answer all questions. Most show work. no references needed
Formulae (1) (2) (3) (4) Effective rates: (1+APR/m)m-1; eAPR-1 Macaulay Duration: Modified Duration, CAPM: Section 1. Please answer 18 questions, clearly striking out questions that are not addressed. Each question is worth 5.55 points. Please be brief and show your work. 1. Over the past few decades, S-Corporations have been growing in number whereas C-Corporations have not. However, some argue that the number of C-Corporations is set to grow again, especially following the policy changes in 2018. What do you believe is the main driver of these prior- and forecasted patterns? 2. Your friend argues that C-Corporations are “ruining the world” by their focus on profits. He argues that, because of their focus on profits, corporations are inherently corrupt and environmentally unfriendly, and mistreat employees, customers, and suppliers. Provide counterarguments against the above while also touching upon Agency conflict and management compensation. 3. The Shadypine Corp has 1 billion common stocks outstanding. The company’s founders and employees currently hold 200 million vested options, each with the strike price of $10. The current stock price $15. The following items are available from Shadypine’s recent Income Statement: Sales:$400m Costs of goods sold: $150m R&D expenses$20m Depreciation $30m Interest Expense$0 Tax Rate 21% Preferred Dividends$1m Common Dividends $2m What are the company’s EPS and diluted EPS? 4. You are a valuation expert working for a M&A firm charged with finding the value of Genomix Corp, a very young biotech firm. What problems arise are likely to arise when attempting to value of Genomix via its financial statements? 5. Your property is expected to produce end-of-year cash flows of $110,000 per year for the next 10 years and $200,000 per year for ten years after that. You expect to sell your property for $1,500,000 at the end of the 20th year. The beta of your property is 1. The expected return on the Market is 10%. What is the fair value of the property? 6. You have borrowed $750,000 at 5% APR to be repaid in 60 equal monthly installments. What is amount of the 29th installment? 7. Sleepy Corp. has a Market to Book ratio of 3.5. Sleepy’s stock price is $28 and it has $500 million in Total Assets and $300 million in Total Liabilities. Compute the number of stocks outstanding for Sleepy Corp. To answer the next question, consider the following information for Bethany Corporation: Revenues = $550 million Cost excluding depreciation = $70 million Depreciation = $30 million Interest Expense = $15 million Tax rate=21% Preferred Dividends= $2 million Common Dividends = $1 million. There is an increase in receivables of $3 million and payables of $5 million over the period 8. A. Bethany’s Operating Margin (EBIT/Revenues) is ----- %, and its Profit Margin (NI available to common stocks/Revenues) is -------%. B. Bethany’s change to cash-flow from operations for the year is --------. 9. I wish to retire in 10 years with $1 million in my brokerage account. What equal amount should I deposit each month if I expect to earn 10% APR over this period? 10. Zebra Bank is offering a 10 year certificates of deposit (CDs) at 4% APR with interest paid monthly. Elephant Bank is offering a 10 year CDs at 3.90% APR with interest paid continuously. If both banks are equally credit-worthy, which Bank’s deposit rate would you prefer and why? 11. You expect that a business will produce no income for the first 3 years. Starting with the fourth year, you expect it will earn $10m in annual income for 10 years, and $11m in annual income after that (in perpetuity). The beta of this business is 1.5, the expected return on the Market is 10%, and the t-bond is yielding 3%. What is the fair value of this business? 12. You run a regression of daily AAPL returns on the corresponding returns on the S&P 500 index using daily data from the prior 3 years. The results are as follows: Adj-R2: 0.90, Intercept: 0.002 (t-stat:2.90), Slope: 1.10 (t-stat: 5.50). The T-bond is yielding 3%. i) What is the required return on AAPL given these data? ii) What can you say about the relative performance of AAPL over the past 3 years? 