FINAL

CONSOLIDATED PROBLEMS 2013 SPRING

1. What is the beta of a portfolio comprised of the following securities?

2. Explain which one is easier to find the required return on a publicly traded stock or a publicly traded
bond? And explain why.

3. QFC paid a $1.80 per share annual dividend last month. The company is planning on paying $2.00, $2.50,
$2.75, and $3.00 a share over the next four years, respectively. After that the dividend will be constant at
$3.20 per share per year. What is the market price of this stock if the market rate of return is 13 percent?

4. Over the past five years, your favorite stock produced returns of 12 percent, 26 percent, -10 percent, 4
percent, and 13 percent. What is the probability that an investor in this stock will NOT lose more than 17.5
percent nor earn more than 35.5 percent in any one given year?

5. Lotus Inc. pays no dividend at the present time. The company plans to start paying an annual dividend in
the amount of $0.20 a share for three years commencing three years from today. After that time, the
company plans on paying a constant $1 a share dividend indefinitely. How much are you willing to pay to
buy a share of this stock if your required return is 15 percent?

6. Today, you sold 100 shares of THY stock. Your total return on these shares is 10.5 percent. You
purchased the shares one year ago at a price of $25.75 a share. You have received a total of $110 in
dividends over the course of the year. What is your capital gains yield on this investment?

7. A stock had the following prices and dividends. What is the geometric average return on this stock?

8. What are the arithmetic and geometric average returns for a stock with annual returns of 26 percent, 4
percent, -30 percent, 43 percent, and 7 percent?

9. What is the amount of the excess return on a risk-free security if the risk-free rate is 4 percent and the
market rate of return is 11 percent?

10. Six months ago, you purchased a stock at a price of $31.88 a share. Today, you sold those shares for
$37.51 a share. During the past six months, you have received dividends totaling $0.46 a share while
inflation has averaged 3.3 percent. What is your approximate real rate of return on this investment?

QU Finance | http://fi.qu.edu.az/~faliyev
 FINAL
CONSOLIDATED PROBLEMS 2013 SPRING
11. You have a portfolio consisting solely of stock A and stock B. The portfolio has an expected return of
10.8 percent. Stock A has an expected return of 13 percent while stock B is expected to return 8 percent.
What is the portfolio weight of stock A?

12. You purchased 200 shares of qFc’s stock for $38.12 a share. You have received a total of $290 in
dividends and $8,130 in proceeds from selling the shares. What is your capital gains yield on this stock?

13. Your firm currently sells 500 units a month at a price of $75 a unit. You think you can increase your
sales by an additional 130 units if you switch to a net 30 credit policy. The monthly interest rate is .4 percent
and your variable cost per unit is $35. What is the incremental cash inflow from the proposed credit policy
switch?

14. What is the expected return on a portfolio comprised of $7,500 in stock M and $2,500 in stock N if the
economy enjoys a boom period?

15. What are the components of the total rate of return on a share of stock? Briefly explain each component.

16. The rate of return on the common stock of ACME is expected to be 15 percent in a boom economy, 12
percent in a normal economy, and only 7 percent in a recessionary economy. The probabilities of these
economic states are 15 percent for a boom, 80 percent for a normal economy, and 5 percent for a recession.
What is the variance of the returns on this common stock?

17. Your portfolio has a beta of 1.24. The portfolio consists of 10 percent U.S. Treasury bills, 55 percent in
stock A, and 35 percent in stock B. Stock A has a risk-level equivalent to that of the overall market. What is
the beta of stock B?

18. You are a broker and have been instructed to place an order for a client to purchase 50 shares of every
IPO that comes to market. The next two IPOs are each priced at $30 a share and will begin trading on the
same day. The client is allocated 15 shares of IPO A and 50 shares of IPO B. At the end of the first day of
trading, IPO A was selling for $37 a share and IPO B was selling for $26 a share. What is the client's total
profit or loss on these two IPOs as of the end of the first day of trading?

19. What do you think, can the initial cash flow at time zero for a project ever be a positive value? If yes,
give an example. If no, explain why not.

20. A 15-year, 6 percent coupon bond pays interest annually. The bond has a face value of $1,000. What is
the change in the price of this bond if the market yield to maturity rises to 6.5 percent from the current rate
of 6.25 percent?

QU Finance | http://fi.qu.edu.az/~faliyev