Questions and Answers of Fundamentals Investments Valuation

Fill in the missing information in the following table. Assume that portfolio AB is 40 percent invested in stock A. Year Stock A Stock B Portfolio AB 2012 11% 21% 2013 37 -38 2014 48 -21 26 16 2015
Given the following information, calculate the expected return and standard deviation for a portfolio that has 35 percent invested in stock A, 45 percent in stock B, and the balance in stock C.
Use the following information to calculate the expected return and standard deviation of a portfolio that is 50 percent invested in 3 Doors, Inc., and 50 percent invested in Down Co.: 3 Doors, Inc.
Consider two stocks, stock D, with an expected return of 13 percent and a standard deviation of 31 percent, and stock I, an international company, with an expected return of 16 percent and a
What are the expected return and standard deviation of the minimum variance portfolio in Problem 16?Data From Problem 16Consider two stocks, stock D, with an expected return of 13 percent and a
You have a three-stock portfolio. Stock A has an expected return of 12 percent and a standard deviation of 41 percent, stock B has an expected return of 16 percent and a standard deviation of 58
You are going to invest in asset J and asset S. Asset J has an expected return of 13 percent and a standard deviation of 54 percent. Asset S has an expected return of 10 percent and a standard
A stock has an expected return of 13.2 percent, the risk-free rate is 3.5 percent, and the market risk premium is 7.5 percent. What must the beta of this stock be?
Based on the stock and market data provided above, which of the following data regarding stock A is most accurate?Janet Bellows, a portfolio manager, is attempting to explain asset valuation to a
A stock has an expected return of 8.0 percent, its beta is 0.60, and the risk-free rate is 3 percent. What must the expected return on the market be?
The beta of stock B is closest to:a. 0.51b. 1.07c. 1.46Janet Bellows, a portfolio manager, is attempting to explain asset valuation to a junior colleague, Bill Clay. Ms. Bellows€™s
A stock has an expected return of 12 percent and a beta of 1.4, and the expected return on the market is 10 percent. What must the risk-free rate be?
Which of the following represents the best investment advice?a. Avoid Texas because its expected return is lower than its required return.b. Buy Montana and Texas because their required returns are
A stock has a beta of 0.8 and an expected return of 11 percent. If the risk-free rate is 4.5 percent, what is the market risk premium?
If the market risk premium decreases by 1 percent while the risk-free rate remains the same, the security market line:a. Becomes steeper.b. Becomes flatter.c. Parallel shifts downward.Janet Bellows,
You own a stock portfolio invested 10 percent in stock Q, 25 percent in stock R, 50 percent in stock S, and 15 percent in stock T. The betas for these four stocks are 1.4, 0.6, 1.5, and 0.9,
You own 400 shares of stock A at a price of $60 per share, 500 shares of stock B at $85 per share, and 900 shares of stock C at $25 per share. The betas for the stocks are 0.8, 1.2, and 0.7,
Is it possible that a risky asset could have a beta of zero? Explain. Based on the CAPM, what is the expected return on such an asset? Is it possible that a risky asset could have a negative beta?
You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.20 and the total portfolio is exactly as risky as the market, what must the beta be for
A stock has a beta of 0.85, the expected return on the market is 11 percent, and the risk-free rate is 3 percent. What must the expected return on this stock be?
A share of stock sells for $35 today. The beta of the stock is 1.2 and the expected return on the market is 12 percent. The stock is expected to pay a dividend of $0.80 in one year. If the risk-free
Asset W has an expected return of 12.0 percent and a beta of 1.1. If the risk-free rate is 4 percent, complete the following table for portfolios of asset W and a risk-free asset. Illustrate the
Stock Y has a beta of 1.05 and an expected return of 13 percent. Stock Z has a beta of 0.70 and an expected return of 9 percent. If the risk-free rate is 5 percent and the market risk premium is 7
In Problem 12, what would the risk-free rate have to be for the two stocks to be correctly priced relative to each other?Data From Problem 12Stock Y has a beta of 1.05 and an expected return of 13
Suppose you observe the following situation:Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate? Beta Expected
Fill in the following table, supplying all the missing information. Use this information to calculate the security€™s beta. Returns Return Deviations Product of Deviations Squared
Consider the following information on Stocks I and II:The market risk premium is 8 percent and the risk-free rate is 5 percent. Which stock has the most systematic risk? Which one has the most
The beta for a certain stock is 1.15, the risk-free rate is 5 percent, and the expected return on the market is 13 percent. Complete the following table to decompose the stock€™s return
What is the price of a Treasury STRIPS with a face value of $100 that matures in 10 years and has a yield to maturity of 3.5 percent?
