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Name_______________________________________Perm #_______________________________Econ 134AJohn HartmanTest 3, Form AMarch 16, 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. Cornelius will receive $3,000 today. He will receive 6% more each subsequent year. If his effective annual discount rate is 17%, what is the present value of this stream of payments?A. $27,000B. $28,500C. $30,000D. $32,000E. $34,0002. Sunny Sunshine will borrow $60,000 on January 1, 2017. She will make 12 equal yearly payments, on July 1 of years 2018-2029, to completely pay back the loan. How much will each payment be if the effective annual interest rate is 15%?A. $10,320B. $11,070C. $11,510D. $11,870E. $12,7303. A stock is currently valued at $50, which is the correct current value. Today, news is revealed in which the new correct value of the stock should be 20% higher if markets were completely efficient. However, the price of the stock increases to $55 today, and the value slowly increases over the next few days until the new efficient value is reached. This is an example of…A. Instant efficient market response to new informationB. Overreaction and reversionC. Slow responseD. A random walk similar to the Halloween night example shown in classE. None of the aboveUse the following information to answer the next three questions: Redondo Springs Miniature Racers stock exhibits price changes that are a random walk. In any given day, the value of the stock goes up by $1 with probability 0.3 and goes down by $0.50 with probability 0.7. The stock’s current value is $60.4. What is the probability that the value of the stock will be the same three days from today?A. 44%B. 34%C. 19%D. 6%E. 0%5. What is the probability that the value of the stock will be the same two days from today?A. 44%B. 34%C. 19%D. 6%E. 0%6. Suppose that you own a call option with an expiration date four days from today. The exercise price on the option is $63. What is the present value of the option if the effective annual interest rate for this option is 25%?A. $0.01B. $0.25C. $0.50D. $0.75E. $1.007. The expected return on a security is 30%. The risk-free rate is assumed to be 7%. The expected return on the market is 15%. Use the CAPM model derived in class to determine the beta of this security.A. 3B. 2.5C. 2D. 1.5E. 18. Marshmallow Toothpick Structures, Inc. (MTS) has $80,000 that it must invest today in one or more of the following three investments:Investment I: Invest $40,000 today, and receive $58,000 one year from today.Investment II: Invest $50,000 today, and receive $70,000 two years from today.Investment III: Invest $X today, and receive $(1.5*X) one year from today.X can be any non-negative amount that MTS wants. Any investments in future years will have a net present value of 0. What is the largest net present value that be earned from the investments made today? Assume that the effective annual discount rate is 20%.A. $30,000B. $25,000C. $20,000D. $18,000E. $16,0009. Liv invests $300 in a project today, and receives $250 one year from today and $50 two years from today. Her NPV from the project is $0, and she receives one final payment four years from today. If her annual discount rate is 7%, then the final payment is _____.A. $0B. $15C. $30D. $45E. $6010. How was the word “underwater” used as a finance term in lecture?A. The drop in an asset’s value after a bubble burstsB. Owing more on a house than what the house is worthC. A stock that is worth less than the price paid for itD. A put option that is in the moneyE. An airfare below Spirit Airline’s “Bare Fare” 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. (7 points) Kora buys one put option with an exercise price of $100 (per share) today, one call option with an exercise price of $120 (per share), and one share of stock currently valued at $80. The expiration date of all 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.12. You have been asked to analyze the costs of two different machines. If you buy Machine A, you have to pay $2,000 today (year 0), and maintenance costs of $300 in each of years 2, 3, and 4. If you buy Machine B, you have to pay $1,500 today and $500 maintenance costs in each of years 1, 2, 3, 4, and 5. Machine A lasts 4 years, and Machine B lasts 5 years. The effective annual discount rate is 10%. (Note: All dollar amounts in this problem are in real terms.)(a) (2 points) What is the present value of all of the costs of Machine A?(b) (2 points) What is the present value of all of the costs of Machine B?(c) (3 points) What is the equivalent annual cost of Machine A?(d) (3 points) What is the equivalent annual cost of Machine B?(e) (2 points) If both machines can be easily replaced in the future, which machine will you buy? Explain in 15 words or less.13. (5 points) Suppose you start a bank account one year from now. If you make annual deposits of $50 into an account that pays an effective annual interest rate of 10%, when will you have an account balance of $10,000? (Round to the nearest number of years. The deposits will occur on the same date each year starting one year from today.)14. Answer each of the following:(a) (3 points) A zero-coupon bond pays its face value of $1,000 in 3 years. Today’s price for the bond is $700. What is the yield to maturity, expressed as an annual percentage rate, using semiannual compounding?(b) (3 points) What is the weighted average cost of capital for a company that has two-fifths of its value in stocks, three-fifths of its value in bonds, the rate of return of stocks is 12%, and the rate of return of bonds is 2%?15. (6 points) Blue Barrel Oil stock is about to pay its annual dividend today (March 16, 2016), $3 per share. Every subsequent annual dividend payment until March 16, 2019 will be 20% higher than the previous dividend. On March 19, 2020, the dividend will be 35% higher than the dividend on March 16, 2019. On March 16 in the years 2021 and beyond the dividend payment will be the same as the dividend payment on March 16, 2020. These payments will go on forever. The effective annual interest rate for this stock is 18%. What is the present value of this stock, assuming that you will receive the next dividend later today?16. There are 3 states of the world, each with 1/3 probability of occurring: Ash, Laugh, and Zilch. In the Ash state, Stock X has a rate of return of 24%, and stock Y has a rate of return of 72%. In the Laugh state, Stock X has a rate of return of 30% and stock Y has a rate of return of –9%. In the Zilch state of the world, Stock X has a rate of return of 0% and stock Y has a rate of return of 0%.(a) (2 points) What is the expected return for each stock?(b) (4 points) What is the covariance of the two stocks’ returns?17. (7 points) Kaja is about to buy her first house. She will pay $600,000 for the house, 30% in cash and the rest will be covered by a 50-year mortgage. As part of the terms of the mortgage, Kaja will make payments of $100,000 18? years, 28? years, and 38? years from today. She will also make 50 equal yearly payments of $N, starting one year from today. The stated annual interest rate of the mortgage is 15%, compounded monthly. How much does N need to be in order to exactly pay off the mortgage?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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