lOMoARcPSD 24145875 UGBA103 MID01A F2019 S UGBA103 MID01A F2019 S Introduction To Finance University of California Berkeley Introduction To Finance University of California Berkeley Studocu is not sponsored or endorsed by any college or university Studocu is not sponsored or endorsed by any college or university Downloaded by Southern California ronsenderov yahoo com lOMoARcPSD 24145875 University of California Walter A Haas School of Business UGBA 103 Introduction to Finance Solutions to the MIDTERM Prof Dmitry Livdan 23 October 2019 1 This problem has two parts for a total of 10 points a 5 points Two years ago you have bought Bank of America BAC stock for P 2 You have used growing perpetuity formula to value it P 2 E 1 r 2 g where you have assumed a constant annual growth rate of earnings g At that time you expected to earn r 2 9 annual APR by holding it Today you check Yahoo Finance and observe that BAC is trading at P0 88 20 with a P E ratio i e P0 E1 equal to 20 You immediately recalculate that your new expected return on BAC has increased to r0 10 annual APR If BAC s growth has not changed g is the same today as it was 2 years ago what is P 2 You have used the same growing perpetuity formula for valuation today P0 E1 r0 g as you did 2 years ago We start by calculating year 1 earnings E1 from today s P E ratio P0 E1 20 E1 P0 20 88 20 20 4 41 We then can calculate the growth rate g from today s valuation E1 P0 r0 g g r0 1 P0 E1 0 1 0 05 0 05 We then can use earnings growth formula to calculate E 1 E1 E 1 1 g 2 E 1 1 g 2 E1 4 41 1 05 2 4 00 The price of BAC stock two years ago was P 2 E 1 r 2 g 4 00 0 09 0 05 100 b There are three bonds A and B both maturing in one year and C maturing in a half a year being traded Bond A has face value of 500 pays a semiannual coupon of 4 APR compounded semiannually and is priced at par value Bond B also has a face value of 500 but pays an annual coupon of 8 APR compounded annually B is priced at 519 23 Bond C is a zero coupon bond with a face value of 300 Downloaded by Southern California ronsenderov yahoo com UGBA 103 MIDTERM Solutions 2 lOMoARcPSD 24145875 i 2 5 points If you have to choose between bonds A and B which one would you pick Note Show all your calculations We need to compare yield of bond A yA to yield of bond B yB Since bond A is traded at par its yield is equal to the coupon rate yA 4 which is semi annual APR yB can be calculated as PB 1 08 500 1 yB yB 1 08 500 519 23 1 0 04 where yB 4 is annually compounded APR Since yA 4 but compounded semiannually A s e ective yield is higher than B s and we pick bond A ii 2 5 points What is the price of bond C if all bonds are fairly priced Note Show all your calculations The price of C is PC D1 2 300 so we need to calculate the half year discount factor D1 2 We can use bond A to calculate it 500 D1 2 10 D1 510 where we do not know the 1 year discount factor D1 We can calculate it using bond B PB D1 540 D1 519 23 540 0 9615 We can now nd nd D1 2 500 D1 2 10 0 9615 510 D1 2 500 0 9615 510 0 9635 10 and then use it to price bond C PC D1 2 300 0 9635 300 289 05 2 15 points Today you are considering to run a campus printer business for all 4 years while you are in college which you will start exactly 1 year from now t 1 To start this business you have to purchase 4 industrial printers for 10 000 each today t 0 Each printer is going to depreciate real terms to 2 000 in 4 years To run your business you estimate that each year you will need to purchase 12 ink cartridges for each printer for 100 each nominal terms Each printer will also generate 100 nominal terms in electrical costs per year The resale value of each printer will be 3 000 real terms You plan to charge 0 01 one cent real terms per page How many pages do you need to print each year to break even Please record your answer in millions using 2 digits after the decimal The tax rate is 20 the nominal discount rate is 10 and the rate of in ation is 2 you should use a shortcut r R i to nd the real rate We calculate the real APR rst CAPEX at t 0 is equal to R r i 10 2 8 CAP EX0 4 10 000 40 000 Downloaded by Southern California ronsenderov yahoo com UGBA 103 MIDTERM Solutions 3 lOMoARcPSD 24145875 We are going to use X for the number of pages per year Annual depreciation for all 4 printers is equal to D 4 10 000 2 000 4 8 000 real terms Let us calculate per year FCFs where we separate real and nominal parts F CF N ominal 1 F CF N ominal 4 F CF Real 1 F CF Real 3 0 8 4 12 100 4 100 4 160 0 8 0 01 X 0 2 8 000 0 008 X 1 600 F CF Real 4 0 008 X 1 600 4 2 000 0 8 3 000 2 000 0 008 X 12 800 Break even means that N P V 0 4 160 40 000 0 1 1 1 14 1 1 600 0 08 1 1 1 083 X 0 008 0 08 1 1 1 084 12 800 1 084 X 1 50M 3 You have the following information about the returns on two stocks Stock 1 Stock 2 Expected return Standard deviation Correlation coe cient 20 30 40 50 0 2 Suppose that you form a portfolio which is 40 invested in stock 1 and 60 invested in stock 2 a 2 5 points What is the mean variance and standard deviation of the portfolio return The return on this portfolio is rp 0 4 r1 0 6 r2 Given the numbers in the provided table we nd rp E rp 0 4r1 0 6r2 0 4 20 0 6 40 32 p Var rp 0 4 2 2 2 0 4 2 0 09 0 6 2 0 25 2 0 4 0 6 0 03 0 1188 2 2 0 4 0 6 12 1 0 6 2 2 p 0 1188 0 3446738 b 2 5 points What is the …