Finance problems

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Instruction

Instruction to this take-home Exam: (1) There are 14 problems in the Exam Set. (2) All problems 1 (a and b) to 14 carry the same weight. (3) You are required to complete 12 problems. You must delete out the problem not counted for submission. (4) You are to complete your work by yourself, not working together with other students. (5) This Take-Home Exam due date is June 1, 2015 by 8:00 PM sending to my email box at: [email protected] I will reply to acknowledge receiving of your submission at the time of your submission. (6) Please let me know if you think there is an error in the exam questions. (7) Please show calculations to get full-credit (when your work is correct) or partial-credit (if your work is wrong).

Question 1(a)

	Question 1 (a)
	James Scott and his wife Lisa retired from their jobs in 2013 and have managed their own 401K money by rolling out to
	Fidelity Investments. Their investment holdings include PSE&G, Facebook, Oracle, and Fidelity Money Market Account.
	The weights of PSE&G (48%), Facebook (12%), Oracle (17%), and Money Market Account (23%). The annual expected returns
	are 4.2%, 18.5%, 7.8%, and 1.2%, respectively. What is the expected annualized return over the next 12 months?
	As the U.S. economy changes and uncertainty can develop over the next 12 months ……..
	they re-allocate the weights of portfolio composite change to PSE&G (45%), Facebook (10%), Oracle (15%), and Money Market Account (30%).
	The annualized expected returns also change for PSE&G, Facebook, Oracle, and Money Market to be 5.4%, 16.3%, 8.6%, and 1.4%, respectively.
	What is the expected annualized return over the next 12 months?
	YOU MUST SHOW YOUR CALCULATIONS:
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Question 1(b)

	Question 1(b)
	In the world of equity investment, individual investors can earn investment profit from 2 sources, dividend income
	and gain from equity prices rising (or falling).
	Steve Silverblatt owns Apple Stocks, ExxonMobil Stocks, and Merck Stocks.
	Steve can expect Apple, Exxon Mobil, and Merck to pay dividends of $1.68, $3.13, and $1.93, respectively, a year from today.
	The prices totay of each stock are $120.0, $68.0, and $46.0, respectively.
	The prices of each stock are expected to rise 21.8%, 12.4%, and 16.8%, respectively
	For a one-year investment, what are the expected return on each stock?
	YOU MUST SHOW YOUR CALCULATIONS:
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Question 2

	Question 2
	James Stevenson owns stock in 2 companies listed on the Nasdaq Stock Exchange.
	Oracle stock is $87.96 at today's closing price and Starbuck stock is $64.50 at closing.
	According to Equity Analyst report from Value Line, Oracle is expected to rise to $96.76 and Starbuck is expected to rise to $73.53 a year from today.
	Both are Nasdaq Companies and do not pay dividend.
	In his portfolio, Oracle carries 35% weight while Starbuck carries 65% weight.
	Reported values of standard deviation for Oracle and Starbuck are 2.7 and 5.0, respectively.
	The correlation coefficient of their returns is -0.1
	What is the portfolio's expected return over the next 12 months?
	What is the portfolio's standard deviation?
	YOU MUST SHOW YOUR CALCULATIONS:
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Question 3

	Question 3
	Mary Tyler Moore owns 2 stocks in her portfolio today, Apple and Boeing, with 25% of her money in Apple and 75% in Boeing.
	The closing price of Apple stock today is $122.64 and Boeing price is $65.77
	The Beta values for Apple is 1.24 and for Boeing is 1.54
	According to Value Line report, the expected prices a year from today for Apple is $137.36 and $78.92 for Boeing
	The standard deviation of returns for Apple is 2.70 and 6.0 for Boeing.
	The correlation coefficient of their returns is 0.48
	Please calculate the portfolio's expected returns and portfolio's standard deviation under the 2 scenarios below:
	(1) 25% of money investing in Apple and 75% of money investing in Boeing
	(2) 75% of money investing in Apple and 25% of money investing in Boeing
	YOU MUST SHOW YOUR CALCULATIONS:
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Question 4

