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Name_______________________________________Perm #_______________________________Econ 134AJohn HartmanTest 3, Form ADecember 5, 2016Instructions:YOU WILL TURN IN THE ENTIRE TEST, INCLUDING THE MULTIPLE-CHOICE QUESTIONS.You have 160 minutes to complete this test, unless you arrive late. Late arrival will lower the time available to you, and you must finish at the same time as all other students.Cheating will not be tolerated during any test. Any suspected cheating will be reported to the relevant authorities on this issue.You are allowed to use a nonprogrammable four-function or scientific calculator that is NOT a communication device. You are NOT allowed to have a calculator that stores formulas, buttons that automatically calculate IRR, NPV, or any other concept covered in this class. You are NOT allowed to have a calculator that has the ability to produce graphs. If you use a calculator that does not meet these requirements, you will be assumed to be cheating.Unless otherwise specified, you can assume the following:Negative internal rates of return are not possible.Equivalent annual cost problems are in real dollars.You are allowed to turn in your test early if there are at least 10 minutes remaining. As a courtesy to your classmates, you will not be allowed to leave during the final 10 minutes of the test.Your test should have 10 multiple choice questions (20 points) and 7 problems (49 points). The maximum possible point total is 70 points. If your test is incomplete, it is your responsibility to notify a proctor to get a new test.365569562230Grading:Filling in scantron correctly, putting name and perm # on this page, & having photo ID ___/1(automatic unless something is incorrect)Multiple choice portion _____/20Problems _____/49Total score _____/7000Grading:Filling in scantron correctly, putting name and perm # on this page, & having photo ID ___/1(automatic unless something is incorrect)Multiple choice portion _____/20Problems _____/49Total score _____/70For your reference, an example of a well-labeled graph is below:MULTIPLE CHOICE: Answer the following questions on your scantron. Each correct answer is worth 2 points. All incorrect or blank answers are worth 0 points. If there is an answer that does not exactly match the correct answer, choose the closest answer.1. A bond pays a coupon of 9% every year, starting one year from today until the date the bond matures. If the bond matures four years from today, has a 5% effective annual discount rate, and currently has a value of $1000, what is the face value?A. $800B. $875C. $950D. $1050E. $11502. If inflation is 3% over the next year, 5% the year after that, and 10% the following year, what is the price of a product three years from today if its current price is $800?A. $874B. $891C. $926D. $952E. $10653. Don invested $100 in a company 30 years ago. This investment is worth $800 today. What is the geometric average annual return on this investment?A. 5%B. 7%C. 12%D. 23%E. Not enough information to answerFor the next three questions, use the following information: Sally is ready to buy a new house. In order to do so, she will need to take a loan out today of $540,000. She will pay back the loan over 360 months, starting in one month. The stated annual interest rate being charged to Sally is 4.2%, compounded monthly.4. If the loan is amortized such that the amount of principal reduced each month is constant, how much is the first payment?A. $3400B. $2600C. $2300D. $1800E. $15005. If the loan is amortized such that all payments are constant, how much is the first payment?A. $3400B. $2600C. $2300D. $1800E. $15006. If the loan is amortized such that the amount of principal reduced each month is constant, how much is the last payment?A. $3400B. $2600C. $2300D. $1800E. $15007. A sample of four stocks’ returns in a given year is 9%, 12%, 35%, and –8%. What is the standard deviation of this sample?A. 14%B. 15%C. 16%D. 17%E. 18%8. A new machine has a purchase price of $900 today, but also has maintenance costs of $500 two years from today and $800 four years from today. What is the equivalent annual cost of owning this machine if it lasts for 7 years and the effective annual interest rate is 18%?A. $310B. $360C. $400D. $450E. $630Use the following information to answer the next two questions: Allegro Super Style Soft Drinks stock prices change consistent with a random walk, with each day’s movement in price independent of the previous day’s price change. Every day, the stock can either go up or down by $4, each with 50% probability. The stock is currently valued at $100.9. What is the probability that the value of the stock will be higher four days from now?A. 50%B. 45%C. 40%D. 35%E. 30%10. What is the present value of a European call option with an expiration date two days from now if the exercise price of the option is $98? Assume a daily discount rate of 0.04%, with compounding daily.A. $4B. $3.50C. $2.50D. $2E. $1.50 For the following problems, you will need to write out the solution. You must show all work to receive credit. Each problem (or part of problem) shows the maximum point value. Provide at least four significant digits to each answer or you may not receive full credit for a correct solution. Show all work in order to receive credit. You will receive partial credit for incorrect solutions in