1) Company XYZ is currently trading at $97.00 a share. The expected growth rate is 4% and the Required Rate of Return is 7.8%. Calculate the next annual dividend amount using the Constant Dividend Growth Model.
Note: D0 = current dividend; D1 = next annual dividend
D1 = P0 (k – g)
= ($97) (0.078 – 0.04)
= $3.686/share
Is this the correct answer? If not, please explain in detail.
#2) Find the Yield to Call on a semiannual coupon bond with a price of $1,085, a
Face Value of $1,000, a call price of $1,067, a coupon rate of 6.75%, 18 years remaining until maturity, 11 years remaining until the call date.
Textbook Essentials of Investments, 9th edition, Bodie, 2013 Chapter 10 – Page 306
Even with the textbook explanation, I could not understand how to solve this problem. Can you explain in detail?
#3) An investor purchases 300 shares of ABC stock for a $15 a share and immediately sells 2 covered call contracts at a strike price of $20 a share. The premium is $2 a share. What is the maximum profit and loss?
Maximum Profit:
(Strike Price – Stock Purchase Price + Premium) (# shares purchased)
($20 - $15 + $2)(300) = $2,100
Maximum Loss: (Stock Purchase Price – Premium) (# shares purchased)
($15 - $2) (300) = $3,900
Is this the correct answer and method? If not, please explain in detail.
#4) You are an analyst comparing the performance of 2 portfolio managers using the Sharpe Ratio measurement. Manager A shows a return of 16% with a standard deviation of 10% while manager B shows a return of 12% with a standard deviation of 6%. If the risk-free rate is 5%, which manager has the better risk adjusted return?
Sharpe Ratio = S = (Ri – rf)/standard deviation
Ri = Portfolio Return
rf = Risk-Free Rate
Sharpe Ratio (A) = (0.16 – 0.05)/0.10 = 1.1
Sharpe Ratio (B) = (0.12 – 0.05)/0.06 = 1.167 (rounded)
Manager (B) has the better adjusted return because the higher Sharpe ratio indicates that his portfolio has a lower yield but with a much lower risk than Manager (A).
Is this the correct answer and is the analysis also correct? If not, please explain in detail.
#5) Look at the following Balance Sheet and Income Statement and calculate the following ratios: Profit Margin, Return on Assets, Return on Equity.
1998 (Millions $) Balance Sheet
Assets
Current Assets
Cash $700
Accounts Receivable $400
Inventory $200
Total Current Assets $1,300
Fixed Assets
Property, Plant, Equipment $2,000
LESS: Accumulated Depreciation $500
Total Fixed Assets $1,500
Liabilities & Owners Equity (1998)
Current
Accounts Payable $700
Notes Payable $300
Total $1,000
Long Term
Long Term Debt $700
Total $700
Stockholders’ Equity (1998)
Common Stock ($1 Par) $100
Capital Surplus $100
Retained Earnings $900
Total Owners’ equity $1,100
Total Liabilities & Stockholders’ Equity $2,800
Income Statement (1998 Millions $)
Sales $600
Cost of Goods Sold $400
Administrative Expenses $100
Depreciation $510
Earnings Before Interest & Taxes (EBIT) -$410
Interest Expense $30
Taxable Income -$440
Taxes -$50
Net Income -$390
Dividends $0
Addition to Retained Earnings -$390
Other Information
# Shares Outstanding (millions) 100
Price per share $18.86
Profit Margin = Net Income / Net Sales (revenue)
-$390/$600 = -0.65
ROA = Net Income / Total Assets
-$390/$2,800 = -0.1392
ROE = Net Income / Shareholders’ Equity
-$390/$1,100 = -0.3545
Are these answers correct and is the analysis correct? If not, please explain in detail.
#6) Find the Intrinsic Value of the stock of Company ABC using the following data:
Risk-Free Rate = 5%
Market Risk Premium = 8%
Expected Market Return = Risk-Free Rate + Market Risk Premium
Beta = 0.9
ROE = 12.5%
Dividend Payout Ratio = 0.22
Dividends for the next 4 years are expected to be: 0.59, 0.67, 0.76, 0.85
Subsequent Growth will be at the computed growth rate (g)