	Question 4
	Stephen Colonnello has a theoretical investment portfolio consisting of one share of Apple, Boeing, Caterpillar, and Du Pont.
	The current prices of Apple is $122.8, Boeing $66.7, Caterpillar $42.8, and Du Pont $54.6
	The Betas are 1.8, 1.1, 1.3, and 1.2, respectively.
	What is the theoretical portfolio Beta of his portfolio?
	Then he received a $62,000 Chrismas Gift from his grandmother and has a plan to invest in Apple, Boeing, Caterpillar, and Du Pont as he know these firms well.
	He plans to buy 100 shares of Apple, 100 shares of Du Pont, 400 shares of Boeing, and 400 shares of Caterpillar.
	With this plan, what would be the Beta of his portfolio?
	YOU MUST SHOW YOUR CALCULATIONS:
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Question 5

	Question 5
	We discussed Capital Asset Pricing Model (CAPM) during the semester.
	We also discussed the impact of Quantitative Easing on the S&P 500. We also discussed the Efficient Market Theory and the Efficient Frontier.
	What is the return on a stock according to the security market line if the 10-year U.S. Treasury risk-free rate currently is 2.2%, the 2014 return on the S&P 500 (U.S. market) is 9.6%,
	and the stock's Beta is 1.1?
	If the Beta had been 1.8, what would be the return?
	Is this higher return consistent with the portfolio theory?
	Why?
	YOU MUST SHOW YOUR CALCULATIONS:
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Question 6

	Question 6
	Steve Colonnello has started a new job and has strong interest in putting his extra cash to work and will be looking to invest in the U.S. Stock Market.
	As a valued investor, one of his primary concern is how to value the stock prices. Using P/E multiples to conduct "Valuation by Comparables" is one of criteria.
	He is also interested in calculating the stock's intrinsic value using Dividend Growth Model.
	Given the information he has accumulated from his research work:
	(a) Johnson & Johnson: Beta = 1.14 Growth rate = 3.2% Current dividend = $1.05 Required rate of return = 6.4%
	(b) Dow Chemical: Beta = 0.97 Growth rate = 2.6% Current dividend = $1.05 Required rate of return = 6.4%
	(c) Chevron: Beta = 0.64 Growth rate = 4.5% Current dividend = $1.86 Required rate of return = 8.9%
	What are the fair values of each of these stock?
	If Chevron stock is selling for $20.0, what does that imply? Buy, or not to buy?
	YOU MUST SHOW YOUR CALCULATIONS:
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Question 7

	Question 7
	CAPM and Dividend Growth Model:
	Your broker suggests that the Facebook stock is a good purchase at $54.75
	You do an analysis of Facebook, determining that the $1.84 dividend and earnings should continue to grow
		indefinitely at 5.6% annually.
	The firm's Beta coefficient is 1.28 and the yield on Treasury bill is 2.24%.
	If you expect the market to earn a return of 6.5%, should you follow your broker's suggestion?
	YOU MUST SHOW YOUR CALCULATIONS:
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Question 8

	Question 8
	There is a man from an old school that is very conservative and 100% risk-averse, only invest his extra money in bonds of large blue chip U.S. companies like General Motors
	He is currently doing research in bond investing to put more of his money to work as the current stock markets is trading at such high valuations
	With current interest rate at 12%, he just found out that GM bonds has a coupon rate of 15.3% and will reach maturity after 7 years
	Current 10-year U.S. Treasury risk-free rate = 2.57%
	He is very much excited about this fixed-income investment opportunity at such high coupon rate.
	As an educated investor and a neighbor, he comes to you for help with the following questions
		What will the price of this bond be if the interest is paid annually?
		What is the Current Yield?
	Please provide your answers in the space below and show your method of calculations.
	YOU MUST SHOW YOUR CALCULATIONS:
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Question 9

A bond broker offer to sell you a 5-year bond for $713 and can be redeemed after 5 years for $1,000

However, it is a zero coupon bond (with AAB Rating)

If you buy this bond and hold it until maturity, what is the holding period return?

What is the yield-to-maturity (YTM) for this bond investment despite the fact that it is a zero coupon bond?

