HELP! 12 questions in BOOK 6 SAMPLE exam 1 Afternoon

1. in three years an investor deposits the first of right 1000 payments into a special fund. the fund will earn interest of 5% per year until the end of fifth year, there after all money accumulated in the fund will earn a reduced interest rate of 4% compounded annually until the end of the tenth year, how much money will the investor have in the fund at the end of ten years assuming no withdrawals. A 8,416.32 B 8,872.93 C 9,251.82 D 9,549.11 2. an analyst estimates a stock has 40% chance of earning 10%, a 40% chances of earning 12.5%, and a 20% chance of earning 30%. what is the stock’s standard deviation of expected returns. A 5.00% B 5.75% C 7.58% D 9.99% 3. A company had the following changes in its stock: The company had 2 million shares outstanding on dec 31, 2000. on March 31 2001, the company paid a 10% stock divident. on june 30 2001, the company sold 10 million of 7% convertible debentures, convertible into common at \$5 per share. on September 30, 2001, the company issues and sold 100,000 shares of common stock at par. The company should compute its 2001 basic earning per share based on A 2,225,0000 shares B 2,250,000 shares C 3,225,000 shares D 3,250,000 shares 4. An analyst gathered the following data about a company: the company had 1 million shares of common stock outstanding for the entire year the company’s beginning stock price was \$50, its ending price was \$70, and its average price is \$60 the company has 100,000 warrants outstanding for the entire year. each warrant allowed the holder to buy one share of common stock at \$50 per share. How many shares of common stock should the company use in computing its diluted earning per share? A 1,100,000 B 1,028,571 C 1,083,333 D 1,016,667
1. Rivendale enterprises issued a 3 year 20 million face, 8% semiannual coupon bond when market interest rates were at 9%. what was initial balance sheet liability and what percentage of the cumulative interest expense occurred through year 1? Initial liability year 1 interest expense A 19,484,213 31.84% B 19,484,213 33.05% C 20,000,000 33.05% D 20,000,000 31.84% a firm issues a 4 year bond with a face value of 10 million and a semiannual coupon rate of 10%. the issuer must make eight periodic payments of 500,000 and a final payment of 10 million. the market interst rate is 11% when the bond is issued. 6. the interest expense for the first period is closest to A 500,000 B 532,580 C 550,000 D 1,100,000 7. the balance sheet liability at the end of the first period will be closest to: A 9,650,692 B 9,715,852 C 9,967,420 D 10,000,000 8. an analyst gathered the following data about a project: Costs are 8,000 plus 2,000 in shipping and installation for the next five years a project will annually generate 5,000 in sales and 2,000 in costs not including depreciation the project is being depreciated on a straight line basis over five years with no salvage value the company's tax rate is 40% WACC is 10% NPV is closest to: A -144 B144 C 279 D 1244 9. Dagmar industries has 41,200,000 shares outstanding with current market value of 50 per share. Dagmar made 200 million in profits for the recent quarter, and since only 70% of these profits will be reinvested back into the company. Dagmar's board of directors is considering repurchase 600,000,000 worth of common stock, Dagmar assumes that the stock can be repurchased at market prise of \$50. however Dagmar decides to borrow %60 million that will use to repurchase. Share price at time of buy back=50 share outstanding before buy back=41,200,000 EPS before buyback= \$10.00 earning yield= \$10.00/\$50=20% After tax cost of borrowing= 8% planned buyback= 1,200,000 shares EPS after repurchase of its common stock will be clost to A \$5.03 B \$8.25 C \$10.18 D \$12.35 10. assume an investor holds a portfolio of bond as follows: \$2,000,000 par value of 10 year bond with duration of 6.95 priced at 95.500 \$3,000,000 par value of 15 years bond with duration of 9.77 prices at 88.6275 \$5,000,000 par value of 30 year bond with a duration of 14.81 priced at 114.8750 duration of portfolio is: A 10.64 B 12.06 C 13.28 D 13.57
1. a CFO of a major corporation wants to hedge against a possible interest rate increase by entering into a forward rate agreement. following quotes are obtained from a dealer for 30 day FRAs 60 day LIBOR=0.048 90 day LIBOR=0.05 180 day LIBOR=0.525 Notion principal is 50 million. the company hedges its risk of an increase in 60 day LIBOR with FRA. 30 days later when the contact expires the 60 day LIBOR rate is 5% what does the company collect from or pay to the dealer? A collects 16,529 B collects 29,691 C pays \$ 29,691 D neither collects nor pays since the rate on 60 day LIBOR at expiration is the same as the rate on 90 day LIBOR initially 12. an investor holds a short position in four gold futures contacts. each gold futures contact is for vdelivery of 100 ounces of gold. when the contact was entered into on day zero, the futher price was 350 per ounce. the initial margin is 1750 per contact and the maintenance margin is \$ 1,312.50 per contact. Day closing price 1 345.5 2 348.75 3 355.5 4 356.25 what is variation margin on the first day a margin call is received? A 500 B 1,800 C 2,200 D2,500 ANSWERS: 1. C 2. C 3. A 4. D 5. B 6. B 7. B 8. A 9. C 10. B 11. A 12. B please help me understand these questions. i can’t figure them out. THANKS FOR YOUR VALUABLE TIME!!

