Questions and Answers of Fundamentals Investments Valuation

Suppose you buy one each SPX call option with strikes of 2000 and 2200 and write two SPX call options with a strike of 2100. What are the payoffs at maturity to this position for S&P 500 Index
A strangle is created by buying a put and buying a call on the same stock with a higher strike price and the same expiration. A put with a strike price of $100 sells for $6.75 and a call with a
You create a bull spread using calls by buying a call and simultaneously selling a call on the same stock with the same expiration at a higher strike price. A call option with a strike price of $20
What are the six factors that determine an option’s price?
What is the value of a call option if the underlying stock price is $84, the strike price is $80, the underlying stock volatility is 42 percent, and the risk-free rate is 4 percent? Assume the
What is the value of a call option if the underlying stock price is $81, the strike price is $90, the underlying stock volatility is 50 percent, and the risk-free rate is 3 percent? Assume the
What is the value of a call option if the underlying stock price is $73, the strike price is $75, the underlying stock volatility is 37 percent, and the risk-free rate is 5 percent? Assume the
A stock is currently priced at $63 and has an annual standard deviation of 43 percent. The dividend yield of the stock is 2 percent and the risk-free rate is 4 percent. What is the value of a call
The stock of Nugents Nougats currently sells for $44 and has an annual standard deviation of 45 percent. The stock has a dividend yield of 2.5 percent and the risk-free rate is 4.1 percent. What is
You are managing a pension fund with a value of $300 million and a beta of 1.07. You are concerned about a market decline and wish to hedge the portfolio. You have decided to use SPX calls. How many
Suppose you have a stock market portfolio with a beta of 1.15 that is currently worth $300 million. You wish to hedge against a decline using index options. Describe how you might do so with puts and
A stock is currently priced at $74 and will move up by a factor of 1.20 or down by a factor of 0.80 over the next period. The risk-free rate of interest is 4.2 percent. What is the value of a call
A stock with a current price of $58 has a put option available with a strike price of $55. The stock will move up by a factor of 1.13 or down by a factor of 0.88 over the next period and the
A call option matures in six months. The underlying stock price is $70 and the stock’s return has a standard deviation of 20 percent per year. The risk-free rate is 4 percent per year, compounded
In its 10Q dated February 4, 2016, LLL, Inc., had outstanding employee stock options representing over 272 million shares of its stock. LLL accountants estimated the value of these options using the
Suppose you hold LLL employee stock options representing options to buy 10,000 shares of LLL stock. You wish to hedge your position by buying put options with three-month expirations and a $22.50
Immediately after establishing your put options hedge, volatility for LLL stock suddenly jumps to 45 percent. This changes the number of put options required to hedge your employee stock options. How
What are the 10K and 10Q reports? By whom are they filed? What do they contain? With whom are they filed? What is the easiest way to retrieve one?
The most recent financial statements for Bradley, Inc., are shown here (assuming no income taxes):Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next
What is the difference between the “retained earnings” number on the income statement and that on the balance sheet?
Alphonse Inc. has a return on equity of 12 percent, 28,000 shares of stock outstanding, and a net income of $98,000. What are earnings per share?
The most recent financial statements for Martin, Inc., are shown here:Assets and costs are proportional to sales. Debt and equity are not. A dividend of $850 was paid, and Martin wishes to maintain
Lemon Co. has net income of $520,000 and 75,000 shares of stock. If the company pays a dividend of $1.28 per share, what are the additions to retained earnings?
For the company in Problem 17, suppose fixed assets are $420,000 and sales are projected to grow to $695,000. How much in new fixed assets is required to support this growth in sales?Data From
The most recent financial statements for Moose Tours, Inc., follow. Sales for 2017 are projected to grow by 15 percent. Interest expense will remain constant; the tax rate and the dividend payout
In Problem 19, suppose the firm was operating at only 90 percent capacity in 2017. What is EFN now?Data From Problem 19The most recent financial statements for Moose Tours, Inc., follow. Sales for
A convertible bond has a $1,000 face value and a conversion ratio of 45. What is the conversion price?
A company just sold a convertible bond at a par value of $1,000. If the conversion price is $58, what is the conversion ratio?
A convertible bond has a $1,000 face value and a conversion ratio of 36. If the stock price is $42, what is the conversion value?
A bond matures in 25 years but is callable in 10 years at 120. The call premium decreases by 2 percent of par per year. If the bond is called in 14 years, how much will you receive?
What is the price of a STRIPS with a maturity of 12 years, a face value of $10,000, and a yield to maturity of 5.2 percent?
The Federal Reserve announces an offering of Treasury bills with a face value of $60 billion. Noncompetitive bids are made for $8 billion, along with the following competitive bids:In a single-price
A municipal bond with a coupon rate of 2.7 percent has a yield to maturity of 3.9 percent. If the bond has 10 years to maturity, what is the price of the bond?
A municipal bond with a coupon rate of 6.2 percent sells for $4,920 and has seven years until maturity. What is the yield to maturity of the bond?