some instances. Clearly circle your answer(s) or else you may not receive full credit for a complete and correct solution.11. (6 points) Countdown Telegraph Products, Inc. has the following dividends planned: The next dividend of $6 is scheduled for 4 months from today. Each subsequent dividend will be paid every 6 months. The dividends paid 10 months, 16 months, 22 months, and 28 months from today will be 5% higher than the previous dividend payment. Every dividend paid 34 months from today and after will be 1% lower than the previous dividend payment. If dividends will be paid forever, what is the present value of these planned payments if the effective annual interest rate is 7%?12. Please answer each of the following:(a) (4 points) In one of the lectures this quarter, I talked about why Hillary Clinton’s campaign may have found it useful to spend campaign money in areas heavily dominated by Democrats, like San Francisco and Washington state. Despite the fact that she was nearly guaranteed to win California and Washington, why would spending this money be useful. Answer in 40 words or less.(b) (4 points) A firm currently has a capital structure of one part debt to one part equity. The beta value of this firm would be 1 if it would be an all-equity firm with no debt. (In other words, the beta of the firm if unlevered is 1.) The beta value of any debt issued is 0.5. How much would the equity beta change if the firm decides to change to having one part debt to two parts equity? (If you need a hint, think about weighted averages.)(c) (3 points) Describe the semistrong form of efficiency in 30 words or less.(d) (3 points) From your econometrics assignment, explain in 30 words or less how to interpret the slope of your regression line.13. (5 points) A stated annual interest rate of 8%, compounded continuously, is equivalent to a stated annual interest rate of 8.32871%, compounded how many times per year? (Hint: You may be able to more easily solve this problem by using only a minimal amount of math and thinking about the problem.)14. (8 points) Suppose that you are advising a couple just about to get married about how much they need to save for college for their future children. They plan on having 2 children, one 6 years from today and the other 11 years from today. Each child will start college 18 years after being born. You estimate the children’s annual cost of education will be $75,000 per year per child, payable at the beginning of each school year. We assume four years of college expenses for each child. The effective annual interest rate is 10%.When you ask the couple how they plan to save for their children’s college funds, they tell you that they want to make two deposits of $X, one 5 years from today and the other 10 years from today. The total of these payments will be exactly enough to cover all of their children’s college expenses. Find X.15. (6 points) Emerald buys one put option with an exercise price of $120 (per share) today, one call option with an exercise price of $90 (per share), and one share of stock currently valued at $150. The expiration date of both of these options is one month from now. Each option is for buying or selling one share. For simplicity in this problem, you can assume that the discount rate is 0%. Draw a well-labeled graph that shows the value of a combination of the two options and one share of stock, as a function of the value of the stock at expiration. The vertical intercept should have the value of the combination of the assets. The horizontal intercept should have the value of the stock on the expiration date. Make sure to label your intercepts and other relevant numbers on each axis, where relevant. (Hint: You may want to look at the front page of the test to see a well-labeled graph.) Explain your answer in words, math, and/or using additional graphs. Include enough detail so that everything on the graph is unambiguous.16. Two mutually exclusive projects are being considered for implementation. Project Alpha requires a $1,000 investment and will pay out $1,150 one year from today. Project Beta requires a $3,000 investment and will pay out $3,300 one year from today. Any remaining money not invested will be invested in a project with a $0 net present value. The effective annual interest rate for both investments is 5%.(a) (2 points) What is the internal rate of return for each project?(b) (3 points) Which project should be implemented? Justify your answer using words, math, and/or a graph.17. (5 points) There are two known states of the world, A and B. Stock 1 has a 18% rate of return in State A, and 2% in State B. Stock 2 has a 5% rate of return in State A and a 7% rate of return in State B. The probability of each state occurring is ?. What is the covariance between these two stocks’ rates of return?NOTE: YOU CAN TEAR THIS SHEET OFF AND USE AS EXTRA SCRATCH PAPER. PLEASE NOTE THAT ANYTHING ON THIS SHEET WILL NOT BE GRADED UNLESS EXPLICITLY SPECIFIED ON THE TEST.PerpetuityAnnuityGrowing perpetuityGrowing annuityQuadratic formulaax2 + bx + c = 0 Logarithmic ruleab = c b = log c / log aVariance of a sampleVariance of a distribution, with each outcome having the same probability of occurringCovariance formulaCorrelation of A and B, where SD stands for standard deviationVariance of a portfolio ................
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