13. You manage a fixed-income portfolio that holds less of Bond A and more of Bond B. CouponYieldMaturityValue of Holdings Bond A010%15 Years$500 million Bond B04%5 years $1.50 billion i) What is the Modified duration of Bond A ----? Bond B ----? ii) What is the Modified duration of your Bond Portfolio? 14. Establish the modified duration of the following annual-coupon bond: market value=$1000 par value=$1000 maturity = 2 years, coupon= 4% paid annually 15. Discuss the importance of (and similarities between) beta and duration as they apply to risk assessment of securities. Discuss how the two measures may aid in the risk-on and risk-off strategies of portfolio managers. 16. You invested $1000 in a stock portfolio 3 years ago. You contributed another $500 to this stock portfolio 2 year ago. The current value of the portfolio is $2000. What is the rate of return (internal rate of return) of this investment? 17. Earlier this morning you bought a 10-year zero coupon muni bond with par=1000 when it was yielding 5%. It is currently trading at $900. i). What the current yield of this bond? ii). What is the bond’s tax equivalent yield if you are in the 30% tax bracket? iii). What are your capital gains if you were to sell this bond at this moment? 18. Provide the fair value of the following coupon bearing bond: AAA rated 30 year bonds of NIKE. Annual coupon rate 3% paid Semiannually. Par value 1000. Similar AAA rated bonds are yielding 5%. 19. You manage a billion-dollar bond portfolio with a very high duration (of -27) and high convexity, especially since most of your bonds are zeros. i) What would you say in a letter to your clients about the aggressiveness of your bond portfolio? That is, what would you tell your clients about your expectations on interest rates and term structure? ii) One of your clients asks about the convexity of the portfolio, and you respond by suggesting that the “duration aside, relatively high convexity might actually be our friend if things go wrong.” Explain this statement. 20. What is the role of the Sharpe Ratio in obtaining the optimal portfolio? What is the role of this Ratio in comparing the performance of markets or indexes? Which of the following markets performed the best based on this metric over a 30 year interval: US annual mean return 7%, annual SD=24%; Japan mean 6%, SD=17%, China mean 14%, SD 33%? Assume RF=3%. 21. Establish the annual returns (standard measure) for INTC stock in the space given below. Establish the annual Arithmetic Average rate of return and Time Weighted rate of return over the 3 investment years. TimePrice DividendReturns 0$100 1$41$2.50? 2$38$2.50? 3$100$2.50? ________________ Arithmetic average: ? Time Weighted (Geometric) average:?_______________ 22. AAPL announced its earnings on March 11. Working for the SEC, you wish to assess whether there was illegal insider trading in AAPL prior to earnings. For this purpose, you run a regression of daily AAPL returns on the corresponding returns on the S&P 500 index using daily data over three years ending a month ago. The results are as follows: Adj-R2: 0.90, Intercept: 0.002 (t-stat:2.90), Slope: 1.10 (t-stat: 5.50). Estimate the abnormal returns and cumulative abnormal returns and, from your results, indicate whether there is cause for further investigation. DayRS&P RAAPLARCAR March 80.010.03 March 9 -0.0050.06 March 100.020.07 March 110.000.02 March 12-0.01-0.02 BONUS Questions. 1.5 points each (1.5 points! Be brief.) 1. What is the short interest ratio? How would you use this or a related ratio to assess whether there might be a Gamestop-like squeeze? 2. Name 3 distinct technical trading “rules.” 3. What does SEC form 8 accomplish? 4. The individual stocks and sub-portfolios within the Tangency (Market) portfolio have a unique characteristic relating to covariance with the Market. Indicate this relationship. 5. Derive the PVAnnuity formula from the PVLumpsum formula. 6. Derive the Macaulay-Duration formula from the basic pricing formula: P = ∑c*e-r*t. å = + = n t t t r t CF B D 1 0 ) 1 ( * 1 ) 1 ( * m r D D + = i M i RF R E RF R E b ) ) ( ( ) ( - + = n LumpSum r FV PV ) 1 ( + = ú ú ú ú û ù ê ê ê ê ë é + - = r r A PV n Annuity ) 1 ( 1 1 ú û ù ê ë é - + = r r A FV n Annuity 1 ) 1 (