SAM 3100 Test Two

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icimmy
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SAM 3100 Test Two
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2014-03-30 17:11:29
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Test Two
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  1. A large publishing firm specializing in college textbooks wishes to expand into online delivery of its materials. In order to facilitate this, it invests in a number of small start-up companies that deliver college courses online and uses these companies to start diversifying the delivery of its content. Which of the following best describes the role of the publishing firm as described above?
    a corporate investor
  2. Simone founded her company using $150,000 of her own money, issuing herself 300,000 shares of stock. An angel investor bought an additional 200,000 shares for $100,000. She now sells another 500,000 shares of stock to a venture capitalist for $3 million. What is the post-money valuation of the company?
    Post-money Valuation= Implied Price per Share x New Total Number of Shares

    VC 3,000,000/500,000= 6

    6 x 1,000,000= 6,000,000
  3. The founder of a company issues 300,000 shares of stock of series A stock for his own $450,000 investment. He then goes through three further rounds of investment, as shown below:
    Round Price Number of Shares
    Series B $2.50 200,000
    Series C $2.75 300,000
    Series D $2.80 200,000
    Which of the following is the percentage of the company owned by the founder of the company?
    • Owners Shares/Total Shares
    • 300,000 / (300,000+200,000+300,000+200,000)= 0.30
    • 30.0%
  4. Which of the following statements is NOT true regarding venture capitalists?
    A. The firms offer limited partners a number of advantages over investing directly in start-ups themselves as angel investors.
    B. They can provide substantial capital for young companies.
    C. They use their control to protect their investments, so they may therefore perform a key nurturing and monitoring role for the firm.
    D. They might invest for strategic objectives in addition to the desire for investment returns.
    D. They might invest for strategic objectives in addition to the desire for investment returns.
    (this multiple choice question has been scrambled)
  5. Price ($) Number of Shares Bid
    6.00   100,000
    6.25   200,000
    6.50   450,000
    6.75   200,000
    7.00   350,000
    7.25   200,000
    7.50   250,000
    Harrison Products is selling 1.45 million shares of stock in an auction IPO. At the end of the bidding period they have received the bids shown above. Which of the following is the price at which the shares will be offered?
    Add up highest priced stock until you reach the amount of shares being sold.

    • 250,000+200,000+350,000+200,000+450,000= 1,450,000
    • 450,000 = 6.50
    • 6.50
  6. Which of the following statements is FALSE?
    A. The two advantages of going public are greater than liquidity and better access to capital.
    B. By going public, companies give their private equity investors the ability to diversify.
    C. The process of selling stock to the public for the second time, and thereafter, is called an initial public offering (IPO).
    D. Public companies typically have access to much larger amounts of capital through the public markets.
    C. The process of selling stock to the public for the second time, and thereafter, is called an initial public offering (IPO).
    (this multiple choice question has been scrambled)
  7. Valiant Industries has 20 million shares of stock outstanding at a price of $28 per share. The company wishes to raise more money and plans to do so through a rights issue. Every existing stockholder will receive one right for each share of stock held. For every eight rights held by the stockholder, one share can be bought at a price of $28. If all rights are exercised, how much money will be raised in this offer?
    Proceeds= Price per Share x Number of Shares (shares/rights)

    $28 x (20,000,000/8)=  $70,000,000
  8. (True or False) Bond covenants tend to decrease a bond issuer's borrowing costs.
    True
  9. What is a call provision?
    An option to the bond issuer to repurchase the bonds at a predetermined price
  10. A company issues a callable (at par) five-year, 8% coupon bond with annual coupon payments. The bond can be called at par in one year after release or any time after that on a coupon payment date. On release, it has a price of $105 per $100 of face value. Which is closest to the yield to call of this bond when it is released?
    PV= C+FV / (1+TYC)

    • $105 =$8+$100/(1+YTC)
    • Trial and Error... YTC= 0.0286

    2.86%
  11. Coupon: 0%
    Conversion Ratio: 220 shares per $1000 principal amount
    Call Date: July 1, 2008
    Call Price: Par
    Maturity: July 1, 2015
    A firm issues the convertible debt shown above. The price of stock in this company on July 1, 2008 is $5.15. If the bonds are called on this date, which of the following is the action most likely to be taken by a holder of bond of face value of $10,000?
    Convert the bond and accept shares with a value of $11,330.
  12. (True or False) The coupon value of a bond is the face value of that bond
    False
  13. How much will the coupon payments be of a 5-year $10,000 bond with a 8.5% coupon rate and semiannual payments?
    • *Divide rate by 2 because it is semiannual
    • Bond Value*rate
    • 10,000*0.0425= $425.00
  14. An investor holds a General Mills bond with a face value of $5000, a coupon rate of 3%, and semiannual payments, that matures on 01/15/2020. How much will the investor receive on 01/15/2020?
    • *Divide rate by 2 because it is semiannual
    • Face Value * Rate=
    • $5000* 0.015= 75
    • 75+5000= $5075
  15. A furniture manufacturer issues a bond with a face value of $10,000 and a coupon rate of 2.88% that matures on 07/15/2019. The holder of such a bond receives coupon payments of $144.00 How frequently are coupon payments made in this case?
    Semiannually
  16. Which of the following statements is FALSE?
    A. By convention the coupon rate is expressed as an effective annual rate.
    B. The time remaining until the repayment date is known as the term of the bond.
    C. Bonds are a securities sold by governments and corporations to raise money from investors today in exchange for promised future payments.
    D. Bonds typically make two types of payments to their shareholders.
    A. By convention the coupon rate is expressed as an effective annual rate.
    (this multiple choice question has been scrambled)
  17. How are investors in zero-coupon bonds compensated for making such an investment?
    Such bonds are purchased at a discount to their face value.
  18. What is the yield to maturity of a one-year, risk-free, zero-coupon bond with a $10,000 face value and a price of $9550 when released?
    A. 3.88%
    B. 4.00%
    C. 4.45%
    D. 4.71%
    • 10,000-9550=450
    • .0471*9550= 449.80
    • 4.71%
  19. A risk-free, zero-coupon bond with a face value of $1,000 has 6 years to maturity. If the YTM is 5.2%, which of the following would be closest to the price at which this bond will trade?
    • Solve for PV
    • N=years
    • I/Y=5.2
    • PMT=0
    • FV=1000

