OLD FINAL

1. Shares of Alphabet Inc. are trading for $1060. Alphabet doesn't currently pay a dividend.
Assume that it will commence paying annual dividends 4 years from today. Once started,
it will pay dividends in perpetuity and they will grow at an annual rate of 2.25%.
Alphabet investors require a return of 11.75%. What dividend is the market using to
arrive at its current valuation? Enter you answer rounded to 2 decimal places.

2. You are 40 years old and want to retire at age 55. Each year, starting one year from now,
you will deposit $35,000 into a savings account that pays 7.5% interest. The last deposit
will be on your 55th birthday. On your 55th birthday you will switch the accumulated
savings into a bank account that also pays 7.5% interest. You will withdraw your annual
income at the end of that year (on your 56th birthday) and each subsequent year until
your 85th birthday. How much can you withdraw (annually) in retirement?

3.
 You are looking for the cheapest railroad stock using the EV-to-EBITDA ratio. Using the
data in the table, which company is the cheapest

4. The SML implies that, if you could find an investment with a negative beta, its expected
return would be less than that of the risk-free rate assuming a positive market risk
premium. (True or False)

5. Douglas Dynamics, Inc. is North America's premier manufacturer of commercial work

truck attachments and equipment. The company hast two segments: First, the Work
Truck Attachments segment, which manufactures snow and ice control attachments such
as snow plow blades. Second, the Work Truck Solutions segment, which manufactures
municipal snow and ice control vehicles. In it's annual report, the company lists some of
the risks that might affect an investor. A sub-set of those risks are listed below.
Categorize each as systematic or unsystematic.
6. Consider the profit diagram for a short put. What is the y-axis intercept? ANS: the option
premium

7. Toll Brothers Inc. builds and finances luxury homes in the U.S.. Toll Bros. offers a 25
year mortgage where the borrower makes no payments during the first year. The
promotion is offered on its entry level design, The Refuge, which sells for $1100000.
What are the monthly payments after the first year? Toll Bros. offers an annual interest
rate of 7.0%. Assume that this offer is in the U.S. where banks charge a periodic interest
rate of i/m. Round your answer to the nearest dollar.

8.
Referring to the Blockbuster financial statements, what is the most important underlying
reason for the change in ROE?
9. The Tiny stock market has two companies listed on the exchange. Data for the two shares
is given in the table. The Tiny Market Index (TMI) is value-weighted. You want to build
a portfolio to mimic the index. You already own 6 share of Company A. How many
shares of Company B do you need to buy so that the return on your portfolio matches the
index?

10. Consider a two year coupon bond issued today with a face value of $1,000 and a 5.75%
coupon rate. Suppose that vields on zero coupon bonds with terms one and two are 6.00%
and 6.50% respectively. What is your best estimate of the price of the bond next year
after the first coupon?

11. The table, above, provides ratios for Los Pollos Hermanos Restaurants Inc. If Los Pollos
wants the same ROE next year as last year, then what D/E ratio should it have next year?
12. Your company is planning to borrow $1,000,000 on a 5 year, ¡=15%, annual payment
fully amortized term loan. What is the dollar amount of principal repaid in the second
year?

13. Draw the profit diagram for a short position in a put option with a call premium of $3 and
a strike price of $50. What is the break - even stock price? (Break-even price = zero profit
price.)

14. Today is January 1st. You are a soybean farmer that wants to hedge the price of your
current crop. Soybean futures contracts trade on the CME, and call for the delivery of
5,000 bushels of soybeans. Your soybeans will be ready for market in September, and
you expect to harvest 75,000 bushels. Assume you enter the appropriate futures position
to hedge your price risk at a futures price of $7.8275/bu. In the fall you sell your
soybeans locally at the current spot price of $7.6/bu, and also execute an offset trade. Due
to convergence, the futures price is equal to the prevailing spot price. What are your total
proceeds from selling your soybeans? Total proceeds include the profits (loss) from the
futures transactions.
15. You want to buy $21000 worth of shares in Tootsie Roll Industries Inc. on margin, but
you only have $7000 of your own money to invest. You will borrow the remainder by
short-selling the risk free asset. What is the portfolio weight for the risk free asset?
Express your answer in decimal form (not percentage) and round your answer to two
decimal places.

16. The Horizons Bull Plus Fund seeks expected returns that are two times (200%) the
performance of the market portfolio. If the risk free rate is 5% and the expected return on
the market is 9%, then what is the Beta coefficient for the Bull Plus Fund? Round your
answer to one decimal place.

17. With interest rates at historic lows, everyone expects the Bank of Canada to raise rates.
You think rates will rise faster and further than other investors. To most profit from your
expectation, you should: ANS: short sell long maturity bonds

18. Gem's R Us (GRU), a world class jewelry designer and manufacture, has forecasted they
will need 100 troy ounces of gold next quarter and is concerned gold bullion prices will
rise. To hedge the risk, GRU should take what position in gold futures contracts? ANS:
short

19. Use the price data in the table to calculate the beta for Weed Inc.
20. You are looking over your brother's portfolio. In his portfolio, he is holding one long
position and one short position. Jimmy, your brother, bought 1400 shares of Sunny Inc.
each for $52. He sold 1000 shares of Rainy Ltd. for $50 a share. Calculate the portfolio
weight on the Rainy Ltd. position.

21. What are the monthly lease payments for a BMW 535i? The price of the car is $68500.
The buyout is $36143, the lease term is 36 months and the lease rate is 7.6% (APR).
Enter your answer to two decimal places.

