# 1) Company XYZ is currently trading at \$97.00 a share. The expected growth rate is 4% and the Requir

1) Company XYZ is currently trading at \$97.00 a share. The expected growth rate is 4% and the Required Rate of Return is 7.8%. Calculate the next annual dividend amount using the Constant Dividend Growth Model.

Note: D0 = current dividend; D1 = next annual dividend

D1 = P0 (k – g)

= (\$97) (0.078 – 0.04)

= \$3.686/share

#2) Find the Yield to Call on a semiannual coupon bond with a price of \$1,085, a

Face Value of \$1,000, a call price of \$1,067, a coupon rate of 6.75%, 18 years remaining until maturity, 11 years remaining until the call date.

Textbook Essentials of Investments, 9th edition, Bodie, 2013 Chapter 10 – Page 306

Even with the textbook explanation, I could not understand how to solve this problem. Can you explain in detail?

#3) An investor purchases 300 shares of ABC stock for a \$15 a share and immediately sells 2 covered call contracts at a strike price of \$20 a share. The premium is \$2 a share. What is the maximum profit and loss?

Maximum Profit:

(Strike Price – Stock Purchase Price + Premium) (# shares purchased)

(\$20 – \$15 + \$2)(300) = \$2,100

Maximum Loss: (Stock Purchase Price – Premium) (# shares purchased)

(\$15 – \$2) (300) = \$3,900

Is this the correct answer and method? If not, please explain in detail.

#4) You are an analyst comparing the performance of 2 portfolio managers using the Sharpe Ratio measurement. Manager A shows a return of 16% with a standard deviation of 10% while manager B shows a return of 12% with a standard deviation of 6%. If the risk-free rate is 5%, which manager has the better risk adjusted return?

Sharpe Ratio = S = (Ri – rf)/standard deviation

Ri = Portfolio Return

rf = Risk-Free Rate

Sharpe Ratio (A) = (0.16 – 0.05)/0.10 = 1.1

Sharpe Ratio (B) = (0.12 – 0.05)/0.06 = 1.167 (rounded)

Manager (B) has the better adjusted return because the higher Sharpe ratio indicates that his portfolio has a lower yield but with a much lower risk than Manager (A).

Is this the correct answer and is the analysis also correct? If not, please explain in detail.

#5) Look at the following Balance Sheet and Income Statement and calculate the following ratios: Profit Margin, Return on Assets, Return on Equity.

1998 (Millions \$) Balance Sheet

Assets

Current Assets

Cash \$700

Accounts Receivable \$400

Inventory \$200

Total Current Assets \$1,300

Fixed Assets

Property, Plant, Equipment \$2,000

LESS: Accumulated Depreciation \$500

Total Fixed Assets \$1,500

Liabilities & Owners Equity (1998)

Current

Accounts Payable \$700

Notes Payable \$300

Total \$1,000

Long Term

Long Term Debt \$700

Total \$700

Stockholders’ Equity (1998)

Common Stock (\$1 Par) \$100

Capital Surplus \$100

Retained Earnings \$900

Total Owners’ equity \$1,100

Total Liabilities & Stockholders’ Equity \$2,800

Income Statement (1998 Millions \$)

Sales \$600

Cost of Goods Sold \$400

Depreciation \$510

Earnings Before Interest & Taxes (EBIT) -\$410

Interest Expense \$30

Taxable Income -\$440

Taxes -\$50

Net Income -\$390

Dividends \$0

Other Information

# Shares Outstanding (millions) 100

Price per share \$18.86

Profit Margin = Net Income / Net Sales (revenue)

-\$390/\$600 = -0.65

ROA = Net Income / Total Assets

-\$390/\$2,800 = -0.1392

ROE = Net Income / Shareholders’ Equity

-\$390/\$1,100 = -0.3545

Are these answers correct and is the analysis correct? If not, please explain in detail.

#6) Find the Intrinsic Value of the stock of Company ABC using the following data:

Risk-Free Rate = 5%

Expected Market Return = Risk-Free Rate + Market Risk Premium

Beta = 0.9

ROE = 12.5%

Dividend Payout Ratio = 0.22

Dividends for the next 4 years are expected to be: 0.59, 0.67, 0.76, 0.85

Subsequent Growth will be at the computed growth rate (g)