FIN 311_Exam Review 3_S23_Solutions

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Northern Arizona University *

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Finance

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Nov 24, 2024

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FIN 311 Exam Review Assignment #3 – Spring 2023 Names _____ Solutions ___________________________________________________________ 1. [6 points] A 12-year, $1,000 par value bond has 8 years left to maturity and its coupon rate is 8%, with interest paid semi-annually. Answer the following questions for this bond. a. If the required return on this bond (the current market rate for similar bonds) is 6%, will this bond sell for a premium or a discount (no calculations are needed)? b. What is the bond’s current price if the market rate (required return) is 4.5%? c. If the bond is currently quoted at (selling for) $939.50 in the market, what is the Yield to Maturity? a. The bond will sell for a premium b. FV = 1,000, N = 8x2 = 16, I = 4.5/2 = 2.25%, PMT = 80/2 = $40, PV = ?; Price = $-1,232.97 c. PV = -939.50, FV = 1,000, N = 16, PMT = 40, I = ?; YTM = 4.54x2 = 9.08% 2. [10 points] You own a stock that you are considering selling. The current dividend is $1.30/share. Your required return for this stock is 8%. The current market price of the stock is $22.50. Consider each of the following situations separately. a. If the dividend is fixed (preferred stock), what is the value of the stock? Should you sell it? b. If the dividend grows at 3% indefinitely, what is the value of the stock? Should you sell it? c. If the dividend grows at 6% per year for each of the first two years and then 3% indefinitely, what is the value of the stock? Should you sell it? a. 1.30/.08 = $16.25 Sell it! b. 1.30(1 + .03) = $26.78 Don’t sell. .08-.03 c. P 0 = 28.32. Don’t sell. Buy if you can! Dividend Growth rate FV N I PMT PV 1.30 6% D 1 = 1.38 1 8% 0 $1.28 1.38 6% D 2 = 1.46 2 8% 0 $1.25 1.46 3% *P 2 = 30.08 2 8% 0 $25.79 Total PV $28.32 *P 2 = [1.46(1.03)]/(.08-.03) = $30.08 P 0 = $28.32

3. [8 points] You are considering purchasing Coca-Cola stock but would like to know more information about risk and returns before you make the purchase. Next year’s possible returns for Coca-Cola and their probabilities of occurring are listed in the table below. Probabilities Possible Returns 20% 3% 55% 8% 25% 12% Calculate: a. The expected return for Coca-Cola. b. The standard deviation for Coca-Cola. c. The coefficient of variation for Coca-Cola. a. r = .2(3.0) + .55(8) + .25(12) =.6 + 4.4 + 3 = 8% b. Std Dev = √(? − 𝟖) ? . ?? + (𝟖 − 𝟖) ? . ?? + (?? − 𝟖) ? . ?? = √? + ? + ? = 3% c. CV = 3/8 = .375 4. [9 points] You are just getting started with investing and considering making some investments in Mutual Funds or Exchange-Traded Funds. You have been given the following ticker symbols for funds that are available to you through your retirement plan. a. Look up the expense ratios, load fees (if any), and 10-year performance returns for each of the listed funds. 10-year performance can be found in the Performance tab, and Load Fees can be found in the Price tab. Fund Expense Ratio Load Fees 10-year Performance AGTHX .60% 5.75% 11.9% AMCPX .65% 5.75% 10.58% TWEIX .93% 0% 8.78% SCHB .03% 0% 11.76% b. If you can only pick one of these funds to invest your money in, which is the better choice and why? Keep in mind that the 10-year returns are not net of fees (meaning fees are not yet deducted when returns are calculated). Each of these funds is an equity fund so they perform basically the same function for investment strategies and risk. However, the SCHB ETF has substantially lower fees than the other Mutual Funds. In addition, if you subtract out the fees from the 10-year return the SCHB ETF has high returns, no load fees, and a very low expense ratio. It is very important to understand how fees can affect total returns. Most investors are unaware of the underlying fees, including the expenses and load fees, that they are paying. It is good to be educated!

5. [2 points] Determine an average age for your team (or use your age if working individually) and calculate the percentage of your portfolio that should be invested in stocks or similar high-risk investments. Average age: 25 100-25 =75%; It is recommended that at least 75% of your portfolios be invested in stocks. If you have a high risk tolerance, then you can invest a larger portion of your portfolio in stocks. If you are risk averse, then you can invest a smaller percentage. Ultimately you get to decide how comfortable you are with risk in your portfolio.

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