22. The Government of Canada Zero Coupon Yield curve is shown below. What does the
shape over the first three years tell you about the market's consensus expectation for
future spot interest rates? ANS: expected spot rate will be higher

23. You bought a share of Gamestop (Tick: GME) today for $100. You plan to sell it in one
year. You foresee two possible scenarios for the price in one year: 1) Rocket Ship; or 2)
GUH. If GME is a Rocket Ship you expect to sell for $410. If GUH, then you will sell for
$40. The two scenarios are equally likely. What is your expected return? (Express your
answer in percentage form rounded to one decimal place.)
24. Shares of Sweetums Candy Company, makers of the famous NutriYum Bars, are trading
for $30.46. You decide to purchase call options which expire in three months with a
strike price of $28.67. The call options are trading for $7.68. What is the time value of
the option?

25. Apple Inc. call options with a strike price of $105 are trading at a premium of $12. Apple
shares are trading for $120 per share. Assume one share per option contract and assume
that the options are American. To take advantage of this option price you should:
I. Buy a share of Apple
II. Buy a call option
Ill. Sell a call option
IV. Exercise the call option
V. Sell a share of Apple
ANS: II then IV then V

26. You have a long position in one corn futures contract. Each futures contract calls for the
delivery of 5,000 bushels of No. 10 corn. The initial margin was $5,000 and the
maintenance margin is $2,400. At the close of trading yesterday, the futures price was
$5.00 per bushel and the balance in your margin account was $4,000 Today, the
settlement price for corn futures is $4.50. What is the balance in your account at the end
of today's trading? Assume that you made the minimum deposit necessary if there was a
margin call.
27. Which of the following described a stock whose return/risk combination plots above the
security market line?

28. The National Post article titled "The American Disease" argues that "The allure of
buybacks is that they can boost stock prices by reducing the number of company shares
in circulation and increasing earnings per share" The article writer assumes that stock
market prices are determined using the P/E valuation model. What is the logical
extension of this reasoning? For example, what would the stock price be if a company
bought back all of its shares? ANS: bankruptcy

29. Since portfolio weights must sum to 1, any single portfolio weight cannot exceed 1 ANS:
false

30. Three months ago (in October) you bought one Tesla April Call option. Today (January)
you've decided that Tesla's share price has peaked and you want to get out of the long
position. What is your profit if you exercise compared to your profit if you execute an
offset (reversing) trade? (Calculate the round-trip profit net of the cost of buying the
option in October. Express your answer as the difference between the offset profit and
profit from exercise. Assume that the option is American and that there is only one share
per option contract.) Enter your answer in dollars rounded to the nearest dollar.
October (Three months Ago)
Tesla Stock Price = $806
April Tesla Call option (X=600) premium = $325
January (Today)
Tesla Stock Price = $1003
April Tesla Call option (X=600) premium = $447

31. Shares in Globex Corp. are trading today for $26. Call options on Globex shares, which
expire in 6 months with a strike price of $25, are trading for $3.60. What is the profit to a
call option writer, at maturity, if the stock price is $27? Assume that there is one share
per contract.
32. You have been scouring The Wall Street Journal looking for shares to add to your (large)
portfolio. The table presents data that you have collected on shares that look promising.
You have calculated the return that you anticipate earning from each stock along with its
beta. Which of the securities should you add to your portfolio?(Assume you must choose
just one.)

33. What is the standard deviation of the returns on a portfolio with 33% invested in Asset A
and 67% in Asset B? The standard deviation of returns for A is 32% and 26% for Asset
B. The correlation of the two assets is -0.45.

34. TNJ Corporation has $100M of bonds outstanding. As a result of outstanding financial
performance during the COVID-19 pandemic, the bond rating agencies have raised their
ratings on TNJ's debt. As a result of this upgrade we can expect the price of the bonds to
______ and the yield on the bonds to ______ ANS: rise; lower

35. In contrast to forward contracts, futures contracts have daily marking-to-market because
of ______

36. The table presents performance data for two mutual funds over the last 5 years: the Hot
Rize fund and the Greensky fund. The table also includes information on the returns of
the market index and risk free asset over the same period. If you had invested in the
market portfolio and the risk free asset in such a way as to match the beta of Hot Rize,
then what return would you have earned? (Enter your answer in percentage form rounded
to one decimal place.)
37. The implication for investors of efficient markets is that if they really are efficient ANS:
investors should not expend

38. Given the feasible set of portfolios shown in the graph, what is the correlation of the two
assets ANS: 0

39. When the long side of a call option on Tesla shares chooses to exercise ANS: she buys
the shares from the call writer

40. Yesterday, Macallan Corp paid out $1.6250B in dividends and repurchased $4.4175B
worth of shares. Macallan has 1.75B shares outstanding and pays all of its dividends and
makes its repurchases at the end of each year. Because of the slow - down in the
economy, analysts expect that next year Macallan will hold dividend payments constant
at yesterday's level and cancel its stock repurchase program. Two years from now,
analysts forecast that total payouts will return to the level of yesterday. After that date
analysts expect that total payouts will grow at an annual rate of 2.75% in perpetuity.
Assume that investors require a 11.50% rate of return on Macallan's shares. What do you
think the stock price today is using the Total Payout Model?
41. The Toronto Dominion (TD) bank has three classes of securities: 1) corporate bonds; 2)
preferred shares; and 3) common shares. In equilibrium, which should have the lowest
yield? ANS: Corporate Bonds