C’mon - this is too much. You need to go try to figure these out and then come back. Do you have any specific problems?

Agree with Joey. I think you should actually “try” these questions. Some of them look hard, but are really not.

joey or kevin can you please help with the Portfolio duration question… not seen anything like that in the L1 material thus far, or I am blanking out… 10. assume an investor holds a portfolio of bond as follows: \$2,000,000 par value of 10 year bond with duration of 6.95 priced at 95.500 \$3,000,000 par value of 15 years bond with duration of 9.77 prices at 88.6275 \$5,000,000 par value of 30 year bond with a duration of 14.81 priced at 114.8750 duration of portfolio is: A 10.64 B 12.06 C 13.28 D 13.57

sorry guys. i know it’s too much… i’ve tried these questions buy i can’t figure how they solved. plus i don’t have any explanation. just pick any question you feel confusing and let’s discuss. CPK. the formula i think it’s WaDa+WbDb+…WnDn. i thought weight should be 20% 30% 50 % respectively but seems i’m wrong.

Foir that question you must first calculate the market price and weigh it. You cannot use the par value.

thanks Smeet.

cpk123 Wrote: ------------------------------------------------------- > joey or kevin > > can you please help with the Portfolio duration > question… not seen anything like that in the L1 > material thus far, or I am blanking out… > > 10. assume an investor holds a portfolio of bond > as follows: > \$2,000,000 par value of 10 year bond with duration > of 6.95 priced at 95.500 > \$3,000,000 par value of 15 years bond with > duration of 9.77 prices at 88.6275 > \$5,000,000 par value of 30 year bond with a > duration of 14.81 priced at 114.8750 > > duration of portfolio is: > A 10.64 > B 12.06 > C 13.28 > D 13.57 Total market value of the portfolio = (0.955*2,000,000)+(0.886275*3,000,000)+(1.14875*5,000,000)=10,312,575 Duration of portfolio = w1*D1 + w2*D2 + w3*D3 = (0.955*2,000,000)/10,312,575*6.95+(0.886275*3,000,000)/10,312,575*9.77+(1.14875*5,000,000)/10,312,575*14.81= 12.058 Choice B

I’ll take a stab for practice. > 1. in three years an investor deposits the first > of right 1000 payments into a special fund. the > fund will earn interest of 5% per year until the > end of fifth year, there after all money > accumulated in the fund will earn a reduced > interest rate of 4% compounded annually until the > end of the tenth year, how much money will the > investor have in the fund at the end of ten years > assuming no withdrawals. > > A 8,416.32 > B 8,872.93 > C 9,251.82 > D 9,549.11 There are 8 payments, 3 of which are in period earning 1.05, 5 of which are in period earning 1.04. So try this: n = 3, i = 5, PMT = 1000 find FV then put FV into PV, n = 5, i = 4, PMT = 1000 and find FV for the final answer > 2. an analyst estimates a stock has 40% chance of > earning 10%, a 40% chances of earning 12.5%, and a > 20% chance of earning 30%. what is the stock’s > standard deviation of expected returns. > > A 5.00% > B 5.75% > C 7.58% > D 9.99% (wa(a-mean)^2 + wb(b-mean)^2 + wc(c-mean)^2).5 wa = .4, wb = .4, wc = .2 a = 10, b = 40, c = 30 mean = wa(a) + wb(b) + wc© > > 3. A company had the following changes in its > stock: > > The company had 2 million shares outstanding on > dec 31, 2000. > on March 31 2001, the company paid a 10% stock > divident. > on june 30 2001, the company sold 10 million of 7% > convertible debentures, convertible into common at > \$5 per share. > on September 30, 2001, the company issues and sold > 100,000 shares of common stock at par. 2 million * 1.1 = 2.2 million then (2.2 million * 12 + 100k*3) /12 > The company should compute its 2001 basic earning > per share based on > A 2,225,0000 shares > B 2,250,000 shares > C 3,225,000 shares > D 3,250,000 shares > > > 4. An analyst gathered the following data about a > company: > > the company had 1 million shares of common stock > outstanding for the entire year > the company’s beginning stock price was \$50, its > ending price was \$70, and its average price is > \$60 > the company has 100,000 warrants outstanding for > the entire year. > > each warrant allowed the holder to buy one share > of common stock at \$50 per share. > > How many shares of common stock should the company > use in computing its diluted earning per share? 1M + 100k*(60-50)/60 > A 1,100,000 > B 1,028,571 > C 1,083,333 > D 1,016,667

