FINA1003_1310_CD Corporate Finance

Semester 1 2016-2017
Assignment 3B (Due: 23th Nov, 2016 Wed 17:30)
Hard copy submission through 9th Floor KKL assignment box only
Name:
Student ID:
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Multiple Choice Questions (40 points)

1. You bought a 10% coupon rate, paid semiannually bond two year ago for $1060
with a face value of $1000. The bond matures five years from now. Suppose you
decide to sell your bonds today and the YTM now is 8%. (4 Points)
a. What is your total dollar return?

b. What is your total percentage return?

2. Stock Z had returns of 7%, -12%, 20%, 17%, and 15% for last five years. (4
Points)
a. What is the arithmetic average and geometric average of Stock Z?

b. What is the standard deviation of Stock Z?

3. The followings are the Stock C and Stock D information: (16 Points)

Rate of Return
if State Occurs
Probability of
State of Stock Stock
State of the Economy Economy X Y
Recession 0.15 0.20 -0.25
Normal 0.70 0.21 0.09
Boom 0.15 0.06 0.44

a. What are the expected return and standard deviation of Stock X and Stock Y?
b. If you invest 70% in Stock X and 30% in Stock Y, what are the expected return,
covariance, and standard deviation of your portfolio?
4.
Security Beta Actual Return T-Bill = 3.3%
A 1.21 10.80% S & P 500 = 9.5%
B 0.83 8.45%
C 2.20 17.52%
D 0.54 6.25%
E 0.35 5.47%

(8 Points)
a. Based on the CAPM, what are the expected returns on the 5 stocks (A, B, C, D, E)?
Which stocks are undervalued, overvalued, fairly priced?

b. If you invest 40% in the S & P 500, 20% in T-Bill, and 8 % each in the 5 stocks,
what is the beta of your portfolio?
5. Consider the following two mutually exclusive projects:

Year Cash Flow (A) Cash Flow (B)

0 -$300,000 -$40,000
1 $10,000 $17,000
2 $60,000 $14,000
3 $60,000 $20,000
4 $400,000 $10,500
You require a 15% return on both investments.
IRR A = 17.37%, IRR B = 20.72%
(8 Points)
a. What is the payback period of each of the project?

b. What is the discounted payback period of each of the project?

c. What is the NPV of each of the project?

d. What is the profitability index (PI) of each of the project?

e. Which project should you choose based on the above information?