Download Exam 2, 2009 - Purdue Agricultural Economics

AGEC $424$ EXAM 2 (119 points)
October 29/30, 2009
Name___________________________
Show your work for all questions. Logically correct work, including calculator inputs and outputs when
appropriate, must be shown to receive credit for your answers. I did not write “show your work here” on
the questions, but you still must show your work!
1. Janet Elliott just turned 20, and received a gift of $20,000 from her rich uncle. Janet plans ahead and
would like to retire on her 55th birthday. She thinks she’ll need to have about $2 million saved by
that time in order to maintain her lavish lifestyle. She wants to make a payment at the end of each
year until she’s 50 into an account she’ll open with her uncle’s gift. After that she’d like to stop
making payments and let the money grow at interest until it reaches $2 million when she turns 55.
Assume she can invest at 7% compounded annually. Ignore the effect of taxes.
a. (6 points) How much will she have to invest each year in order to achieve her objective?
b. (2 points) What percent of the $2 million will have been contributed by Janet (including the $20,000
she got from her uncle)?
2. What are the monthly mortgage payments on a 30-year loan for $150,000 at 12%?
a. (4 points) Show work and calculate the monthly payment
b. (10 points) Construct an amortization table for the first two months of the loan.
Month
Beg Bal
Payment
Interest
Prin. Reduction
End Balance
1
3.
a.
b.
c.
d.
(4 points) First Bank offers you a car loan at an annual interest rate of 10% compounded monthly.
What effective annual interest rate is the bank charging you?
10.38%
10.42%
10.45%
10.47%
4. (4 points) You want to purchase a boat that costs $40,000. You want to finance as much of the
purchase as possible with a 5-year bank loan at 12% compounded monthly, but can only afford loan
payments of $750 per month. How much will you need as a down payment to buy the boat?
5.
(5 points) Jackrabbit Inc. has an outstanding semiannual, 8% coupon, $1000 face value bond with 12
years to maturity. What is this bond worth assuming the market is currently requiring a 6% rate of
return on bonds of this risk?
6. (5 points) Wildman Products Inc. has an outstanding semiannual, 9% coupon, $1000 face value
bond priced at $1075. The bond has 5 years to maturity. What is this bond’s YTM?
7. (4 points) What is the current yield of the above Wildman Products bond?
8. (5 points) Jake’s Inc. has an outstanding semiannual, 13% coupon, $1000 face value bond that is
selling for $1185 and has 10 years to maturity. What is the YTM?
9. (5 points) Assume the Jake’s Inc. bond in #4 is callable in 5 years with a $50 call premium.
What is the YTC?
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10. (5 points) Undue Perversity Inc. has a 10 year, callable, semiannual, $1000 face value, 12% coupon
bond for sale. It is callable in 3 years with a $100 call premium. If comparable bonds of this risk
yield 6% and you expect this bond to be called, what is its value?
11. (4 points) The Spinnaker Company has paid an annual dividend of $2 per share for some time.
Recently, however, the board of directors voted to grow the dividend by 6% from now on. What is
the most you would be willing to pay for a share of Spinnaker if you expect a 10% return on your
stock investments and believe the 6% growth will occur indefinitely?
12. (4 points) You are considering investing in B & B, Inc.’s stock and your broker has told you that you
can purchase it for $72. You require a return 12% for this type of investment. The last dividend (D0)
that B & B paid was $4 and a 6% constant growth rate is anticipated. Should you purchase B & B,
Inc.?
a. No, because the stock is overpriced by $1.33.
b. No, because the stock is overpriced by $3.33.
c. Yes, because the stock is underpriced by $1.33.
d. Yes, because the stock is underpriced by $3.33.
13. (14 points) The Miller Milk Company has just come up with a new lactose free dessert product for
people who can’t eat or drink ordinary dairy products. Management expects the new product to fuel
sales growth at 30% for about two years. After that competitors will copy the idea and produce
similar products, and growth will return to about 3% which is normal for the dairy industry in the
area. Miller recently paid an annual dividend of $2.60, which will grow with the company. The
return on stocks like the Miller Company is typically around 10%. What is the most you would pay
for a share of Miller? Include a time line.
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14. (8 points) Charlie Dobbs is considering investing in Astrotech. His research has revealed the
following:
The market is returning 11%.
Three month treasury bills are yielding 5%.
Astrotech’s beta is 1.2.
Astrotech recently paid a dividend of $1.50.
Analysts expect Astrotech to grow at 4% indefinitely.
How much should Charlie be willing to pay for a share of Astrotech?
a. $19.02
b. $12.00
c. $10.26
d. $18.29
15.
a.
b.
c.
d.
(2 points) Which of the following statements is false?
Beta is meaningful only if an investor holds a well-diversified portfolio.
You can completely eliminate risk if you hold a well diversified portfolio.
A portfolio composed of only one stock will not be well diversified.
A wise investor diversifies to capture the high average return of stocks while avoiding as
much risk as possible.
e. All of the above statements are correct.
16.
a.
b.
c.
d.
(2 points) Which of the following is not an example of a source of systematic or market risk?
Interest rate changes
Foreign competition with an industry’s products
Changes in the overall economic outlook
Changes in the inflation rate
17.
a.
b.
c.
d.
(2 points) A statistic known as a stock’s beta coefficient measures:
total risk.
systematic or market risk.
unsystematic or business-specific risk.
none of the above
18. (4 points) Assume the following facts about a single product firm:
Selling price per unit
Variable costs per unit
Total annual fixed costs
= $25.00
= $20.00
= $30,000
What is the firm’s annual breakeven volume in sales revenues?
a. $6,000
b. $250,000
c. $150,000
d. $1,500
19. (4 points) Porter Productions sells videotapes for $15.00 each. Their variable cost per unit is $9.00. In
addition, they incur $180,000 in fixed costs each year. At 40,000 units of sale, what is Porter’s degree
of operating leverage (DOL)?
a.
b.
c.
d.
e.
1.33
2.50
3.00
4.00
6.00
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20. (4 points) A firm has EBIT of $3.6M and debt of $15M on which it pays 8% interest. What is its
Degree of Financial Leverage (DFL)?
21. (4 points) A firm’s degree of financial leverage is 2 and the degree of operating leverage is 2.5. What
is their degree of total leverage?
a. 6.0
b. 4.5
c. 5.0
22. (4 points) Illinois Tool Company’s degree of total leverage (DTL) is 3.00 at a sales volume of $9
million. Determine ITC’s percentage change in earnings per share (EPS) if forecasted sales increase
by 20 percent to $10,800,000.
23. (4 points) Harris Inc. has EBIT of $1,500 and debt of $5,000 on which it pays 12% interest. Its EPS is
currently $2.35 per share. Management anticipates a difficult period ahead and fears EBIT could
decline by as much as 20%. What will the new EPS be if that happens?
a. $1.88
b. $1.41
c. $1.57
d. Can’t tell from the information given
24. (3 points extra credit) Conestoga Ltd. has the following estimated probability distribution of returns.
Return
Probability
4%
.20
12%
.50
14%
.30
Calculate Conestoga’s expected return, the variance, standard deviation, and coefficient of variation.
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