:
a. equals 1.40
b. equals 1.24
c. equals 1.33
d. equals 1.40
stock beta = stock return / market return
= 1.6% / 1.2%
= 1.33
The answer is C.
6. How much will a firm need in cash flow before tax and interest to
satisfy debt holders and equity holders if the tax rate is 40%, there
is $10 million in common stock requiring a 12% return, and $6 million
in bonds requiring an 8% return?
a. $1,392,000
b. $1,488,000
c. $2,480,000
d. $2,800,000
after-tax cash flow = .12 * $10,000,000 + .08 * $6,000,000
= $1,680,000
before-tax cash flow = after-tax cash flow / (1 - .4)
= $1,680,000 / .6
= $2,800,000
The answer is D.
7. ABC Corp. stock is selling for $30 per share when a 10% stock
dividend is declared. If you own 100 shares of ABC Corp. then you will
receive:
a. $3
b. $3 times 100 shares = $300
c. $300 plus 10 shares of ABC Corp.
d. 10 shares of ABC Corp.
The answer is B.
8. The main purpose in contracting to purchase foreign currency in the
forward market is to:
a. earn a premium (interest) on the exchange.
b. lock into a price now.
c. take advantage of future price reductions.
d. avoid the more expensive spot rates.
The answer is C.
9. The spot price of silver closes at $7 per ounce at the expiration
of an option contract. Which one of the following option positions
will have value?
a. The buyer of a call with a $5 strike price
b. The seller of a call with a $5 strike price
c. The buyer of a put with a $5 strike price
d. The seller of a put with a $5 strike price
Someone who owns a $5 call option on silver can now buy it for $5 and
immediately sell it for $7, resulting in a $2 profit.
The answer is A. |
Clarification of Answer by
leapinglizard-ga
on
09 Jun 2005 06:55 PDT
Sure thing. See below.
leapinglizard
7. ABC Corp. stock is selling for $30 per share when a 10% stock
dividend is declared. If you own 100 shares of ABC Corp. then you will
receive:
a. $3
b. $3 times 100 shares = $300
c. $300 plus 10 shares of ABC Corp.
d. 10 shares of ABC Corp.
A dividend is a payment made by a company to its shareholders as a way
of rewarding them for their investment. A certain amount is paid out
for each share, so the more shares you own, the more you will collect.
In this case, we have a 10% stock dividend, which means that the size
of the per-share payment is 10% of the share's market value at a given
point in time. If a share is worth $30 when the dividend is declared,
then 10% of that is
.1 * $30 = $3
so you are paid $3 for each share you own. With 100 shares, you collect
100 * $3 = $300
in total. This is what answer B expresses.
9. The spot price of silver closes at $7 per ounce at the expiration
of an option contract. Which one of the following option positions
will have value?
a. The buyer of a call with a $5 strike price
b. The seller of a call with a $5 strike price
c. The buyer of a put with a $5 strike price
d. The seller of a put with a $5 strike price
A call option is a license to buy something for a certain price at a
future point in time. The something is silver in this case, and the
guaranteed price is called the strike price. The buyer may exercise
the option to buy silver at the strike price, and if the market price
of silver is actually higher, it is the seller who must pay the
difference.
When a call option is sold, what takes place is a bet between the
option seller and option buyer based on the price of silver. The
option buyer gives the option seller a certain amount of money --
namely, the option price -- in the hope that silver will rise in price
sufficiently to let him, the option buyer, make back the price of the
option and then some. The option seller is hoping the opposite: that
the price of silver will not rise so much that it will cost more than
the option price to cover the difference between strike price and
market price.
Someone who owns a $5 call option on silver has the right to buy it
for $5 an ounce. If the market price is actually $7, the option seller
must pay the $2 difference, and the option buyer can immediately
resell the silver to make a $2 profit. So the option buyer's position
is valuable here, and the option seller's position is detrimental.
That is why the answer must be A.
The last two choices, C and D, mention a put option, which is a
license to sell silver at the strike price. It is the reverse of a
call option. The put option grants the option buyer the right to sell
silver to the option seller. If the strike price is $5 and the market
price is $7, the option buyer would lose money by selling silver at
the strike price, so of course this is not a valuable position for
him. But the option seller cannot force the option buyer to exercise
the option, so the position is not valuable to him either.
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