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Exam 3: Equity Valuation, Managing Bond Portfolios, Macroeconomic and Industry Analysis

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Question 1

Multiple Choice

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A bond currently has a price of $1 050. The yield on the bond is 6.00%. If the yield increases 25 basis points, the price of the bond will go down to $1 030. The duration of this bond is ________ years.

A) 7.46
B) 8.08
C) 9.02
D) 10.11

E) C) and D)
F) B) and C)

Correct Answer

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B

Question 2

Multiple Choice

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Assume that the Reserve Bank increases the money supply. This will cause ________. I. interest rates to decrease II. consumption and investment to decrease III. inflation to fall

A) I only
B) I and II only
C) II and III only
D) I, II and III

E) A) and D)
F) A) and B)

Correct Answer

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A

Question 3

Multiple Choice

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Westsyde Tool Company is expected to pay a dividend of $2.00 in the upcoming year. The risk-free rate of return is 6% and the expected return on the market portfolio is 12%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's shares is 1.20. Using a one-period valuation model, the intrinsic value of Westsyde Tool Company shares today is ________.

An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1) Industry sales have grown at 15-20% per year in recent years and are expected to grow at 10-15% per year over the next three years, still well above the economic growth rate. 2) Some US manufacturers are attempting to enter fast-growing non-US markets, which remain largely unexploited. 3) Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4) The current penetration rate in the US is 60% of households and will be difficult to increase. 5) Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6) Some manufacturers are able to develop new, unexploited niche markets in the US based on company reputation, quality and service. 7) Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8) New manufacturers continue to enter the market. Characteristics 4 and 5 would indicate that the industry is in the ________ stage.

Cache Creek Manufacturing Company is expected to pay a dividend of $4.20 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 4% and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalisation rate on the shares, and the constant growth DDM to determine the intrinsic value of the shares. The shares are trading in the market today at $84.00. Using the constant growth DDM and the CAPM, the beta of the shares is ________.

A bond with a 9-year duration is worth $1 080.00 and its yield to maturity is 8%. If the yield to maturity falls to 7.84%, you would predict that the new value of the bond will be ________.

Caribou Gold Mining Corporation is expected to pay a dividend of $6 in the upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5% and the expected return on the market portfolio is 13%. The shares of Caribou Gold Mining Corporation have a beta of -0.50. Using the constant growth DDM, the intrinsic value of the shares is ________.

Cache Creek Manufacturing Company is expected to pay a dividend of $3.36 in the upcoming year. Dividends are expected to grow at 8% per year. The risk-free rate of return is 4% and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalisation rate, and the constant growth DDM to determine the value of the shares. The share is currently priced at $84.00. Using the constant growth DDM, the market capitalisation rate is ________.

If you choose a zero coupon bond with a maturity that matches your investment horizon which of the following statements is/are correct? I. You will have no interest rate risk on this bond. II. Absent default, you can be sure you will earn the promised yield rate. III. The duration of your bond is less than the time to your investment horizon.