How to answer finance exam Q2
31. Advanced Micro Devices (NYSE: AMD) is currently trading at
$20.75 on the NYSE. Advanced Micro Devices is also listed on NASDAQ and assume
it is currently trading on NASDAQ at $20.50.
Required: Does an arbitrage opportunity exist and if so how would you exploit it and how much would you make on a block trade of 1,000 shares? (4 marks)
32. Required: Can the nominal interest rate ever be negative? Can the real interest rate ever be negative? Explain. (4 marks)
33. Required: What is the relationship between a bond's price and its yield to maturity? (2 marks)
34. Growing Real Fast Company (GRF) is expected to have a 25 percent growth rate for the next four years (affecting D_{1}, D_{2}, D_{3}, and D_{4}). Beginning in year five, the growth rate is expected to drop to 7 percent per year and last indefinitely.
Required: If GRF just paid a $2.00 dividend and the appropriate discount rate is 15 percent, then what is the value of a share of GRF? (4 marks)
35. Consider two mutually exclusive projects with the following cash flows:
Project |
C/F_{0} |
C/F_{1} |
C/F_{2} |
C/F_{3} |
C/F_{4} |
C/F_{5} |
C/F_{6} |
A |
$(41,215) |
$12,500 |
$14,000 |
$16,500 |
$18,000 |
20,000 |
N/A |
B |
$(46,775) |
$15,000 |
$15,000 |
$15,000 |
$15,000 |
$15,000 |
$15,000 |
Required: If the discount rate for project B is 15%, then what is the NPV for project B? (4 marks)
36. Required: What is a sunk cost? Should it be included in the incremental cash flows for a project? Why or why not? (4 marks)
37. Consider the following realized annual returns:
Year End |
Market Realized Return |
Microsoft Realized Return |
1996 |
21.2% |
88.3% |
1997 |
30.3% |
56.4% |
1998 |
22.3% |
114.6% |
1999 |
25.3% |
68.4% |
2000 |
-11.0% |
-62.8% |
2001 |
-11.3% |
52.7% |
2002 |
-20.8% |
-22.0% |
2003 |
33.1% |
6.9% |
2004 |
13.0% |
9.2% |
2005 |
7.3% |
-0.9% |
Required: Using the data provided in the table, calculate the average annual return, the variance of the annual returns, and the standard deviation of the average returns for the market from 1996 to 2005. (4 marks)
38. Consider the following returns:
Year End |
Lowes Realized Return |
Home Depot Realized Return |
IBM Realized Return |
2000 |
20.1% |
-14.6% |
0.2% |
2001 |
72.7% |
4.3% |
-3.2% |
2002 |
-25.7% |
-58.1% |
-27.0% |
2003 |
56.9% |
71.1% |
27.9% |
2004 |
6.7% |
17.3% |
-5.1% |
2005 |
17.9% |
0.9% |
-11.3% |
Required: Calculate the variance on a portfolio that is made up of equal investments in Home Depot and IBM stock. (6 marks)
39. The Aardvark Corporation is considering launching a new product and is trying to determine an appropriate discount rate for evaluating this new product. Aardvark has identified the following information for three single division firms that offer products similar to the one Aardvark is interested in launching:
Comparable Firm |
Equity Cost of Capital |
Debt Cost of Capital |
Debt-to-Value Ratio |
Anteater Enterprises |
12.50% |
6.50% |
50% |
Armadillo Industries |
13% |
6.10% |
40% |
Antelope Inc. |
14% |
7.10% |
60% |
Required: Based upon the three comparable firms, calculate the most appropriate unlevered cost of capital for Aardvark to use on this new product. (4 marks)
40. Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%.
Sisyphean Bolder Movers Incorporated has no debt, a total equity capitalization of $50 billion, and a beta of 2.0. Included in Sisyphean's assets are $12 billion in cash and risk-free securities.
Required: Calculate Sisyphean's enterprise value and unlevered beta considering the fact that Sisyphean's cash is risk-free. (4 marks)
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