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3. What is the difference between term structure of interest rates and yield curve?

4. What are the factors that affect bond yields?

5. Differentiate between callable and convertible bonds.

6. Briefly explain the following

a. Yield to maturity

b. Coupon rate

c. Par value

d. The relationship between the coupon rate and the yield to maturity (YTM) and its implications for bond pricing.

7. What is the price of a 20 year zero-coupon bond with a face value of $1000 and the market required rate of return of 9%?

8. Find the price of a $1,000 par value bond that matures in 10 years, if it pays interest annually, based on a 6% coupon rate, and if

the market rate of interest is 5%

9. Consider a bond with a coupon rate of 10% and coupon is paid annually. The par value is $1000 and the bond has 5 years to

maturity. The yield to maturity is 11%. What is the value of the bond?

10. Suppose you are reviewing a bond that pays a 10% semi-annual coupon and a face value of GH¢1000. There are 20 years to

maturity, and the yield to maturity is 8%. What is the price of this bond?

11. YAGSHS bonds are currently priced at gh952, they pay annual coupons 10% and are set to mature in 5 years. If the required rate

of return on the bonds is 12%, what is the par value of the bond?

12. A bond that has a par value of gh1000 is priced at gh903.7351 and matures in 5 years with a market yield of 9%. What is the

coupon rate?

13. Assume that an 8% coupon bond with a 30 year maturity has a par value of GHC 1000. Assuming coupon payments are made

twice a year;

Determine the value of the bond to an investor whose required rate of return is 10 percent.

Should the investor purchase this bond if the current market price of the bond on the GSE is GHC 900?

14. Assume you purchased an 8%, twenty-year bond with $1,000 par value, annual payment bond priced at $1,012.50 when it has

twelve years remaining to maturity. Compute the approximate yield to maturity.

15. Bonds of Akatakyie Corporation has a par value of GHC 1000 and sells for GHC 960, mature in five years, and have a 7% annual

coupon rate paid semi-annually. Calculate the current yield and approximate yield to maturity for this bond.

16. A taxable bond has a yield of 8% and a municipal (not taxable) bond has a yield of 6%. If you are in a 40% tax bracket, which

bond do you prefer?

17. Holy Child Girls’ Senior High School bond has 8 years to maturity and a $1000 face value is selling at $980 today. The bond pays

semi-annual coupons at an annual rate of 6.4%. What would be the price of the bond two years from now if the yield to maturity

becomes 6.5%?

18. A zero coupon bond has 12 years to maturity, a face value of $1000, and currently sells for $300 in the market. What is the yield

to maturity on the bond?

19. A bond with a par value $1000 and a coupon rate of 8% is selling at a price of $970. What is the current yield on the bond?

20. What is the price of a 3-year Eurobond with 5% annual coupons, a face value of $1,000, and the following spot rates: r1 = 4.5%,

r2 = 5.5%, and r3 = 6%?

21. If the real rate of interest is 5% and the expected inflation is 3% what is the nominal return? (fisher equation)

22. Prempeh College is considering issuing some bonds to finance its next phase of business expansion. After several consultations

with their financial consultant, they decide to offer a 10-year 10% coupon bond with a face value of Ghȼ1000 that is priced at

Ghȼ925. What yield To maturity (YTM) is the firm faced with?

23. Find the yield to call on a semiannual coupon bond with a face value of $1000, a 10% coupon rate and 15 years remaining until

maturity given that the bond price is $1175 and it can be called 5 years from now at a call price of $1100.

24. What is the price of a bond with a par value of $1000, a 10% coupon rate with a drop in YTM to 7% in 5 years ahead, 15 years

remaining until maturity given that the bond price is $1175 and it can be called 5 years from now at a call price of $1200?

0 -200

1 50

2 60

3 70

4 120

Calculate the payback, the discounted payback, the PI, the NPV and IRR at a required return of 10 percent. State two

2. Consider a Dam Project, which requires an investment of GHC1billion initially, with subsequent cash flows as follows:

YEAR CASHFLOWS(GHC

Millions)

1 200

2 300

3 400

4 -200

5 I

What are the net present value, payback period, discounted payback period and the IRR of the Dam Project if the required of

3. A project costs GHC 2,000,000 and yields annually a profit of GHC 300,000 after depreciation at 12.5% but before tax at

4. You are looking at a three-year project with a projected net income of GHC2000 in Year 1, GHC4000 in Year 2, and

GHC6000 in Year 3. The cost is GHC12, 000 which will be depreciated straight-line to zero over the three-year life of the

5. Ama buys a sewing machine for GHC 500 and generates an income from the machine. In the 1st year she receives GHC 100, GHC 120 in the 2nd year

and GHC 140 in 3rd year, GHC 150 in 4th year and GHC0020200 in the 5th year. What is the payback period for this machine?