    $737
  20. What is the yield to maturity of a $5,000 bond with a five year term, a 3.6% coupon rate, and semiannual coupons if this bond is currently trading for a price of $5,054?
    • Solve for I/Y
    • n=5
    • PV=-5054
    • PMT= (.036x5000)=180
    • FV=5000

    3.36%
  21. What must be the price of a $1000 bond with a 5.2% coupon rate, annual coupons, and 20 years to maturity if YTM is 6.5% APR?
    • Solve for PV
    • N=20
    • I/Y= 6.5
    • PMT=(1000*0.052)=52
    • FV=1000

    $856.76
  22. A $1000 bond with a coupon rate of 5.4% paid semiannually has five years to maturity and a yield to maturity of 9.5%. If interest rates rise and the yield to maturity increases to 9.8%, what will happen to the price of the bond?
    • Solve for PV
    • 9.5%= 842.57
    • 9.8%=832.35
    • 842.57-832.35= -10.22

    Fall by $10.47
  23. A company releases a ten-year bond with a face value of $1000 and coupons paid semiannually. If market interest rates imply a YTM of 3%, what should be the coupon rate offered if the bond is to trade at par?
    • –If a bond sells at par the only return investors will earn is from the coupons
    • that the bond pays. 
    • –Therefore, the bond’s coupon rate will exactly equal its yield to maturity. 
    • 3%
  24. Which of the following statements is true?
    A. A rise in interest rates causes bond prices to fall.
    B. A fall in interest rates causes a fall in bond prices.
    C. Bond prices and interest rates are not connected.
    D. A fall in bond price causes interest rates to fall.
    A. A rise in interest rates causes bond prices to fall.
    (this multiple choice question has been scrambled)
  25. (True or False) The credit spread of a bond increases if it is perceived that the probability of the issuer defaulting increases.
    True
  26. (True or False) Bonds with a high risk of default typically can’t offer high yields.
    False
  27. Consolidated Mining pays a dividend of $4.25 per share and is expected to pay this amount indefinitely. If Consolidated's equity cost of capital is 11%, which of the following would be expected to be closest to Consolidated's stock price?
    A. $29.98
    B. $31.11
    C. $35.22
    D. $38.64
    $38.64*0.11=$4.25

    $38.64
  28. A stock is bought for $20.00 and sold for $26.00 one year later, immediately after it has paid a dividend of $1.50. What is the capital gain rate for this transaction?
    • Capital Gain Yield= (P1-P0)/P0
    • (26-20)/20= 0.30
    • 30.00%
  29. Von Bora Corporation (VBC) is expected to pay a $3.00 dividend a year from now. If you expect VBC's dividend to grow by 7% per year forever and VBC's equity cost of capital is 15%, then the value of a share of VBS stock is closest to:
    • P= D1/ (r-g)
    • 3.00/ (.15-.07)
    • 3.00/0.08= $37.50
  30. Luther Industries has a dividend yield of 2.5% and a cost of equity capital of 12%. Luther Industries' dividends are expected to grow at a constant rate indefinitely. The growth rate of Luther's dividends are closest to:
    • g= rE - DIV1/P0
    • 12-2.5= 9.5
  31. A portfolio consists of three securities: 200 shares of Yahoo (YHOO), 200 Shares of General Motors (GM), and 50 shares of Standard and Poor's Index Fund (SPY). If the price of YHOO is $60, the price of GM is $30, and the price of SPY is $150, calculate the portfolio weight of YHOO and GM.
    • YHOO (200*$60) 12,000
    • GM (200*$30) 6,000
    • SPY (50*$150) 7,500

    • 12,000/ (12,000+6,000+7,500) = 47.1%
    • 6,000/ 25,500= 23.5%
  32. The beta of the market portfolio is:
    1
  33. (True or False) The Capital Asset Pricing Model (CAPM) says that the excess return on a stock is equal to the risk free rate plus the stock’s beta times the market risk premium.
    False
  34. Your estimate of the market risk premium is 8%. The risk-free rate of return is 3.5% and General Electric has a beta of 1.3. According to the Capital Asset Pricing Model (CAPM), what is its expected return?
    Expected Return= Risk-free Rate + (Beta x Market Risk Premium)

    • .035 + (1.3*0.08) = 0.139
    • 13.9%
  35. A portfolio comprises Coke (beta of 1.1) and Consolidated Edison (beta of 0.80). The amount invested in Coke is $20,000 and in Consolidated Edison is $10,000. What is the beta of the portfolio?
    • (1.1*0.66666) + (0.80*0.33333)
    • .7333333+ .2666666 = .99999
    • 1.00
  36. The Capital Asset Pricing Model asserts that the ________ return is equal to the risk-free rate plus a risk premium for systematic risk.
    expected return

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