adjust rapidly to new information UI the efficient markets hypothesis J. future stock returns cannot be predicted from any information that is publicly aaese C. corporate insiders should have no better investment performance than allowed to trade freely D. A andB E. B and C other investors even if f-A nswer Questions (3 questions, 15 points, suggested time 15 minutes) wer each question in two to three sentences 5 points) When is a company's value of growth (PVGO) a negative mumber (ie, when does higher gowh result in a lower stock price)? (5 points) A stock's forward P/E ratio is higher than the average P/E ofall of the companies in its industry Does this mean that the stock is over-valued (priced too high)? Briefly explain your answer. In discussing a mutual fund's performance, what is meant by the term "turnover"? Is higher or lower turnover better for mutual fund investors? Explain why. blems (6 questions, 55 points, suggested time 55 minutes) full credit on the problems, show all work and label answers clearly. Show in detail how you wers: show the formulas you use and your arrive at yous document assumptions. (12 points) Your predictions for the returns on two stocks are summarized in the table below: Return on Stock A Scenario Probability Stock B (25) .09 Recessiorn Slow growth Moderate growth High growth So 11 Standard deviation 250 .050 Beta 1.40 he covariance of the two stocks is .01 and their correlation coefficient is .80. If you invest 40% of your rtfolio in stock A and 60% of your money in stock B, what will be your portfolio's a. Expected return? b. Standard deviation? C. Beta? er's margin requirements for short sales are 60% initial margin and 40% maintenance margin. a. How much will you need to deposit in your margin account when you do the short sale? b. On a per-share basis, what will your dollar profitloss be if the stock's price rises to $75 oints) A stock is currently selling for $60 a share. You decide to short-sell 300 shares of the stock. Your (This is the same as asking a Hou far can the stock's price rise before you get a margin call? tly cqual to the margin required by your broker.) of 2018.. The company's tax rate is 20%. Capital expenditures were 2018. Depreciarion expense was $21 million in 2017 and $2 $25 million in 2017 and S10 millon million in 2018. For 2018 what was the company's Free cash flow to the firm (FCFF Free cash flow to equity (FCFEyn a. b. 22 (15 points has experienced 20% growth in earnings and dividends per year overthe last neral , and then to 10% in the third year out and g% in company 's dividend growth rate will be 3% for the foreseeable s) A company e years. You believe that the company's that its growth rate will fall to 15% in the second year out. the f to grow at a 20% rate earnings and dividends will continue year out After tdividend ofon After that you future. The is 8%, the company's WACC is 5%. company's stock? Based on CAPMshaehlden, required return to pay for the juistpaid a dividend of S4 00 ashare Under these 23. (5 points) Going forward, you expect market will be 11%. Your estimates of heir standard devices at 2% Fund A to earn a return of 8%, Fund B to earn a return of 10% and you think the return on the overall stock 0% for Fund A, 25% for Fund B and 20% for the overall stock m arket. The risk-free interest rate is on a risk-adjusted basisthe epected performance of Fund A and B relative to each other and the market 4. (S points) For elected return is 10% and its standard deviation is 20%, Risk-free investment only two investments you are willing to cosder are the S&P500mtalfund reasuries, how would you allocate your money betweem these two investments if you wanted your expected return of 8% (ie what percent or your money would you invest in the SAP risky investment, you want to be well diversified, so you choose an S&P 500 index mutual fund. Its (Treasuries) yield 2%, ir the and U.S. portfolio to have ex 500 fund and what per cent would you invest in Treasuries)? According to the B. future C. insiders should have no bete allowed to trade freely D. A and B E. Band C Brief-Answer Questions (3 questioss, 15 points. Answer each question in two to thess sentences saggested time 15 minutes) 16. (5 points) When a is a company's value of growth (PVGO) a negative number (ie, result in a lower stock price)? when does higher growth 17. (5 points) A stock's forward PE ratio is higher than the average PE: of all of the companies a its Does this mean that the stock is over-valued (priced too high? Briefly esplain your anseer 18. In discussing a mutual fund's performance, what is meant by the ter tunover" Is higher or lower turnover better for mutual fund investors? Explain why. Problems (6 questions, 55 points, suggested time 55 minstes) For full credit on the problenss, show all work and label answers ckearly. Show in detail how you arive at your answers: show the formulas you use and your step-by-siop.calsulations document assumptioes 19. (12 points) Your predictions for the returns on two socks are summarined in the table below: Probability steck A (25)09 Slow growth Moderate growth High growch 25 1 .20 Standard deviation 250 050 60 Beta 1.40 The covariance of the two stocks is .01 and their correlation coefficient is so. If you invest 40% of you portfolio in stock A and 60% of your money in stock B, what will be your portfolio's a Expected return? b. Standard deviation? c. Beta? broker's margin requirements for short sales are 60% initial margin and 40% maintenance margin. a. How much will you need to deposit in your margin account when you do the short sale? b. On a per-share basis, what will your dollar profit/loss be if the stock's price rises to $75? 20. (8 points) A stock is currently selling for $60 a share. You decide to short-sell 300 shares of the stock. Y c. How far can the stock's price rise before you get a margin call? (This is the same as aski margin would be exactly equal to the margin required by your broker.) 2 (10 points) A company reported net income of $80 million for the year just ended (2o18). The comp At December 31, 2017 the market va the company's outstanding bonds was $400 million; at December 31, 2018, the market value bonds was $430 million. The company paid $20 million of interest on its bonds in 2018 anount is before-tax.) Net working capital was $100 million at the end of 2017 and $112 million a financed by debt (long-term bonds) and partly Page 3 of 6