Assume a municipal bond has 18 years until maturity and sells for $5,640. It has a coupon rate of 5.70 percent and it can be called in 10 years. What is the yield to call if the call price is 110
A taxable corporate issue yields 6.5 percent. For an investor in a 35 percent tax bracket, what is the equivalent after tax yield?
A taxable issue yields 6.4 percent, and a similar municipal issue yields 4.7 percent. What is the critical marginal tax rate?
A Treasury issue is quoted at 102.28125 bid and 102.375 ask. What is the least you could pay to acquire a bond?
A Treasury bond with the longest maturity (30 years) has an ask price quoted at 99.4375. The coupon rate is 4.6 percent, paid semiannually. What is the yield to maturity of this bond?
Calculate the following:a. The current market conversion price for the Sands convertible bond.b. The expected one-year rate of return for the Sands convertible bond.c. The expected one-year rate of
A STRIPS traded on May 1, 2016, matures in 18 years on May 1, 2034. Assuming a 4.1 percent yield to maturity, what is the STRIPS price?
A STRIPS traded on November 1, 2016, matures in 12 years on November 1, 2028. The quoted STRIPS price is 62.75. What is its yield to maturity?
If the economy was in recession, what monetary policies might the Fed employ?
If you are a U.S. investor who believes the Australian dollar is going to appreciate, would that make you more or less likely to invest in Australian stocks?
The CPI for this year was reported at 154.65. If inflation was 2.2 percent, what must the CPI have been last year?
If nominal GDP was reported at $1,425.68 billion and inflation was 4.3 percent, what is the level of real GDP for the period?
Which one of the following propositions would be consistent with a supply-side view of fiscal policy?a. Higher marginal tax rates will help reduce the size of the budget deficit.b. A tax reduction
Assume there are 300 million people in the United States, 155 million of whom make up the labor force. If 10 million people are unemployed, what is the unemployment rate?
Why is inflation associated with lower values of real GDP and wages?
An analyst gathered the following year-end price level data for an economy:2010...................... 174.02014...................... 190.32015...................... 196.8What is the economy’s
Consider the following information on GDP and CPI for an economy over the last three years:Calculate nominal GDP growth for 2014 and 2015. GDP ($ billions) CPI 2013 125.4 105.3 2014 136.1 106.1 106.4
Using the information from Problem 10, calculate the inflation rates and approximate real GDP growth rates for 2014 and 2015.Data From Problem 10Consider the following information on GDP and CPI for
Suppose you want to convert U.S. dollars into Indian rupees. If you have $1,500,000 and the exchange rate is $0.0245 per rupee, how many rupees will you receive in the conversion?
You are going to value Lauryn’s Doll Co. using the FCF model. After consulting various sources, you find that Lauryn’s has a reported equity beta of 1.4, a debt-to-equity ratio of 0.3, and a tax
Johnson Products earned $2.80 per share last year and paid a $1.25 per share dividend. If ROE was 14 percent, what is the sustainable growth rate?
If a firm has an EV of $750 million and EBITDA of $165 million, what is its EV ratio?
Using your answers from Problems 3 through 5, value Lauryn’s Doll Co. assuming her FCF is expected to grow at a rate of 3 percent into perpetuity. Is this value the value of the equity?Data From
Referring to Questions 5 and 6, under what circumstances might a company choose not to pay dividends?
Lauryn’s Doll Co. had EBIT last year of $40 million, which is net of a depreciation expense of $4 million. In addition, Lauryn’s made $5 million in capital expenditures and increased net working
In addition to price-weighted and value-weighted indexes, an equally weighted index is one in which the index value is computed from the average rate of return of the stocks comprising the index.
In Problem 16, will your answers change if the Douglas McDonnell stock splits? Why or why not?Data From Problem 16Repeat Problem 14 if a value-weighted index is used. Assume the index is scaled by a
In Problem 14, suppose that Douglas McDonnell shareholders approve a 3-for-1 stock split on January 1, 2017. What is the new divisor for the index? Calculate the rate of return on the index for the
You are given the following information concerning two stocks that make up an index. What is the price-weighted return for the index? Price per Share Shares Beginning of Year End of Year Outstanding
Xytex Products just paid a dividend of $1.62 per share, and the stock currently sells for $28. If the discount rate is 10 percent, what is the dividend growth rate?
Star Light & Power increases its dividend 3.8 percent per year every year. This utility is valued using a discount rate of 9 percent, and the stock currently sells for $38 per share. If you buy
If a firm has no dividends and has negative earnings, which valuation models are appropriate?
Using your answer to Problem 3, calculate the appropriate discount rate assuming a risk-free rate of 4 percent and a market risk premium of 7 percent.Data From Problem 3You are going to value
Why do we need to convert the typical equity beta to value a firm using FCF?
What is the basic principle behind dividend discount models?