Answer to Q2: Avg=0.4*10%+0.4*12.5%+0.2*30%=15% STD=(0.4*(15%-10%)^2+0.4*(12.5%-15%)^2+0.2*(30%-15%)^2))^0.5=7.58 C

> 5. Rivendale enterprises issued a 3 year 20 \> million face, 8% semiannual coupon bond when \> market interest rates were at 9%. what was initial \> balance sheet liability and what percentage of the \> cumulative interest expense occurred through year \> 1? \> \> Initial liability year 1 interest \> expense \> \> A 19,484,213 31.84% \> B 19,484,213 33.05% \> C 20,000,000 33.05% \> D 20,000,000 31.84% well, I get closer to B, but I can't get their exact numbers either. First interest payment = 19,484,213 \* .045 = 876,789.59 Second interest payment = (19,484,213 + 900k - 876,789.59) \*.045 = 877,834.05 Total interest = 1.6M \* 3 + 20M - 19,484,213. \> a firm issues a 4 year bond with a face value of \> 10 million and a semiannual coupon rate of 10%. \> the issuer must make eight periodic payments of \> 500,000 and a final payment of 10 million. the \> market interst rate is 11% when the bond is \> issued. \> \> 6. the interest expense for the first period is \> closest to \> A 500,000 \> B 532,580 \> C 550,000 \> D 1,100,000 \> find PV then multiply by .11/2 \> 7. the balance sheet liability at the end of the \> first period will be closest to: \> A 9,650,692 \> B 9,715,852 \> C 9,967,420 \> D 10,000,000 PV + coupon - interest \> 8. an analyst gathered the following data about a \> project: \> \> Costs are 8,000 plus 2,000 in shipping and \> installation \> for the next five years a project will annually \> generate 5,000 in sales and 2,000 in costs not \> including depreciation \> the project is being depreciated on a straight \> line basis over five years with no salvage value \> the company's tax rate is 40% WACC is 10% \> \> NPV is closest to: \> A -144 \> B144 \> C 279 \> D 1244 CF0 = -10k CF1..5 = (5k-2k-2k)\*.6 i = 10 find NPV \> 9. Dagmar industries has 41,200,000 shares \> outstanding with current market value of 50 per \> share. Dagmar made 200 million in profits for the \> recent quarter, and since only 70% of these \> profits will be reinvested back into the company. \> Dagmar's board of directors is considering \> repurchase 600,000,000 worth of common stock, > Dagmar assumes that the stock can be repurchased > at market prise of \$50. however Dagmar decides to > borrow %60 million that will use to repurchase. > > Share price at time of buy back=50 > share outstanding before buy back=41,200,000 > EPS before buyback= \$10.00 > earning yield= \$10.00/\$50=20% > After tax cost of borrowing= 8% > planned buyback= 1,200,000 shares > > EPS after repurchase of its common stock will be > clost to > A \$5.03 > B \$8.25 > C \$10.18 > D \$12.35 still dun understand why you don’t add back the retained earnings… maybe EPS was already inclusive of that? > 10. assume an investor holds a portfolio of bond > as follows: > \$2,000,000 par value of 10 year bond with duration > of 6.95 priced at 95.500 > \$3,000,000 par value of 15 years bond with > duration of 9.77 prices at 88.6275 > \$5,000,000 par value of 30 year bond with a > duration of 14.81 priced at 114.8750 > > duration of portfolio is: > A 10.64 > B 12.06 > C 13.28 > D 13.57 value weighted average as stated before

