Finance Assignment - Investment Analysis

1. As a recent hire with a Financial Firm, you have been asked by one of your customers, who is in 30% marginal tax bracket to make specific recommendations about the following two investment choices that have the same amount of risk:                                                   

                                                               

1              A 4.5% Tax Free Municipal Bond                                              

2              A 6.5% Corporate Bond

Your advice to the Customer is to:

Answer

	a.	Buy Municipal Bond because it is Tax Free
	b.	Buy Stock rather than Bonds because Stocks perform better than Bonds
	c.	Buy Corp Bond because its after Tax yield is higher than tax free Bond
	d.	Buy both the Bonds as both are offering good yields

2. Over the last 5 years average returns on T-Bills and S&P-500 has been 3.5% and 13.5%, respectively.  The Cost of selling common stock to a Firm that has a Beta Coefficient of 1.20 is:

Answer

	a.	16.20%
	b.	15.5%
	c.	23.9%
	d.	13.5%

 

3. Returns on a Security, with Beta Coefficient of 1.30, and Market  are17% and 12.5%, respectively. This means Risk Free Rate of Return is:

Answer

	a.	-1.23%
	b.	3.5%
	c.	-2.5%
	d.	2.69%

 

4. Currently, a Firm’s common shares are selling for $ 30.00 per share. The Firm just paid a dividend of $ 2.50 per share. The firm has a policy to increase its Dividends each year by 6%. The required rate of return by investors is 16%. This firm wants to sell additional Common shares at $ 30 each.   The floating cost on the sale of new shares is likely to be 5%. According to your calculation, the cost of selling additional common shares would be:

Answer

	a.	13.02%
	b.	9.30%
	c.	15.30%
	d.	$2.65 per share

5. Smart Sammy quadrupled his investments in just 10 years. His Avg Annualized Rate of Return was close to:

Answer

	a.	15%
	b.	25%
	c.	30%
	d.	35%

6. All of the following statements regarding a Term Bonds are TRUE, EXCCEPT:

Answer

	A.	It has a limited life known as Maturity
	B.	Mkt Interest Rate down, Bond Price Up and vice versa
	C.	It makes semi-annual interest payments called Coupons
	D.	Its par value AKA List Price is always $1,000
	E.	Bond is traded on the NY Stock Exchange Market

 

7. If the market Interest Rate is 10%, the Price of a Bond that has a par value of $1,000, fixed Coupon Rate of 8%, and remaining maturity of 10 years should be close to:

 

Answer

	A.	$ 631
	B.	$ 923
	C.	$ 1,000
	D.	$ 875

 

8. A 7.5% Bond with remaining maturity of 8 years is selling for $875. However this Bond is a callable Bond in two year time at par. According to your calculation the diff between yield to call (YTC) and yield to maturity (YTM) is approximately:

Answer

	a.	3.5%
	b.	10.8%
	c.	5.2%
	d.	0%

9. SML.xlsx  

Click on the SML.xlsx to open a Graph on Security Market Line. This Graph shows three stocks, A, B, and C. According to you the overpriced stock is:

Answer

	a.	Stock B
	b.	Stock A
	c.	Stock C
	d.	None - all three Stocks A,B,&C are priced right

10. ABC Corp Financial Data for the year 2011

Net Sales = $ 18 million

Total assets = $ 13 million

Total Debt = $ 3.8 million

Profit Margin = 8%

From the above data, we can say that the ABC’s Return on Equity (ROE) in 2011 was:

 Answer

	a.	29.00%
	b.	21.00%
	c.	15.65%
	d.	8.00%

 

11. A Firm has Equity Multiplier (EM) of 1.35, Total asset Turnover (TATO) of 1.64, and Profit Margin (PM) of 7.00%. This means this Firm has a Return on Equity (ROE) of:

Answer

	a.	9.5%
	b.	15.5%
	c.	82.3%
	d.	11.5%

 

12. According to the Experts, the returns on the stock of XYZ Corp under the three likely conditions of economy are listed below:

Economy	Probability	% Return
Good	50%	20%
So-S0	40%	8%
Bad	10%	-12%

 

Based on your calculation the Expected Return for XYZ is:

Answer

	a.	5.3%
	b.	12.0%
	c.	15.0%
	d.	Approximately 10%

 

13. You have decided that you will not invest in the stock of any company that does not have a sustainable growth rate (SGR) of at least 10%. Shares of AXION Corp are currently selling for $ 25.00 each. According to the Financial Statement this firm has ROE of 13.1% and a dividend payout ratio of 30%. Based on your calculation, will you buy the shares of Axion Corp or not?

Answer

	a.	Buy only if the Price falls below $20 per share
	b.	May be
	c.	No
	d.	Yes

14. Supposing you work for a firm that sells its merchandise to other businesses. Your firm had seceded that they will not sell merchandise to any form that does not pay its bills in <= 90 days. Tita Corp wants to buy merchandise woth $ 150,000 m on credit. Tita’s latest Financial Statement shows that it had COGS and the Account Payable Balances of of $59,382 and $13,689, respectively.  Based on your calculation you have decided to:

Answer

	a.	No, Because Tita pays its bills in > 90 days
	b.	Tita is asking too much in credit ($150,000) for this reason I will say NO.
	c.	Yes, because Tita pays its bills in < 90 days
	d.	May be, because Tita Pays its bills on exactly 90 days.

 

15.       Followings are the notes of a Financial Analyst:

 

Yr	Div	PPS
0	$ 3.00	$ 50 Current Price
1	$   3.25
2	$  4.00
3	$   4.30	$ 75.00

B

Based on Your Calculation at Required Rate of Return of 15%, the Stock is:

Answer

	a.	Over Priced
	b.	Under Priced
	c.	Priced Right
	d.	Intrinsic value per share is not equal to the selling price of $ 75.00

 

16. A 8.5% Bond with remaining maturity of 10 years is currently selling for 85% of its par value. This means the current yield on this bond is:

Answer

	a.	5.5%
	b.	11.1%
	c.	8.5%
	d.	10.0%

  

17. Debt to Equity (D/E) ratio of a Firm is 0.6. What is the return on Equity (ROE) if the Return on Investment (ROA) is 12.5%:

Answer

	a.	7.5%
	b.	18.5%
	c.	12.5%
	d.	20.0%

 

18.The Following is a Portfolio of Investment: 

Stock	No	PPS	B
A	500.00	$   12.75	0.8
B	1,200.00	$   25.60	1.1
C	1,500.00	$   30.00	1.2
D	2,000.00	$    40.00	1.4

PPS = Price per Share: B = beta Coefficient

Beta Coefficient of this Portfolio is:

Answer

	a.	1.15
	b.	1.10
	c.	1.26
	d.	1.13