Georgia State University Department of Finance MBA 8622 Fall 2001 MBA 8622: Corporation Finance Take-Home Problem Set Instructors: Lalitha Naveen, N. Daniel, C.Hodges, A. Mettler, R. Morin, M. Shrikhande, Directions: This take-home problem set (THPS) is due at the begin of the regular class in week 13 (Nov 12-16), 2001, and has to be turned in physically (i.e. do not send your answers via e-mail, an electronically turned in THPS will not be graded). Though you may use your book, notes, etc., all work on this THPS is to be yours alone - any discussion of either the questions on the assignment or your answers with anyone other than the instructor will be considered as cheating and, thus, as a violation of the GSU honor code. For the multiple choice questions (Part I), record the letter of the correct multiple choice answer directly on the answer sheet on the last page (do not show any intermediate steps, no partial credit will be assigned for multiple choice questions). For the problems with no answer choices (Part II), record your final numeric answer including relevant calculations and intermediate steps on separate sheets of paper (partial credit may be assigned for the problems with no answer choices, if appropriate). The grade on any assignment turned in after the beginning of class on the relevant date listed above will be reduced at a daily compounded rate of 10% per day (begin mode). For grading purposes, each multiple choice question (Part I) has a grading weight of 1 (one), each question of Part II has a grading weight of 2 (two). Following: - Part I: Multiple choice questions (pp. 2-5) - Part II: Problems and Calculations (pp. 6-8) - Cover Sheet with answers to Part I (p. 9, to turn in together with the solutions of Part II)GSU, Department of Finance - Take-Home Problem Set / page 2 - Corporation Finance Fall 2001 MBA 8622 Part I: Multiple Choice Questions (Record the letter corresponding with the best answer on the answer sheet) 1. Which of the following statements is most correct? a) An investment which compounds interest semiannually, and has a nominal rate of 10 percent, will have an effective rate less than 10 percent. b) The present value of a three-year $100 annuity due is less than the present value of a three-year $100 ordinary annuity. c) The proportion of the payment of a fully amortized loan which goes toward interest declines over time. d) Statements a and c are correct. e) None of the answers above is correct. 2. You are willing to pay $15,625 to purchase a perpetuity which will pay you and your heirs $1,250 each year, forever. If your required rate of return does not change, how much would you be willing to pay if this were a 20-year, annual payment, ordinary annuity instead of a perpetuity (rounded to the next $)? a) $10,342 b) $11,931 c) $12,273 d) $13,922 e) $17,157 3. The risk-free rate, kRF, is 6 percent and the market risk premium, (kM – kRF), is 5 percent. Assume that required returns are based on the CAPM. Your $1 million portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8. Which of the following statements is most correct? a) The portfolio’s required return is less than 11 percent. b) If the risk-free rate remains unchanged but the market risk premium increases by 2 percentage points, the required return on your portfolio will increase by more than 2 percentage points. c) If the market risk premium remains unchanged but expected inflation increases by 2 percentage points, the required return on your portfolio will increase by more than 2 percentage points. d) If the stock market is efficient, your portfolio’s expected return should equal the expected return on the market, which is 11 percent. e) None of the above answers is correct.GSU, Department of Finance - Take-Home Problem Set / page 3 - Corporation Finance Fall 2001 MBA 8622 4. Ripken Iron Works faces the following probability distribution: State of Probability of Stock’s Expected Return the Economy State Occurring if this State Occurs Boom 0.25 25% Normal 0.50 15 Recession 0.25 5 What is the coefficient of variation on the company’s stock? a) 0.06 b) 0.47 c) 0.54 d) 0.67 e) 0.71 5. If the yield to maturity increased 1 percentage point, which of the following bonds would have the largest percentage decrease in value? a) A 10-year zero-coupon bond. b) A 10-year bond with an 8 percent coupon. c) A 20-year zero-coupon bond. d) A 20-year bond with an 8 percent coupon. e) A 20-year bond with a 12 percent coupon. 6. A 10-year bond has a 10 percent annual coupon and a yield to maturity of 12 percent. The bond can be called in 5 years at a call price of $1,050 and the bond’s face value is $1,000. Which of the following statements is most correct? a) The bond’s current yield is greater than 10 percent. b) The bond’s yield to call is less than 12 percent c) The bond is selling at a price below par d) Both answers a and c are correct e) None of the above answers is correct 7. You have $2,000 invested in a bank account that pays a 4 percent nominal annual interest with daily compounding. How much money will you have in the account in 132 days from today? (Assume there are 365 days in each year.) a) $2,029.14 b) $2,028.93 c) $2,040.00 d) $2,023.44 e) 2,023.99GSU, Department of Finance - Take-Home Problem Set / page 4 - Corporation Finance Fall 2001 MBA 8622 8. Which of the following is most correct? a) The present value of a 5-year annuity due will exceed the present value of a 5-year ordinary annuity. (Assume that both annuities pay $100 per period and there is no chance of default.) b) If a loan has a nominal rate of 10 percent, then the effective rate can never be less than 10 percent. c) If there is annual compounding, then the effective, periodic, and nominal rates of interest are all the same. d) Answers a and c are correct. e) All of the answers above are correct. 9. If it were evaluated with an interest rate of 0 percent, a 10-year regular annuity would have a present value of $3,755.50. If the future (compounded) value of this annuity, evaluated at Year 10, is $5,440.22, what effective annual interest rate must the analyst be using to find the future value? a) 7% b) 8% c) 9% d) 10% e) 11% 10. Assume you are to receive