1. an analyst gathered the following data about a project: Costs are 8,000 plus 2,000 in shipping and installation for the next five years a project will annually generate 5,000 in sales and 2,000 in costs not including depreciation the project is being depreciated on a straight line basis over five years with no salvage value the company’s tax rate is 40% WACC is 10% NPV is closest to: A -144 B144 C 279 D 1244 Annual cash flow: Revenue: 5,000 Cost (2,000) Depreciation (2,000) Taxable income 1,000 After tax income 600 Add back deprediation: 2,600 NPV of 2,600 for 5 years, 10% I/Y, first year -10,000, get NPV=-144
1. Dagmar industries has 41,200,000 shares outstanding with current market value of 50 per share. Dagmar made 200 million in profits for the recent quarter, and since only 70% of these profits will be reinvested back into the company. Dagmar’s board of directors is considering repurchase \$ 600,000,000 worth of common stock, Dagmar assumes that the stock can be repurchased at market prise of \$50. however Dagmar decides to borrow %60 million that will use to repurchase. Share price at time of buy back=50 share outstanding before buy back=41,200,000 EPS before buyback= \$10.00 earning yield= \$10.00/\$50=20% After tax cost of borrowing= 8% planned buyback= 1,200,000 shares EPS after repurchase of its common stock will be clost to A \$5.03 B \$8.25 C \$10.18 D \$12.35 Share after buy back: 41,200,000 - 1,200,000 = 40,000,000 Revenue prior to buy back: \$10*41,200,000 = 412,000,000 Because of debt, after tax interest = 8%*60,000,000 = 4,800,000 New EPS = (412,000,000-4,800,000)/40,000,000=10.18

achogogo Wrote: ------------------------------------------------------- > 11. a CFO of a major corporation wants to hedge > against a possible interest rate increase by > entering into a forward rate agreement. following > quotes are obtained from a dealer for 30 day FRAs > > 60 day LIBOR=0.048 > 90 day LIBOR=0.05 > 180 day LIBOR=0.525 > > Notion principal is 50 million. the company hedges > its risk of an increase in 60 day LIBOR with FRA. > 30 days later when the contact expires the 60 day > LIBOR rate is 5% what does the company collect > from or pay to the dealer? close enough to (0.05-0.048)*50M* 60/360 but I dunno why I’m not getting the exact answer. 365 or compounding won’t work either. > A collects 16,529 \> B collects 29,691 > C pays \$ 29,691 > D neither collects nor pays since the rate on 60 > day LIBOR at expiration is the same as the rate on > 90 day LIBOR initially > > 12. an investor holds a short position in four > gold futures contacts. each gold futures contact > is for vdelivery of 100 ounces of gold. when the > contact was entered into on day zero, the futher > price was 350 per ounce. the initial margin is > 1750 per contact and the maintenance margin is \$ > 1,312.50 per contact. > Day closing price > 1 345.5 > 2 348.75 > 3 355.5 > 4 356.25 > what is variation margin on the first day a > margin call is received? > A 500 > B 1,800 > C 2,200 > D2,500 > short, so need price raise… (1750-1312.5)/100 = 4.375 355.5 > 350 + 4.375 355.5 - 350 = 5.5 * 100 * 4 > > > ANSWERS: > 1. C > 2. C > 3. A > 4. D > 5. B > 6. B > 7. B > 8. A > 9. C > 10. B > 11. A > 12. B > > please help me understand these questions. i can’t > figure them out. THANKS FOR YOUR VALUABLE TIME!!

Let me know if the calculations don’t work…

acwu, your are not correct in Q8. You forgot to add back 2,000 depreciation to annual cash flow.

> 11. a CFO of a major corporation wants to hedge > against a possible interest rate increase by > entering into a forward rate agreement. following > quotes are obtained from a dealer for 30 day FRAs > > 60 day LIBOR=0.048 > 90 day LIBOR=0.05 > 180 day LIBOR=0.525 > > Notion principal is 50 million. the company hedges > its risk of an increase in 60 day LIBOR with FRA. > 30 days later when the contact expires the 60 day > LIBOR rate is 5% what does the company collect > from or pay to the dealer? close enough to (0.05-0.048)*50M* 60/360 but I dunno why I’m not getting the exact answer. 365 or compounding won’t work either. You are not getting the right answer because you are forgetting the denominator which is -------------------- 1 + .05 * 60 /360 once you do that --> numerator 16667 / den = 16529 or whatever because LIBOR went up, and he is long the FRA, he’ll collect.

The duration of a portfolio of bonds is the weighted average (using market value weights) of the durations of the bonds in the portfolio. First let’s find the weights. Bond Price as age of Par Face Value Market Value 1 95.5000 2,000,000 1,910,000 2 88.6275 3,000,000 2,658,825 3 114.8750 5,000,000 5,743,750 Total 10,312,575 The weights based on market values are: Weight of bond 1 = Weight of bond 2 = Weight of bond 3 = Bond Weights Duration Weighted Duration 1 0.1852 6.95 1.2871 2 0.2578 9.77 2.5187 3 0.5570 14.81 8.2492 Total 12.055