Great Deal! Get Instant $10 FREE in Account on First Order + 10% Cashback on Every Order Order Now

5. Nominal versus Real Returns: a. In nominal terms? b. In real terms? The nominal return is 10.23% from the table. To find the real return, we use the fisher equation (1 + R) = (1 + r) (1 + h)...

1 answer below »
5. Nominal versus Real Returns:
a. In nominal terms?
b. In real terms?
  1. The nominal return is 10.23% from the table.
  1. To find the real return, we use the fisher equation

(1 + R) = (1 + r) (1 + h)
XXXXXXXXXX) = (1 + r XXXXXXXXXX)
1.1023 = (1 + r XXXXXXXXXX)
1 + r = 1.0593
r = 1.0593 – 1
r = XXXXXXXXXXor 5.93%
7. Calculating Returns and Variability:
Returns
Year X Y
1 6% 18%
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Return X
Arithmetic average returns, R = [R1 +R2 + R3 + R4 + R5]/N
= [ XXXXXXXXXX XXXXXXXXXX]/5
= 0.44/5
= 0.088 or 8.80%
Variance = 1/ (N – 1) [(R1 – R) 2 + (R2 – R) 2 + (R3 – R) 2 + (R4 – R) 2+ (R5 – R) 2]
= 1/ (5 – 1) [(0.06 – 0.088)2 XXXXXXXXXX – 0.088)2 + (0.13 – 0.088)2 XXXXXXXXXX – 0.088)2+ (0.15 – 0.088)2]
= ¼ [0.08148]
= XXXXXXXXXX
Standard deviation = vVariance
= v0.02037
= XXXXXXXXXXor 14.27%
Return Y
Arithmetic average returns, R = [R1 +R2 + R3 + R4 + R5]/N
= [ XXXXXXXXXX XXXXXXXXXX]/5
= 0.78/5
= XXXXXXXXXXor 15.60%
Variance = 1/ (N – 1) [(R1 – R) 2 + (R2 – R) 2 + (R3 – R) 2 + (R4 – R) 2+ (R5 – R) 2]
= 1/ (5 – 1) [(0.18 – 0.156)2 XXXXXXXXXX – 0.156)2 XXXXXXXXXX – 0.156)2 XXXXXXXXXX – 0.156)2+ (0.47 – 0.156)2]
= ¼ [0.32732]
= XXXXXXXXXX
Standard deviation = vVariance
= v0.08183
= XXXXXXXXXXor 28.61%
8. Risk Premiums:
a. Calculate the arithmetic average returns for large-company stocks and T-Bills over this period.
b. Calculate the standard deviation of the returns for large-company stocks and T-Bills over this period.
c. Calculate the observed risk premium in each year for the large-company stocks versus T-Bills. What was the average risk premium over this period? What was the standard deviation of the risk premium over this period?
d. Is it possible for the risk premium to be negative before an investment is undertaken? Can the risk premium be negative after the fact?
Year Large stock return T-bill return Risk premium
1970 -3.57% 6.89 -10.46
1971 8.01 3.86 4.15
1972 27.37 3.43 23.94
1973 0.27 4.78 -4.51
1974 -25.93 7.68 -33.61
1975 18.48 7.05 11.43
Total 24.63 33.69 -9.06
  1. Large Company Stocks

Arithmetic average returns, R = [R1 +R2 + R3 + R4 + R5 + R6]/N
= 24.63/6
= 4.105%
T-bills
Arithmetic average returns, R = [R1 +R2 + R3 + R4 + R5 + R6]/N
= 33.69/6
= 5.615%
  1. Large Company Stocks

Variance = 1/ (N – 1) [(R1 – R) 2 + (R2 – R) 2 + (R3 – R) 2 + (R4 – R) 2+ (R5 – R) 2 + (R6 – R) 2]
= 1/ (6 – 1) [(-3.57 – 4.105)2 XXXXXXXXXX – 4.105)2 XXXXXXXXXX – 4.105)2 + (0.27 – 4.105)2 XXXXXXXXXX – 4.105)2 XXXXXXXXXX – 4.105)2]
= 1/5 [ XXXXXXXXXX]
= XXXXXXXXXX
Standard deviation = vVariance
= v XXXXXXXXXX
= XXXXXXXXXXor 18.65%
T-bills
Variance = 1/ (N – 1) [(R1 – R) 2 + (R2 – R) 2 + (R3 – R) 2 + (R4 – R) 2+ (R5 – R) 2 + (R6 – R) 2]
= 1/ (6 – 1) [(6.89 – 5.615)2 XXXXXXXXXX – 5.615)2 + (3.43 – 5.615)2 + (4.78 – 5.615)2+ (7.68 – 5.615)2+ (7.05 – 5.615)2]
= 1/5 [ XXXXXXXXXX]
= XXXXXXXXXX
Standard deviation = vVariance
= v XXXXXXXXXX
= XXXXXXXXXXor 1.82%
  1. Average observed risk premium = [R1 +R2 + R3 + R4 + R5 + R6]/N = -9.06/6 = -1.51%

