INSTRUCTIONS
I. SHOW YOUR WORK.
II. YOUR GRADE IS BASED ON YOUR CORRECTNESS, CONVICTION, ELABORATION AND ELUCIDATION.
III. YOU OUGHT TO DO ALL THE PROBLEMS AND CHOOSE 3 ESSAYS. EACH PROBLEM COUNTS 17, AND EACH ESSAY COUNTS 17 POINTS.
A.PROBLEMS.
1. We have a stock Bottine and Despotakis (A&D) which we buy for $10. We keep it for 6 years at which point we sell it for $25. During the six year period, it pays us $12 which we reinvest at 5% annual return. Calculate the rate of return we make per annum.
2. We have the following information. We have two companies we are considering. They are Anthony and Ben and their betas are 1 and 1.4, respectively. The T bond rate is .02 and the rate of return in the market is .12. The debt rates of the two firms are .30 and .60 in order we have mentioned them. Finally, their tax rates are .25 and .40, respectively. Compute their cost of equity. If they each pay $4 and their growth rate is .01, what are their prices? Expound on the differences and in which one you would invest and why.
3. Answer numbers 10 and 11 on page 28. Consider it as one question.
B. ESSAYS
1. Expound on the determinants of beta.
2. Discuss systematic versus unsystematic risk. Give examples of each. Which one is more important and why?
3 There are a few specific return objectives, such as capital preservation, current income, capital appreciation and total return. Use each and apply it to a person with different ages and wealth. Be thorough. How does the existence of risk alters the issues?
4. Explicate how the investment constraints affect one’s decision making. Include tax concerns, liquidity, time horizon and regulatory/legal reasons.
5. There is a client who has $500,000 cash. She instructs you, her advisor, to invest $200,000 in the stock market for 2 years, when she wants to buy a house. Furthermore, she requests you to invest $300,000 in AAA bonds for her retirement, which will occur in 30 years from now. Evaluate these requests