QUESTION 47

1. Which of the following investors is more likely to engage in overconfidence bias?

   		a. A pension fund manager operating within strict portfolio allocation requirements.
   		b. A novice investor allocating the majority of their funds to index investing.
   		c. An investor with a few years' experience selecting stocks after examining the risk and return expectations of several stocks.
   		d. A fund manager with several years' experience outperforming the market.

QUESTION 48

1. Which of the following behavioral finance errors does research indicate are likely to be made by professional money managers? (1) Herding. (2) Confirmation bias. (3) Overconfidence bias. (4) Mental accounting.

   		a. 1 and 2.
   		b. 1 and 4.
   		c. 1 and 3.
   		d. 1, 2 and 3.

What is the “Time Value of Money” and why does money have a time value associated with it?

Consider a binomial pricing economy. There are two dates only, date 0 and 1. A European call written on the market portfolio expires on date 1; its exercise price is $100. The price of this call at date 0 is $8. The market portfolio has a price of $100 at date 0 and its future price at date 1 will be either $120 or $95, with probability 0.6 and 0.4 respectively.

a) Compute the expected returns of the call option and the market portfolio.

b) What is the risk-free rate implied by this call option and the market portfolio?

A nation's economy fluctuates instead of growing at a steady pace every year. These fluctuations are generally referred to as the business cycle. Describe the four different phases of the business cycle.

1. Suppose you plan to retire at age 70, and you want to be able to withdraw an amount of $87,000 per year on each birthday from age 70 to age 100 (a total of 31 withdrawals). If the account which contains your savings earns 5.7% per year simple interest, how much money needs to be in the account by the time you reach your 70th birthday? (Answer to the nearest dollar.)
   
   Hint: This can be solved as a 30-year ordinary annuity plus one withdrawal at age 70, or as a 31-year annuity due.

11-4: Project L costs $40,000, its expected cash inflows are $10,000 per year for 11 years, and its WACC is 9%. What is the project's payback? Round your answer to two decimal places.

11-6: Your division is considering two projects with the following cash flows (in millions):

0 1 2 3

Project A -$17 $8 $8 $3

Project B -$26 $13 $10 $9

What are the projects' NPVs assuming the WACC is 5%? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places.

Project A:__ $ million
Project B:__ $ million

What are the projects' NPVs assuming the WACC is 10%? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places.

Project A: $__ million
Project B: $__ million

What are the projects' NPVs assuming the WACC is 15%? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places.

Project A: $ million
Project B: $ million

What are the projects' IRRs assuming the WACC is 5%? Do not round intermediate calculations. Round your answer to two decimal places.

Project A: %
Project B: %

What are the projects' IRRs assuming the WACC is 10%? Do not round intermediate calculations. Round your answer to two decimal places.

Project A: %
Project B: %

What are the projects' IRRs assuming the WACC is 15%? Do not round intermediate calculations. Round your answer to two decimal places.
Project A: %
roject B: %

If the WACC was 5% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 20.19%.)

If the WACC was 10% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 20.19%.)

If the WACC was 15% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 20.19%.)

Consider the following probability distribution for stocks A and B: State probability return on stock A return on stock B 1 0.10 10% 8% 2 0.20 13% 7% 3 0.20 12% 6% 4 0.30 14% 9% 5 0.20 15% 8% 1)

1. Let G be the global minimum variance portfolio. The weights of A and B in G are __________ and __________, respectively.

You have been given the following return information for a mutual fund, the market index, and the risk-free rate. You also know that the return correlation between the fund and the market is 0.97.

Calculate Jensen’s alpha for the fund, as well as its information ratio. (Do not round intermediate calculations. Enter the alpha as a percent rounded to 2 decimal places. Round the ratio to 4 decimal places.)

3. Kramer is trying to decide whether or not to refinance his home. He borrowed $400,000 to buy the home 7 years ago. He took out a 30 year mortgage at a rate of 5.5%. He can refinance today with a 30 year loan at a rate of 4%. Closing costs are estimated to be about $6,000. Should Kramer refinance if he expects to be in the house for about one more year? 5 more years? (5 Points) Kramer can also refinance for 15 years at 3%.   Should he do this based on the same one and five year criteria? Is there anything else he might want to consider with this option? (5 Points)

Consider a 30-year mortgage for $345,552 at an annual interest rate of 5.6%. After 13 years, the mortgage is refinanced to an annual interest rate of 3.5%. How much interest is paid on this mortgage?

Suppose that Coca-Cola is considering a new capital budgeting project. The project will use debt with maturities of 15 years. To determine the cost of debt for the project, an analyst at Coca-Cola looks at currently trading Coca-Cola debt. The analyst is looking at a Coke bond that trades today for $984.00. This bond has an annual coupon rate of 8.00%, face value of $1,000, and will mature in 15 years. The marginal tax rate for Coca-Cola is 38.00%.

What is the after-tax cost of debt for Coca-Cola?

Answer format: Percentage Round to: 2 decimal places (Example: 9.24%, % sign required. Will accept decimal format rounded to 4 decimal places (ex: 0.0924))

First City Bank pays 6 percent simple interest on its savings account balances, whereas Second City Bank pays 6 percent interest compounded annually. If you made a $69,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of 10 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Difference in accounts $

There’s a fairly new product for retirement mutual funds that target your date of retirement. I’m not sold on the product. I’m 59 years old. Over the last 10 years the Vanguard Index500 fund averaged a 10.49% annual return. The 2025 (retirement target date 6 years from now) retirement fund has averaged a 5.13% over the last 10 years. At age 49 I had $200,000 in retirement funds and for the next 17 years (to age 66) $12,000 per year is invested in the fund. (Assume all monies are invested at the beginning of the year.) Now we don’t know what future returns will be but let’s speculate they both will perform identically to past history. At age 66 (7 years from now) how much will I have in the Index500 fund? How much would I have in the 2025 target fund if I listened to an investment “expert” when I was 49 years old and invested in the retirement target fund? In dollars, how much was the financial mistake investing in the 2025 target fund?

Consider a 20-year mortgage for $359,670 at an annual interest rate of 4.8%. After 9 years, the mortgage is refinanced to an annual interest rate of 2.1%. What are the monthly payments after refinancing?

Consider a 30-year mortgage for $345,552 at an annual interest rate of 5.6%. After 13 years, the mortgage is refinanced to an annual interest rate of 3.5%. How much interest is paid on this mortgage?