2. (AP8) Not sure where I went wrong… Example: Risk free ROR (real)= 2.5% Inflat
ID: 2752749 • Letter: 2
Question
2. (AP8) Not sure where I went wrong…
Example:
Risk free ROR (real)= 2.5%
Inflation Premium = 1.5%
Market Risk Premium= 7.5%
Company Beta= 0.90
Dividend Growth Rate = 5.5%
Dividends per share= $0.75
Due to sudden and unexpected political events, the market risk premium increased by 100 basis points. What is the likely resultant % change in the intrinsic value of the company’s shares?
Answer: -14.6%
Practice:
Risk free ROR (real)= 3.5%
Inflation Premium = 2.5%
Market Risk Premium= 7.0%
Company Beta= 0.75
Dividend Growth Rate = 3.0%
Dividends per share= $1.30
Due to sudden and unexpected political events, the market risk premium increased by 110 basis points. What is the likely resultant % change in the intrinsic value of the company’s shares?
Answer: -9.1% (My answer: -15.4%)
4. (AP1a) No lecture/example
You want to add an additional stock to your portfolio and are considering two alternatives. For stock A, the expected return is 17.60% and the beta is 1.44. For stock B, the expected return is 12.40% and the beta is 1.14. The risk-free rate is 6.1% and the expected return on the market portfolio is 12.3%. According to the Capital Asset Pricing Model, which statement about adding these securities to your portfolio is most accurate?
Answer: Add only stock A since its expected return is the only one to exceed its required return.
5. AP2d Lecture hard to follow. Need step-by-step solution.
You have the following information about equity rates of returns for the past 5 periods.
For observation 1 RORcompany = 17% and RORmarket = 19%.
For observation 2 RORcompany = 15% and RORmarket = 14%.
For observation 3 RORcompany = -1% and RORmarket = -9%.
For observation 4 RORcompany = 17% and RORmarket = 15%.
For observation 5 RORcompany = 8% and RORmarket = 12%.
Use the above observations to estimate the market model. The most recent information suggests that the current period market return is 9% and the company return is -15%. Use the market model to find the company risk-adjusted rate of return.
Answer: -25.4%
7. (AP5b) No video/lecture
The company's beta is 0.75, its dividend growth rate is 8.8%, just yesterday it paid a dividend of $1.35 , and today's shareprice is $20.98 . You believe that today's shareprice equals today's intrinsic value. Furthermore, you believe that the shareprice moves in accordance with the dividend constant growth model. The economy wide risk free interest rate is 6.0%, and the expected risk premium for the market portfolio is 9.5%. You believe that the stock represents a good investment if the expected total rate of return implied by the dividend constant growth model exceeds the required rate of return implied by the Capital Asset Pricing Model. Which of the following statements is most accurate?
Answer: e. The required return is 13.1% and the expected return is 15.8% so buy it
18. (DS6a) Thought I understood example, but missed practice several times.
Example:
You have $14,000 to invest in company shares that currently trade at $25.20. You choose to invest 10% of your funds in long-term call options with a strike of 30 that are currently quoted at $0.70. The options will expire in 10 months. The other funds will be placed into a money market earning 5.5% compounded monthly. Find the ROR for the holding period on the total investment position if the share price is up 28% at expiry.
Answer: 10%
Practice:
You have $10,000 to invest in company shares that currently trade at $17.00. You choose to invest 5% of your funds in long-term call options with a strike of 20 that are currently quoted at $0.60. The options will expire in 15 months. The other funds will be placed into a money market earning 7.0% compounded monthly. Find the ROR for the holding period on the total investment position if the share price is up 34% at expiry.
Answer: 27% (21.14%)
Practice:
You have $16,000 to invest in company shares that currently trade at $46.00. You choose to invest 20% of your funds in long-term call options with a strike of 50 that are currently quoted at $0.80. The options will expire in 24 months. The other funds will be placed into a money market earning 6.5% compounded monthly. Find the ROR for the holding period on the total investment position if the share price is up 16% at expiry.
Answer: 75% (42.881%)
Practice:
You have $16,000 to invest in company shares that currently trade at $14.25. You choose to invest 20% of your funds in long-term call options with a strike of 15 that are currently quoted at $0.50. The options will expire in 22 months. The other funds will be placed into a money market earning 4.5% compounded monthly. Find the ROR for the holding period on the total investment position if the share price is up 26% at expiry.
Answer: 105% (51.18%)
21. CR6 No fucking clue
One marrka is worth 7.30 yuan and 0.82 franc. One franc is worth 9.71 yuan. Which statement is most consistent with the triangle arbitrage equilibrium condition?
Answer: b. the marrka is undervalued relative to the yuan
22. (PR3b) Idk, I’m not Asian.
The one-year risk-free interest rate is 7.00% in Poland (currency is the zloty) and 9.00% in China (currency is the yuan). Today's spot exchange rate (yuan per zloty) is 7.40. and the one-year forward rate is 9.05. Choose the statement about today's equilibrium 1-year forward exchange rate (yuan per zloty) that is most consistent with the Interest Rate Parity relation.
Answer: a. the equilibrium forward rate is 7.54 and in the forward market the zloty is relatively overvalued
Explanation / Answer
Answer: (AP8)
Example:
Rf=real rate+inflation premium
Rf=2.5%+1.5%=4%
Calculate beginning r required:
r required=rf+Beta(risk premium)
r required=4%+0.90(7.5%)=10.75%
Calculate ending r required:
r required=rf+Beta(risk premium)
r required=0.04%+0.90(0.075+0.001)=10.84%
Calculate beginning intrinsic value:
V beg=D0(1+g)/r-g
=$0.75(1.055)/10.75%-5.5%
=1.50714
Calculate ending intrinsic value:
V end=D0(1+g)/r-g
=$0.75(1.055)/10.84%-5.5%
=1.48174
Calculate % change=1.48174-1.50714/1.50714=-1.68%
Answer: (AP8)
Practice:
Rf=real rate+inflation premium
Rf=3.5%+2.5%=6%
Calculate beginning r required:
r required=rf+Beta(risk premium)
r required=6%+0.75(7%)=11.25%
Calculate ending r required:
r required=rf+Beta(risk premium)
r required=0.06%+0.75(0.07+0.0011)=11.33%
Calculate beginning intrinsic value:
V beg=D0(1+g)/r-g
=$1.30(1.03)/11.25%-3%
=16.23
Calculate ending intrinsic value:
V end=D0(1+g)/r-g
=$1.30(1.03)/11.33%-3%
=16.07
Calculate % change=16.07-16.23/16.23=-9.1%
Answer:4 (AP1a):
We should add a stock to our portfolio when the expected rate of return is greater than the required rate of return:
r required<r expected
For stock A:
r required=rf+Beta(risk premium)
r required=rf+beta(rm-rf)
=6.1%+1.44(12.3%-6.1%)
=15.028%
15.028%=r required<r expected 17.60%
Add Stock A to your portfolio
For stock B:
r required=rf+Beta(risk premium)
r required=rf+beta(rm-rf)
=6.1%+1.14(12.3%-6.1%)
=13.168%
13.168%=r required>r expected 12.40%
Do not Add Stock B to your portfolio
Answer: (AP5b)
V0=D0(1+g)/r-g
20.98=$1.35(1.088)/r-0.088
20.98 r-1.84624=1.4688
r=15.80%
r required=rf+Beta(risk premium)
=0.06+0.75(0.095)
=13.125%
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