Variance = 1/ (N – 1) [(R1 – R) 2 + (R2 – R) 2 + (R3 – R) 2 + (R4 – R) 2+ (R5 – R) 2 + (R6 – R) 2]
= 1/ (6 – 1) [(-10.46 – 1.51)2 XXXXXXXXXX – 1.51)2 XXXXXXXXXX – 1.51)2 XXXXXXXXXX – 1.51)2 XXXXXXXXXX – 1.51)2 XXXXXXXXXX – 1.51)2]
= 1/5 [ XXXXXXXXXX]
= XXXXXXXXXX
Standard deviation = vVariance
= v0.03933
= XXXXXXXXXXor 19.83%
d) Before the fact, the risk premium will positive, investors demand compensation above the risk-free return to invest money. After the fact, the risk premium can be negative if assets nominal return is low and risk-free return is high unexpectedly.
9. Calculating Returns and Variability:
a. What was the arithmetic average return on Crash-n-Burn’s stock over this 5-year period?
b. What was the variance of Crash-n-Burn’s returns for this period? The standard deviation?
  1. Arithmetic average return, R = [R1 +R2 + R3 + R4 + R5]/N

= [ XXXXXXXXXX XXXXXXXXXX]/5
= 0.49/5
= 0.098 or 9.80%
  1. Variance = 1/(N – 1) [(R1 – R)2 + (R2 – R)2 + (R3 – R)2 + (R4 – R)2+ (R5 – R)2]

= 1/ (5 – 1) [(0.02 – 0.098)2 XXXXXXXXXX – 0.098)2 + (0.24 – 0.098)2 + (0.19 – 0.098)2+ (0.12 – 0.098)2]
= ¼ [0.06688]
= XXXXXXXXXX
Standard deviation = vVariance
= v0.01672
= XXXXXXXXXXor 12.93%
12. Effects of Inflation:
T-bill rates were highest in initial period. During the period of high inflation, it was consistent in accordance with the Fisher effect.
13. Calculating Investment Returns:
Given that Coupon rate = 7%,
Price 1 year ago, P1 = $920
Required return on bond, I = 8%
Number of years, n = 6
Inflation rate, h = 4.2%
To find total real return, we have to find the nominal return based on the current price of bond. Now,
Coupon payment, C = 0.07 x 1000 = $70
P1 = C (PVIFA @ 8%, 6) + Face value (PVIF @ 8%, 6)
= $70 [(1.086 – 1)/ (0.08*1.086)] + 1000/1.086
= $ XXXXXXXXXX/ XXXXXXXXXX
= $ XXXXXXXXXX
= $323.60 + $630.17
= $953.77
Nominal return, R = [(P1 – P0 + C]/P0
= [(953.77 – XXXXXXXXXX]/920
= 103.77/920
= XXXXXXXXXXor 11.28%
Using the fisher equation,
(1 + R) = (1 + r) (1 + h)
XXXXXXXXXX) = (1 + r XXXXXXXXXX)
(1.1128) = (1 + r XXXXXXXXXX)
1 + r = 1.1128/1.042
1 + r = 1.0679
r = 1.0679 – 1
r = XXXXXXXXXXor 6.79%
The total real return on investment is 6.79%
005_b4usajo-orr5ramp.doc
Answered Same Day Dec 22, 2021

Solution

Robert answered on Dec 22 2021
126 Votes
Business Finance (FIN2304)
Final Exam “A”
Page 16 of 16
EXAMINATION COVER PAGE
    COURSE CODE:
    FIN2304 - A
    COURSE TITLE:
    BUSINESS FINANCE
    DELIVERY MODE:
    FULLY ONLINE, CENTRE FOR CONTINUING AND ONLINE LEARNING
    SEMESTER:
    2013 Winter term
Student Information
    STUDENT NAME (please print)
    
    DATE:
    
    FACILITATOR NAME:
    James Campbell
[email protected]
jcampbell@
igatafunds.com
Exam Information
    Exam Duration:
    3 Hours
    Materials Required:
    