Year 0 1 2 3 4

7. An investment which cost GHC 50, 000 pays GHC 15, 000 from the 1st through to the 5th year. Determine the NPV of this investment if the discount rate

is 12% p.a. should the investor go ahead with this investment or otherwise? Find the IRR of the project.

8. Your company has to choose between two mutually exclusive investments A and B, each of which has a life of four years. Machine A and B cost GHC

50,000 and B GHC45, 000 respectively. The year-end cash flows would be as follows:

1 25000 12000 -

3 20000 24000 -

4 10000 35000 -

At the end of the fourth year, the scrap value of machine A is estimated to be GHC 5000 and that of machine B is GHC 4000. Using a cost of capital of

14% for A and 15% for B, and a net present value criterion, which machine would you recommend to our chief executive officer?

9. You want to venture into a project that will cost GH 50,000 to set up and will generate GHs 8500 per annum indefinitely. If cost of capital is 12% , should

10. You have been consulted by a client to help make an investment decision. Information gathered reveals that the project will generate the following cash

flows from years 1-5 respectively: GHs 20,000; Ghs 34,000; Ghs 43,000; Ghs 32,000; Ghs 23,000. Cost of capital is 23%. If the client wants to make at

least Ghs 25,000 as net present value from the project, what is the maximum amount that can be invested in the project?

11. Tobinco Pharmacy is considering a new malaria drug that has a total life span of 20 years, seven (7) of which will be used in its pre-trial and testing and the

remaining thirteen (13) will be the revenue generating years. Phase I will take two years and cost Ghs 35 million. Phase II will take two years and cost Ghs

40.4 million. Phase III will take three years and cost Ghs 500 million. All costs for the individual phases will be made at the beginning of each phase. The

product will then be launched at the beginning of the 8th year for another Ghs 405 million. Cash inflows of Ghs 843 million per year are expected. Since

they do not have the expertise internally, you have been consulted to help management in arriving at an appropriate decision. Your terms of reference are

to determine the viability of this project using the following techniques (the firm has a cost of capital of 20%). Find net present value, profitability index,

discounted payback, payback period.

12. A firm whose cost of capital is 10% is considering two mutually exclusive projects X and Y this exclude a depreciation of GHC 2000 and 1000

GHC GHC

0 70000 70000

1 10000 50000

2 20000 40000

3 30000 20000

4 45000 10000

5 60000 10000

Compute the Net Present Value, Profitability Index, and the Internal Rate of Return of the two projects and make decision.

13. Machine A costs GHC100, 000, payable immediately. Machine B costs GHC120, 000, half payable immediately and half payable in one year’s time.

1 20000 -

2 60000 60000

3 40000 60000

4 30000 80000

5 20000 -

With 7% cost of capital, which machine should be selected? Use NPV, payback and discounted payback period.

14. A company is considering the replacement of its existing machine which is obsolete and unable to meet the rapidly rising demand for its product. The

company is faced with two alternatives: (i) to buy Machin e A which is similar to the existing machine or (ii) to go in for Machine B which is more

expensive and has much greater capacity. The cash flows at the present level of operations under the two alternatives are as follows:

0 1 2 3 4 5

Machine A -25 - 5 20 14 14

Machine B -40 10 14 16 17 15

The company’s cost of capital is 10%. The finance manager tries to evaluate the machines by calculating the following: Net Present Value, Profitability Index,

At the end of his calculations, however, the finance manager is unable to make up his mind as to which machine to recommend. You are required to make these

calculation and in the light thereof to advise the finance manager about the proposed investment.

15. Assume a company want to invest in a new machine that cost GHC 400,000 it will be depreciated using straight-line method

over 4 years and can be salvaged for GHC10, 000 at the end of the estimated life of the machine. The working capital would

increase by GHC20, 000 during the life of the new program. If the cost of capital is 12% and the tax rate is 30%, should the

company invest in the machine. The following table shows the revenues and operating expenses.

year 1 2 3 4

1. You bought a bond for GH¢950 one year ago. You have received two coupons of GH¢30 each. You can sell the bond for

GH¢975 today. What is your total dollar return?