Another technical indicator is the put/call ratio. The put/call ratio is the number of put options traded divided by the number of call options traded. The put/ call ratio can be constructed on the
Use the information from Problem 13 to calculate the three-day and five-day exponential moving averages for eBay and graph your results. Place two-thirds of the average weight on the most recent
Below you will find the closing stock prices for eBay over a three-week period. Calculate the simple three-day and five-day moving averages for the stock and graph your results. Are there any
stock had the following trades during a particular period. What was the money flow for the stock? Is the money flow a positive or negative signal in this case? Week Day Price Volume $61.85 Monday
Use the data below to construct the advance/decline line and Arms ratio for the market. Volume is in thousands of shares. Declining Stocks Advancing Volume Stocks Declining Advancing Volume 2,530
Suppose you are given the following information on the S&P 500:Date Close10/1/2015
You are given the following information concerning the trades made on a particular stock. Calculate the money flow for the stock based on these trades. Is the money flow a positive or negative signal
A group of investors was polled each week for the last five weeks about whether they were bullish or bearish concerning the market. Construct the market sentiment index for each week based on these
What is the “illusion of knowledge” and how does it impact investment performance?
Which of the following would Mr. Higgins, Ms. McHale, and Mr. Sims be least likely to use when making investment decisions?a. Heuristicsb. Their personal experiencesc. Fundamental analysisTerry
Using the stock prices in Problem 3, calculate the exponential three-month moving average for IBM and Amazon. Place 50 percent of the average weight on the most recent price. How does this
In the context of behavioral finance, why do men tend to under perform women with regard to the returns in their portfolios?
Which of the following best describes Jack Sims’s behavioral characteristic in investment decisions?a. Jack is overconfident.b. Jack uses frame dependence.c. Jack uses representativeness.Terry
Using the stock prices in Problem 3, calculate the exponential three-month moving average for both stocks where two-thirds of the average weight is placed on the most recent price.Data From Problem
Why do 401(k) plans with more bond choices tend to have participants with portfolios more heavily allocated to fixed income?
Which of the following best describes Joanne McHale’s behavioral characteristic in investment decisions?a. Joanne is loss averse.b. Joanne uses the ceteris paribus heuristic.c. Joanne is
The table below shows the closing monthly stock prices for IBM and Amazon. Calculate the simple three-month moving average for each month for both companies.IBM
Briefly explain mental accounting and identify the potential negative effect of this bias.