YOU MUST SHOW YOUR CALCULATIONS:

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Question 10

	Question 10
	Steve Colonnello has just graduated from college and found a job immediately,
	Steve decides to start saving money for retirement immediately by opening up a Roth IRA Account at Fidelity Investments.

	He is a well-educated and active market participant and always invests in high Beta Stock (with Beta of at least 1.4)
	His Required Rates of return Ri is typically 12% or higher
	He invests $1,500 a year for the first 10 years, then invest $3,500 a year for the following 10 years.
	He expects 14% average rate of return for the entire 20 years.
	How much Steve can expect his account to be after 20 years?
	YOU MUST SHOW YOUR CALCULATIONS:
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Question 11

	Question 11
	Solve for the unknown interest rate in each of the following:
	YOU MUST SHOW YOUR CALCULATIONS:
	Present Value = $19,775
	Future Value = $28,996
	No. of Years = 12
	Calculated Interest Rate = ______________ %
	Present Value = $96,554
	Future Value = $102,665
	No. of Years = 3
	Calculated Interest Rate = ______________ %
	Present Value = $988,876
	Future Value = $1,355,986
	No. of Years = 5
	Calculated Interest Rate = ______________ %
	Present Value = $88,766
	Future Value = $483,500
	No. of Years = 9
	Calculated Interest Rate = ______________ %
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	Solve for the unknown number of years in each of the following:
	YOU MUST SHOW YOUR CALCULATIONS:
	Present Value = $54,778
	Future Value = $86,554
	Interest Rate = 7.5%
	Calculated Period = ______________ Years
	Present Value = $14,885
	Future Value = $55,347
	Interest Rate = 17.0%
	Calculated Period = ______________ Years
	Present Value = $114,675
	Future Value = $227,886
	Interest Rate = 5.7%
	Calculated Period = ______________ Years
	Present Value = $106,887
	Future Value = $173,439
	Interest Rate = 12.6%
	Calculated Period = ______________ Years
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Question 12

	Question 12
	Calculate Rate of Return on Investments at a local TD Bank in Princeton, New Jersey
	John Greenwald is considering an investment in Money Market Account with the following information:
		Which investment produce the higher return?
		YOU MUST SHOW YOUR CALCULATIONS:
		Present Value = $135,000
		Future Value = $235,000
		Compounding Frequency = Annually
		Annual interest rate = ______________ %
		Present Value = $275,000
		Future Value = $495,000
		Compounding Frequency = Annually
		Annual interest rate = ______________ %
		Present Value = $715,000
		Future Value = $1.035,000
		Compounding Frequency = Semi-annually
		Annual interest rate = ______________ %
		Present Value = $1,175,000
		Future Value = $2,195,000
		Compounding Frequency = Quarterly
		Annual interest rate = ______________ %
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Question 13

	Question 13
	You are performing a yard work service to your senior neighbor and promise to do it over the next 5 years
	He offers the following payment schedules that you must decide on:
	> $150 at the end of each summer or a lum sum payment of $1,000 at the end of the fifth summer
	If you can earn 6% interest income on your annual saving account at TD Bank
	Which payment choice you should decide on that is higher based on Time Value of Money Concept?
	YOU MUST SHOW YOUR CALCULATIONS:
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Question 14

	Question 14
	Calculate and Decide on Retirement Investment Choices:
	(a) Stephen Colonnello is retiring from a long career at Du Pont with a Pension Lum Sum of $400,000
	He discussed investment options with a financial advisor at Fidelity Investments who also suggests that he goes with Annuity Option
	The option guarantees that he will receive $26,000 at the end of each year for the rest of his life
	Please calculate the interest rate used in this calculation.
	(b) John Greenwald, a neighbor, also is retiring from a long career at Citi Bank with a Pension Lum Sum of $860,000
	He discussed investment options with a financial advisor at Edward Jones who suggests that he goes with Annuity Option
	The option guarantees that he will receive $32,000 at the end of each year for the rest of his life
	Please calculate the interest rate used in this calculation.
	YOU MUST SHOW YOUR COMPLETE CALCULATIONS:
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