1. A professional hockey player is offered a 5-year contract in which the player receives a $6 million signing bonus today and a quarterly salary starting at $1.2 million paid at the end of the first quarter. The salary grows at 1.2% every quarter. If the discount rate is 6.5%, reported as an annual percentage rate with daily compounding, what is the value of this contract to the player? Assume there are 12 months in a year, each with 30 days.

a. Between $25.0 million and $25.5 million

b. Between $25.5 million and $26.0 million

c. Between $26.0 million and $26.5 million

d. Between $26.5 million and $27.0 million

e. Between $27.0 million and $27.5 million

f. Between $27.5 million and $28.0 million

g. Between $28.0 million and $28.5 million

h. Between $28.5 million and $29.0 million

i. Between $29.0 million and $29.5 million

j. Between $29.5 million and $30.0 million

1. A zero coupon bond with 3 years to maturity and a face value of $1,000 is currently trading at $987.10. A portfolio manager from PIMCO estimates a fair discount rate for the bond of 0.49%, expressed as an annual percentage rate and assuming semi-annual compounding. What should the portfolio manager do?

a. Hold the zero coupon bond, as the market is correctly valuing it.

b. Buy the zero coupon bond, as the market is undervaluing it.

c. Sell the zero coupon bond, as the market is overvaluing it.

d. Since the price is below face value, the bond is trading at a discount. The portfolio manager should sell.

e. Since the price is below face value, the bond is trading at a discount. The portfolio manager should buy.

f. Since the coupon rate is essentially zero, the portfolio manager should sell.

g. Since the coupon rate is essentially zero, the portfolio manager should buy.

h. Since the price is above face value, the bond is trading at a discount. The portfolio manager should sell.

i. Since the price is above face value, the bond is trading at a discount. The portfolio manager should buy.

j. Since the price is below face value, the bond is trading at a premium. The portfolio manager should buy.

1. A $1,000 face value semiannual coupon bond with a 3.5% coupon, expressed as an annual percentage rate, and 10 years to maturity is currently priced at $1,050. Over the next 6 months, the bond has a holding period return of -15% (which includes the first coupon payment). What is the yield to maturity of the bond 6 months from now (just after the first coupon payment), expressed as an annual percentage rate with semiannual compounding?

a. 4.8% to 4.9%

b. 4.9% to 5.0%

c. 5.0% to 5.1%

d. 5.1% to 5.2%

e. 5.2% to 5.3%

f. 5.3% to 5.4%

g. 5.4% to 5.5%

h. 5.5% to 5.6%

i. 5.6% to 5.7%

j. 5.7% to 5.8%

1. Suppose that today you buy an 8% coupon bond at $1,050. The coupon rate of the bond is reported as an annual percentage rate and the par value is $1,000. The bond has quarterly coupon payments. If you sell the bond 1.5 years from now for $1,320 (just after a coupon payment), what will be the holding period yield on this investment expressed on a quarterly basis?

a. Holding period yield is between 1.0% and 1.5% per quarter.

b. Holding period yield is between 1.5% and 2.0% per quarter.

c. Holding period yield is between 2.0% and 2.5% per quarter.

d. Holding period yield is between 2.5% and 3.0% per quarter.

e. Holding period yield is between 3.0% and 3.5% per quarter.

f. Holding period yield is between 3.5% and 4.0% per quarter.

g. Holding period yield is between 4.0% and 4.5% per quarter.

h. Holding period yield is between 5.0% and 5.5% per quarter.

i. Holding period yield is between 5.5% and 6.0% per quarter.

j. Holding period yield is between 6.0% and 6.5% per quarter.

1. In forecast year 1, Johnson & Johnson will have annual dividends of $2.62, after which dividends will grow at 5.60% per year indefinitely. Your estimates of net profit after tax over forecast years 1-3 are $1,186 million, $1,298 million, and $1,471 million, respectively. Johnson & Johnson has 263 million shares outstanding. What is your estimate of the dividend payout ratio in forecast year 3?

a. 22% to 26%

b. 26% to 30%

c. 30% to 34%

d. 34% to 38%

e. 38% to 42%

f. 42% to 46%

g. 46% to 50%

h. 50% to 54%

i. 54% to 58%

j. 58% to 62%

1. Earnings per share estimates for the next 5 years for Apple are $4.44 in year 1, $4.65 in year 2, $5.02 in year 3, $5.56 in year 4, and $6.10 in year 5. Apple is expected to pay out 19% of its earnings as dividends in year 1 and to reduce the payout ratio by 1% per year for the next 4 years (so 18% in year 2, down to 15% in year 5). The current price of Apple stock is $126.21 and an appropriate discount rate (cost of equity) is 8%. Suppose that we value Apple stock using the following approach. We will use the dividend discount model. But in estimating the terminal value at the end of year 5, instead of assuming that dividends grow at a constant growth rate in perpetuity, the terminal value is estimated as a multiple of year 5 earnings per share. What terminal price-to-earnings per share multiple would justify the current stock price?

a. 27 to 28

b. 28 to 29

c. 29 to 30

d. 30 to 31

e. 31 to 32

f. 32 to 33

g. 33 to 34

h. 34 to 35

i. 35 to 36

j. 36 to 37

1. Suppose that the average return on the S&P 500 index over the last 20 years has been 10.8% with a standard deviation of 20.9%. Suppose that returns on the S&P 500 are normally distributed (they aren't in reality but assume that for the question). What is the probability that an investment in the S&P 500 will earn a return less than -15% next year?

a. 2% to 4%

b. 4% to 6%

c. 6% to 8%

d. 8% to 10%

e. 10% to 12%

f. 12% to 14%

g. 14% to 16%

h. 16% to 18%

i. 18% to 20%

j. 20% to 22%

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