Which of the following best describes the potential problem with Mr. Higgins’s investment strategy?a. He will underestimate the risk of his portfolio and underestimate the impact of an event on
Using the data in Problem 1, construct the Arms ratio on each of the five trading days.Data From Problem 1Use the data below to construct the advance/decline line for the stock market. Volume
Which of the following best describes Tom Higgins’s behavioral characteristic in investment decisions?a. Tom is overconfident.b. Tom uses frame dependence.c. Tom uses anchoring.Terry Shriver and
Use the data below to construct the advance/decline line for the stock market. Volume figures are in thousands of shares. Declining Advancing Volume Stocks Stocks Declining Advancing Volume Monday
When a stock is going through a period of non constant growth for T periods, followed by constant growth forever, the residual income model can be modified as follows: where Al??s Infrared Sandwich
Given your answers in Problems 27€“30, do you feel Beagle Beauties is overvalued or undervalued at its current price of around $82? At what price do you feel the stock should sell?Beagle
Use the information from Problem 29 and calculate the stock price with the clean surplus dividend. Do you get the same stock price as in Problem 29? Why or why not?Data From Problem 29Assume the
Assume the sustainable growth rate and required return you calculated in Problem 27 are valid. Use the clean surplus relationship to calculate the share price for Beagle Beauties with the residual
Using the P/E, P/CF, and P/S ratios, estimate the 2016 share price for Beagle Beauties.Beagle Beauties engages in the development, manufacture, and sale of a line of cosmetics designed to make your
What are the sustainable growth rate and required return for Beagle Beauties? Using these values, estimate the current share price of Beagle Beauties stock according to the constant dividend growth
The current price of Parador Industries stock is $67 per share. Current sales per share are $18.75, the sales growth rate is 8 percent, and Parador does not pay a dividend. The expected return on
The current price of Parador Industries stock is $67 per share. Current earnings per share are $3.40, the earnings growth rate is 6 percent, and Parador does not pay a dividend. The expected return
Given the information below for StartUp.Com, compute the expected share price at the end of 2017 using price ratio analysis. Year 2016 2015 2013 2014 $ 68.12 Price $ 95.32 $104.18 N/A -3.68 EPS N/A
Given the information below for HooYah! Corporation, compute the expected share price at the end of 2017 using price ratio analysis. Assume that the historical average growth rates will remain the
In Problem 21, suppose the dividends per share over the same period were $1.00, $1.08, $1.17, $1.25, $1.35, and $1.40, respectively. Compute the expected share price at the end of 2017 using the
Given the information below for Seger Corporation, compute the expected share price at the end of 2017 using price ratio analysis. Assume that the historical average growth rates will remain the same
Sea Side, Inc., just paid a dividend of $1.68 per share on its stock. The growth rate in dividends is expected to be a constant 5.5 percent per year indefinitely. Investors require an 18 percent
Leisure Lodge Corporation is expected to pay the following dividends over the next four years: $15.00, $10.00, $5.00, and $2.20. Afterwards, the company pledges to maintain a constant 4 percent
Jonah’s Fishery has EBITDA of $65 million. Jonah’s has market value of equity and debt of $420 million and $38 million, respectively. Jonah’s has cash on the balance sheet of $12 million. What
Netscrape Communications does not currently pay a dividend. You expect the company to begin paying a $4 per share dividend in 15 years, and you expect dividends to grow perpetually at 5.5 percent per
The dividend for Should I, Inc., is currently $1.25 per share. It is expected to grow at 20 percent next year and then decline linearly to a 5 percent perpetual rate beginning in four years. If you
Could I Industries just paid a dividend of $1.10 per share. The dividends are expected to grow at a 20 percent rate for the next six years and then level off to a 4 percent growth rate indefinitely.
For Bill’s Bakery described in Problem 13, suppose instead that current earnings per share are $2.56. Calculate the share price for Bill’s Bakery.Data From Problem 13Bill’s Bakery expects
Bill’s Bakery expects earnings per share of $2.56 next year. Current book value is $4.70 per share. The appropriate discount rate for Bill’s Bakery is 11 percent. Calculate the share price for
A certain stock has a beta of 1.3. If the risk-free rate of return is 3.2 percent and the market risk premium is 7.5 percent, what is the expected return of the stock? What is the expected return
What is the estimated value of Country Point in a proposed spin-off?a. $144.5 millionb. $162.6 millionc. $178.3 millionBeachwood Builders merged with Country Point Homes on December 31, 1992. Both
The value of beta for Country Point is:a. 1.09b. 1.27c. 1.00Beachwood Builders merged with Country Point Homes on December 31, 1992. Both companies were builders of midscale and luxury homes in their
Given Ms. Nguyen€™s estimate of Country Point€™s terminal value in 2014, what is the growth assumption she must have used for free cash flow after 2014?a. 7 percentb. 9
What is the cost of capital that Ms. Nguyen used for her valuation of Country Point?a. 18 percentb. 17 percentc. 15 percentBeachwood Builders merged with Country Point Homes on December 31, 1992.
