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# 324 Note for MGMT 31000 with Professor Kim at Purdue

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This 8 page Class Notes was uploaded by an elite notetaker on Friday February 6, 2015. The Class Notes belongs to a course at Purdue University taught by a professor in Fall. Since its upload, it has received 16 views.

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Date Created: 02/06/15

Midterm 2 PRACTICE EXAM Name no nicknames please Circle your Section XXX XXX XXX XXX 7 XXX XXX 7 XXX XXX 7 XXX 1 You are only allowed to have with you a penpencil and a calculator no books notes computers phones etc Extra scratch paper will be provided if you need it You must have your own calculator no sharing 2 Round your interim work and nal answers to the nearest three decimal places and write your nal answer in the provided boxes You must show work where applicable 3 You have 90 minutes to complete the exam There are 8 pages and 20 questions MaXimum possible score is 100 out of 100 TrueFalse 4 points each Total 36 points 1 The standard deviation on a portfolio can be greater than that on every True False asset in the portfolio 2 It is easier to take control over a rm whose board of directors has True False staggered election terms 3 If Bond A has greater time to maturity than Bond B then Bond A s price True False must be more sensitive to changes in interest rate uctuations 4 Higher bond duration indicates that the bond s price is more sensitive to True False uctuations in interest rates 5 If you hold a zerocoupon bond to maturity then your annualized rate of True False return is guaranteed to equal the original yield to maturity at time of purchase assuming the issuer does not default 6 The ask price is the price at which a dealerspecialistmarket maker will True False sell a security to you 7 The effective annual rate EAR tells you the rate at which your real True False buying power increases 8 According to CAPM the risk premium on an asset is determined entirely True False by its beta and the market risk premium loutofS Midterm 2 PRACTICE EXAM Consider assets A and B both with identical standard deviations Then a True portfolio with positive weights on each of these assets must have a standard deviation less than that on either asset This portfolio is not invested in any other assets Multiple Choice 5 points each Total 15 points 9 All else equal if the expected return on Stock X suddenly decreases then 10 False A The price per share decreases B The contemporaneous realized return is negative C Both A and B D Neither A nor B Final Answer Which of the following is true of a bond selling below its face value A Its yield to maturity is less than the coupon rate B Its current yield is less than the coupon rate C Both A and B D Neither A nor B Final Answer 11 Suppose that today you just purchased a painting for 100000 If in 10 years time t10 you were able to sell this painting for 200000 your annualized rate of return on this investment would be A Less than 10 B Equal to 10 C Greater than 10 but less than 20 D Equal to 20 Final Answer E Greater than 20 20utof8 Midterm 2 PRACTICE EXAM 12 Consider a bond with a face value of 1000 time to maturity of 10 years coupon rate of 5 paid semiannually and a yield to maturity of 8 A What is the current price of the bond 7 points F I A Ina nswer B What is the effective annual yield on this bond 5 points Final Answer 3outof8 Midterm 2 PRACTICE EXAM 13 Consider a parvalue bond with a face value of 1000 yield to maturity of 10 and time to maturity of 10 years What is its current yield 5 points Final Answer 14 Suppose firm X is not currently paying dividends You expect that the firm will pay its first dividend in the amount of 1 per share in four years at time t4 You expect to receive an annual dividend of 1 every year thereafter forever The expected return is 10 What is the current price per share 7 points Final Answer 4outof8 Midterm 2 PRACTICE EXAM 15 Suppose firm X just paid its annual dividend of 1 per share For the next 10 years ending t10 you expect dividends to grow at a rate of 10 after which point you expect dividends to grow at a rate of 5 thereafter forever The expected return is 8 What is the current price per share 5 points Final Answer SoutofS Midterm 2 PRACTICE EXAM 16 Suppose Firm X just paid out 30 million in dividends It s earnings at time t0 is 100 million its total assets are currently 1 billion and it has 30 million shares outstanding The rm must keep a constant diVidend payout ratio and cannot issue any debt or equity Assuming the percentage of sales approach if the required rate of return is 10 what is the maximum justi able price per share today under these conditions 5 points Final Answer 6outof8 Midterm 2 PRACTICE EXAM 17 What is the average beta across all assets 1 point Final Answer 18 Firm X just paid its annual dividend of 10 cents per share Its next annual dividend is expected to be 20 cents per share and is expected to remain constant each year thereafter 5 points Suppose the risk free rate is 3 the market risk premium is 10 and a marketmodel regression yields alpha and beta estimates of 001 and 080 respectively The standard deviation of Firm X s past returns is 35 Under CAPM what would be the current price per share of Firm X Final Answer 7outof8 Midterm 2 PRACTICE EXAM 19 You have just purchased a parvalue bond with face value of 1000 and yield to maturity of 10 The bond makes annual coupon payments and matures in 10 years What is your realized return if you sell the bond next year right after you collect the annual coupon payment at which point the market s required rate of return has decreased to 5 5 points Final Answer 20 Draw the capital market line assuming that the rate at which you can borrow money is greater than the rate at which you can invest in the riskless asset ie the rate at which you lend money to the government Label your gure clearly 4 points 80utof8

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