    Special Instructions:
    · CLOSED BOOK
· Financial calculator permitted
( including BAII Plus)
NON-PROGRAMMABLE
· Answer questions in the space provided
· Student name to appear on all exam pages
· Return all exam materials including questions at end of exam
· A formula sheet is provided on the last page of the exam
    Return Completed Exams to:
    Examination Coordinator – Online Learning
Algonquin College
Room P209
1385 Woodroffe Ave.
Ottawa, ON K2G 1V8
Phone: (613) 727- 4723, ext 5206
MARKING:
Multiple Choice /25 /50
Short Answer #1 /5
Short Answer #2 /5
Short Answer #3 /5
Short Answer #4 /5
Short Answer #5 /5
Short Answer #5 /5
Long Answer #1 /15
Long Answer #2 /15
Long Answer #3 /15
/125
FINAL SCORE /100
This Exam consists of 25 Multiple Choice questions - 50 marks, 6 Short Problem questions - 30 marks, 3 Long Problem questions - 45 marks, for a Total of 125 marks.
PART A – Multiple Choice (2 marks each, total 50 marks)
Use the following to answer questions 1-3:
Use the following to answer the question(s) below. A savings account, which started with a balance of $500, has the following end of year balances. No withdrawals were made over the life of the account, but there was one additional deposit of $50 made at the beginning of year 5.
Year 1 = $550; Year 2 = $580; Year 3 = $660; Year 4 = $772; Year 5 = $950
1.
If you leave the money in the account for another five years and the account earns 8% compounded annually, what will the balance in the account grow to?
A)
$1,341.05
B)
$1,347.82
C)
$1,395.86
D)
$1,406.23
E)
$1,491.15
2.
Over the first four years, the account earned ________ compounded annually.
A)
11.5%
B)
12.8%
C)
14.6%
D)
15.6%
E)
23.1%
3.
If the account earned a total of $300 in simple interest over its life, how much was earned in compound interest?
A)
$25
B)
$50
C)
$75
D)
$100
E)
$125
4.
You received a $1 savings account earning 5% on your 1st birthday. How much will you have in the account on your 40th birthday if you don't withdraw any money before then?
A)
$5.89
B)
$6.34
C)
$6.70
D)
$7.00
E)
$7.04
5.
You bo
owed $1,500 at 6% compounded annually. Your payments are $90 at the end of each year. How many years will you make payments on the loan?
A)
9 years
B)
10 years
C)
11 years
D)
12 years
E)
forever
6.
The amount by which the call price exceeds the bond's par value is the:
A)
Coupon rate
B)
Redemption value.
C)
Call premium
D)
Original-issue discount
E)
Call rate
7.
Assume the required return on a zero-coupon bond will remain constant over the remainder of its life. The market value of the bond will:
A)
Increase each year by an amount equal to the imputed coupon rate for the period
B)
Increase each year by an amount equal to the imputed interest for the period
C)
Decrease each year by an amount equal to the imputed interest for the period
D)
Decrease each year by an amount equal to the bond's yield to maturity
E)
Remain unchanged
8.
If investors are uncertain that they will be able to sell a corporate bond quickly, the investors will demand a higher yield in the form of a(n) _________________.
A)
inflation premium
B)
interest rate risk premium
C)
default risk premium
D)
liquidity risk premium
E)
increased real rate of interest
9.
________________ is an account into which periodic payments are made for the purpose of retiring a bond issue.
A)
An indenture
B)
A debenture
C)
A covenant
D)
A call option
E)
A sinking fund
10.
Which of the following terms is typically associated with BOTH prefe
ed stock and common stock?
A)
Proxy
B)
Voting rights
C)
Dividend yield
D)
A
earage
E)
Cumulative voting
11.
Saskatchewan Steel, Ltd. and Alberta Copper, Inc. both recently announced earnings of $400,000. Both companies have common shares outstanding of 250,000 and rates of return of 10%. Saskatchewan Steel has a new project that will generate net cash flows of $50,000 per year forever. Alberta Copper has a new project that will generate net cash flows of $40,000 per year forever. The stock price of Saskatchewan Steel should be _______ greater than the stock price of Alberta Steel.
A)
$0.04
B)
$0.40
C)
$3.60
D)
$10,000
E)
$100,000
12.
The process of valuing an investment by determining the present value of its future cash flows is called (the):
A)
Constant dividend growth model
B)
Discounted cash flow valuation
C)
Average accounting valuation
D)
Expected earnings model
E)
Capital Asset Pricing Model
13.
Which capital investment evaluation technique is described by the following characteristics? (1) Easy to understand; (2) Biased towards liquidity; (3) Requires an a
itrary cutoff point; (4) Ignores the time value of money.
A)
NPV
B)
IRR
C)
Profitability index
D)
Payback period
E)
Discounted...
SOLUTION.PDF
SOLUTION.PDF

Answer To This Question Is Available To Download

Related Questions & Answers

More Questions »

Submit New Assignment

Copy and Paste Your Assignment Here
Attach File