What is the estimate of Country Point€™s free cash flow to the firm (FCFF) in 2012?a. 25b. 16c. 11Beachwood Builders merged with Country Point Homes on December 31, 1992. Both companies
Suppose the mutual fund in Problem 1 has a current market price quotation of $21.89. Is this a load fund? If so, calculate the front-end load.
Is it necessarily true that, all else the same, an index with more stocks is better? What is the issue here?
The World Income Appreciation Fund has current assets with a market value of $8.5 billion and has 410 million shares outstanding. What is the net asset value (NAV) for this mutual fund?
Suppose you purchase five put contracts on Testaburger Co. The strike price is $45 and the premium is $3. If, at expiration, the stock is selling for $39 per share, what are your put options worth?
Suppose you buy 50 April 100 call option contracts. How much will you pay, ignoring commissions? Calls Puts Strike Last Close Price Expiration Vol. Last Vol. Hendreeks 103 Feb 100 72 5.20 50 2.40 Mar
In Problem 4, suppose that Hendreeks stock is selling for $105.70 per share on the expiration date. How much is your options investment worth? What if the stock price is $101.60 on the expiration
How many option contracts on Milson stock were traded with an expiration date of July? How many underlying shares of stock do these option contracts represent? Calls Puts Option & N.Y. Close Strike
A call option is currently selling for $3. It has a strike price of $65 and six months to maturity. What is the price of a put option with a $65 strike price and six months to maturity? The current
Are the call options in the money? What is the intrinsic value of a Milson Corp. call option? Calls Puts Option & N.Y. Close Strike Vol. Last Vol. Price Expiration Last Milson Mar 66 1.06 59 55 98
A call option currently sells for $8. It has a strike price of $80 and five months to maturity. A put with the same strike and expiration date sells for $6. If the risk-free interest rate is 4
Are the put options in the money? What is the intrinsic value of a Milson Corp. put option? Calls Puts Option & N.Y. Close Strike Vol. Last Vol. Price Expiration Last Milson Mar 66 1.06 59 55 98 3.50
A put option with a strike price of $50 sells for $3.20. The option expires in two months and the current stock price is $51. If the risk-free interest rate is 5 percent, what is the price of a call
A call option is currently selling for $4.60. It has a strike price of $60 and three months to maturity. A put option with the same strike price sells for $7.20. The risk-free rate is 6 percent and
You can also create a bull spread using put options. To do so, you buy a put and simultaneously sell a put at a higher strike price on the same stock with the same expiration. A put with a strike
A put option is currently selling for $8.30. It has a strike price of $80 and seven months to maturity. The current stock price is $83. The risk-free rate is 5 percent and the stock will pay a $1.40
Suppose you write 15 put option contracts with a $45 strike. The premium is $2.40. Evaluate your potential gains and losses at option expiration for stock prices of $35, $45, and $55.
Suppose you buy one SPX call option contract with a strike of 2200. At maturity, the S&P 500 Index is at 2218. What is your net gain or loss if the premium you paid was $14?
You write a put with a strike price of $60 on stock that you have shorted at $60 (this is a “covered put”). What are the expiration date profits to this position for stock prices of $50, $55,
You buy a call with a strike price of $70 on stock that you have shorted at $70 (this is a “protective call”). What are the expiration date profits to this position for stock prices of $60, $65,
You buy a straddle, which means you purchase a put and a call with the same strike price. The put price is $2.80 and the call price is $4.20. Assume the strike price is $75. What are the expiration
Suppose you buy one SPX call option with a strike of 2125 and write one SPX call option with a strike of 2150. What are the payoffs at maturity to this position for S&P 500 Index levels of 2050,
Suppose you buy one SPX put option with a strike of 2100 and write one SPX put option with a strike of 2125. What are the payoffs at maturity to this position for S&P 500 Index levels of 2000,
Suppose you buy one SPX call option with a strike of 2100 and write one SPX put option with a strike of 2100. What are the payoffs at maturity to this position for S&P 500 Index levels of 2000,

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