Escambia Beach Systems is offering 1,000 shares in a Dutch auction IPO. The following bids have been received:How much will Bidder A have to spend to purchase all of the shares that have been
Suppose the following three defense stocks are to be combined into a stock index in January 2016 (perhaps a portfolio manager believes these stocks are an appropriate benchmark for his or her
You construct a price-weighted index of 40 stocks. At the beginning of the day, the index is 8,465.52. During the day, 39 stock prices remain the same, and one stock price increases $5.00. At the end
In October 2015, Goldman Sachs was the highest priced stock in the DJIA and Cisco was the lowest. The closing price for Goldman Sachs on October 27, 2015, was $186.31, and the closing price for Cisco
On October 28, 2015, the DJIA opened at 17,581.43. The divisor at that time was 0.14967727343. Suppose on this day the prices for 29 of the stocks remained unchanged and one stock increased $5.00.
Look back at Problem 1. Assume that Able undergoes a 1-for-2 reverse stock split. What is the new divisor?Data From Problem 1Able, Baker, and Charlie are the only three stocks in an index. The stocks
There are basically four factors that differentiate stock market indexes. What are they? Comment on each.
In Problem 5, assume the value-weighted index level was 408.16 at the beginning of the year. What is the index level at the end of the year?Data From Problem 5Calculate the index return for the
With regard to the NASDAQ, what are inside quotes?
Suppose Tesla is currently trading at $200. You think that if it reaches $210, it will continue to climb, so you want to buy it if and when it gets there. Should you submit a limit order to buy at
Calculate the index return for the information in Problem 4 using a value-weighted index.Data From Problem 4You are given the following information concerning two stocks that make up an index. What
Suppose Microsoft is currently trading at $50. You want to sell it if it reaches $55. What type of order should you submit?
Assume that when Mr. White and Ms. Plain entered their buy order for GHT, the price of the stock increased to $25.45. This is the price at which the trade was executed. Given this impact, the
In the example given by Ms. Plain, what was the spread for the GHT stock just prior to execution?a. $0.06b. $0.02c. $0.04George White, CFA, and Elizabeth Plain, CFA, manage an account for Briggs and
In Problem 1, assume that Baker undergoes a 4-for-1 stock split. What is the new divisor now?Data From Problem 1Able, Baker, and Charlie are the only three stocks in an index. The stocks sell for
Which of the following statements regarding market orders is most accurate? Market orders:a. Have price uncertainty, and limit orders have execution uncertainty.b. Have execution uncertainty, and
Able, Baker, and Charlie are the only three stocks in an index. The stocks sell for $93, $312, and $78, respectively. If Baker undergoes a 2-for-1 stock split, what is the new divisor for the
In your local Chevrolet retailer, both a primary and a secondary market are in action. Explain. Is the Chevy retailer a dealer or a broker?
The Bruin Stock Fund sells Class A shares that have a front-end load of 5.75 percent, a 12b-1 fee of 0.23 percent, and other fees of 0.73 percent. There are also Class B shares with a 5 percent CDSC
You purchased 2,000 shares in the New Pacific Growth Fund on January 2, 2016, at an offering price of $47.10 per share. The front-end load for this fund is 5 percent, and the back-end load for
In Problem 11, suppose the annual operating expense ratio for the mutual fund is 0.75 percent and the management fee is 0.45 percent. How much money did the fund’s management earn during the year?
How does a high-water mark constrain hedge fund managers from earning excess performance management fees?
A closed-end fund has total assets of $240 million and liabilities of $110,000. Currently, 11 million shares are outstanding. What is the NAV of the fund? If the shares currently sell for $19.25,
Refer to Figure 4.5. Look at the three-year performance for the funds listed. Why do you suppose there are so few poor performers?Figure 4.5 Mutual Funds: Closing Quotes GO TO:
A mutual fund sold $36 million of assets during the year and purchased $32 million in assets. If the average daily assets of the fund were $96 million, what was the fund turnover?
In Problem 6, assume the fund is sold with a 6.25 percent front-end load. What is the offering price of the fund?Data From Problem 6Suppose the fund in Problem 5 has liabilities of $110,000. What is
Suppose the fund in Problem 5 has liabilities of $110,000. What is the NAV of the fund now?Data From Problem 5An open-end mutual fund has the following stocks: Stock Shares Stock Price 6,000 $98
An open-end mutual fund has the following stocks:If there are 50,000 shares of the mutual fund, what is the NAV? Stock Shares Stock Price 6,000 $98 33,000 19 4,600 89 D 82,500 12
If Ms. Harlan is truly concerned about benchmarks, she should avoid which of her suggested investments?a. None of themb. Kelly Tool and Diec. Hedge funds
Which of Ms. Harlan’s responses is most likely to make Mr. Phillips consider her a bad candidate for investing in hedge funds?a. I pay a lot of attention to expense and return data from my
The Emerging Growth and Equity Fund is a “low-load” fund. The current offer price quotation for this mutual fund is $15.95, and the front-end load is 2.0 percent. What is the NAV? If there are

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