2. You bought a stock for GH¢35, and you received dividends of GH¢1.25. The stock is now selling for GH¢40. What is your

dollar return? What is your percentage return?

3. If Big Oil stock over a large number of years return will be 10% in a third of the years, 10% in a further third, and 30% in the

remaining years. What is the arithmetic average of these yearly returns?

4. Your stock investments return 8%, 12%, and -4% in consecutive years. What is the geometric return? What is the sample

standard deviation of the above returns?

5. State and explain the three forms of market efficiency?

6. What is the difference between systematic and unsystematic risk and explain why one of them is rewarded with risk

premium. Also, explain the factors that affect a stock’s expected return.

7. Suppose you have predicted the following returns for stocks A and B in three possible states of the economy.

State Probability Stock A Stock B

Boom 0.3 15 25

Normal 0.5 10 20

recession 0.2 2 1

What are the variance and standard deviation for each stock?

What is the covariance and correlation?

8. Consider the following information

State probability ABC Incorp. (%)

Boom .25 15

Normal .50 8

Slowdown ? 4

Recession .10 -3

What is the variance?

What is the standard deviation?

9. You invest $25,000 in T-bills and $50,000 in the market portfolio. If the risk-free rate equals 2% and the expected market

risk premium is 6%, what is the expected return on your portfolio?

10. Malta Guinness Inc. has a beta of 0.80. The risk-free rate is 4 percent and the expected rate of return on the market portfolio

is 13.5 percent. Using the CAPM, Malta Guinness Inc. is expected return on equity is?

11. Suppose you have GH¢15,000 to invest and you have purchased securities in the following amounts. What are your portfolio

weights in each security? What is the expected return for the portfolio

Security Portfolio Returns (%)

DCLK 2000 19.69

KO 3000 5.25

INTC 4000 16.65

KEI 6000 18.24

state probability X (%) Z

Boom .25 15 10

Normal .60 10 9

recession .15 5 10

What are the expected return and standard deviation for a portfolio with an investment of GH¢6,000 in asset X and

GH¢4,000 in asset Z?

13. Consider the betas for each of the assets given earlier. If the risk-free rate is 4.15% and the market risk premium is 8.5%,

what is the expected return for each?

security Beta

DCLK 2.685

KO 0.195

INTC 2.161

KEI 2.434

14. You have decided to invest all your wealth in two mutual funds: A and B. Their returns are 15% and 11% for A and B

respectively. You want your total portfolio to yield a return of 12%. What proportions of your wealth should you invest in A

and B?

15. You can form a portfolio of two assets, A and B, whose returns have the following characteristics

stock E(r) SD correlation

A 0.10 0.20 0.5

B 0.15 0.40

If you demand an expected return of 12%, what are the portfolio weights? What is the portfolio’s standard deviation?

16. You are a consultant to a large manufacturing corporation that is considering a project with the following net after-tax cash

flows (in millions of cedis):

Years from After-tax cash flow

now

0 (40)

1-10 15

The project’s beta is 1.8. Assuming that rf = 8% and E(rm) = 16%, what is the net present value of the project?

Use the table to calculate for the beta

Year Market return DKM return

1 -8 -11

2 4 8

3 12 19

4 -6 -13

5 2 3

6 8 6

17. Which one of the following stocks is correctly priced if the risk-free rate of return is 3.7 percent and the market risk premium

is 8.8 percent?

18. According to CAPM, the expected return on a risky asset depends on three components.

Describe each component and explain its role in determining expected return

19. What is the expected return and variance on a portfolio which is invested 25 percent in stock A, 55 percent in stock B, and

the remainder in stock C?

20. A stock has a beta of 1.2 and an expected return of 17 percent. A risk-free asset currently earns 5.1 percent. The beta of a

portfolio comprised of these two assets is 0.85. What percentage of the portfolio is invested in the stock?

21. The following information relates to Baba ltd’s pay-offs for next year:

probability Dividend(Ghc) Stock price (Ghc)

Boom .3 5 195

Normal economy .5 2 100

recession .2 0 0

The company goes out of business if a recession occurs. Suppose the stock is selling for Ghc 90 today: find

a. Expected rate of return to Baba’s shareholders

b. Standard deviation of Baba’s returns

c. With the information provided above on Mansa ltd, compute the following

i. The expected return and standard deviation of a portfolio half invested in Mansa and half in Baba

ii. Show that the portfolio standard deviation is lower than the individual stocks’ and explain why this happens

1. If a preferred stock pays dividends of GHC1 forever and investors have a required return of 15% with a semi-annual compounding.

What will be the value of this stock?

2. What would you pay for a share of ABC Corporation stock today if the dividend one year from now will be GHC3 per share and

you can sell the stock (after you receive the dividend) for GHC90 a year from today. Assume your required return is 15%.

3. The dividend on Simple Motors common stock will be GHC3 in 1 year, GHC4.25 in 2 years, and GHC6 in 3 years. You can sell the

stock, after you receive the dividend, for GHC100 at the end of 3 years. If you require a 12% return on your investment, how much

would you be willing to pay for a share of this stock today?

4. A stock that pays a constant dividend of GHC1.50 forever currently sells for GHC10.71. What is the required rate of return?

5. Suppose you are thinking of purchasing the stock of Fan milk Ltd. You expect it to pay a GH¢2 dividend in one year, and you

believe that you can sell the stock for GH¢14 at that time. If you require a return of 20% on investments of this risk, what is the

maximum you would be willing to pay?

Now, what if you decide to hold the stock for two years? In addition to the dividend in one year, you expect a dividend of GH¢2.20 in

two years and a stock price of GH¢15 at the end of the year. Now how much would you be willing to pay?

6. KSB corp. industries have just paid its annual dividend of GHC3 per share. The dividend is expected to grow at a constant rate of

8% indefinitely. The beta of KSB corp. is 1.5, the risk free rate is 6% and the market premium is 8%. What should the price of this

stock be?

7. Suppose Big Ben, Inc., just paid a dividend of GH¢0.50 per share. It is expected to increase its dividend by 4% per year. If the

market requires a return of 10% on assets of this risk, how much should the stock be selling for?

8. Roger Miller Company is expected to pay a dividend of GH¢4 next period, and dividends are expected to grow at 6% per year. The

required return is 16%. What is the current price and what is the price expected to be in year 4?

9. What is the value of a stock that is expected to pay a constant dividend of GH¢2 per year if the required return is 15%? What if the

company starts increasing dividends by 3% per year, beginning with the next dividend? The required return stays at 15%.

10. Suppose a firm is expected to increase dividends by 20% in one year and by 15% in

two years. After that, dividends will increase at a rate of 5% per year indefinitely. If the last

dividend was GH¢1 and the required return is 20%, what is the price of the stock?

11. Suppose a firm’s stock is selling for GH¢10.50. It just paid a GH¢1 dividend and dividends are expected to grow at 5% per year.

What is the required return? What is the dividend yield? What is the capital gains yield

12. You observe a stock price of GH¢18.75. You expect a dividend growth rate of 5%, and the most recent dividend was GH¢1.50.

What is the required return?

13. The stock of GT Bank currently sells for C90 per share. The firm has a constant dividend growth rate of 6% and just paid a

dividend of GHC5.09. You are unsure about the stock’s required rate of return. What will the stock sell for one year from now?

14. A company pays a dividend with a constant growth of 20% for three years and after the three years dividend will grow at 5%

forever. The company currently pays a dividend of GHC150 and a required rate of return of 15%. Find the price of the stock?

15. MM Ltd. has started the production of a new vaccine against a fatal sexually transmitted disease. The popularity of the product is

such that it expects to pay its shareholders dividends which grow at 20% a year for the first 3 years. After 3 years, most of the

population would have been inoculated and dividends are expected to grow at a steady 5% a year forever. The current annual dividend

is GHC 150 and investors require a return of 15%. What should the price of MM be? Would you buy this stock if the current mar ket

price of MM on the exchange is GHC 3000?

16. Company X is expected to pay and end-of-year dividend of Ghȼ10 per share. Its price is expected to be Ghȼ110 a share. If the

market rate is 10%, what is the price of the stock?

17. Company Y does not plow back any of its earnings and is expected to produce a level dividend stream of Ghȼ5 per share. If the

current stock price is Ghȼ40, what is the required rate of return on company Y’s stock?

18. Company Z’s earnings and dividend are expected to grow indefinitely at 5% a year. If next year’s dividend is Ghȼ10 and the

required rate of return is 8%, what is the current price of the stock?

19. Renew it Incor. is preparing to pay its first dividend. It is going to pay GHS 0.45, GHS 0.60, and GHS 1 a share over the next three

years, respectively. After that, the company has stated that the annual dividend will be GHS 1.25 per share indefinitely. What is this

stock worth to you per share if you demand a 10.8% rate of return on stocks of this type?

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