Chapter 8, Problem 3P

In plain English, what is the Agency problem?

HW Question 29: what is the difference between accounting and finance?

1. You are assessing the average performance of two mutual fund managers with the Fama-French 3-factor model. The fund managers and the Fama-French factors had the following performance over this periodof time:                                 Manager 1          Manager 2           Rm − rf           smb          hmlAvg. (total) Ret        27%                    13%                      8%                  2%            6%βmkt                        2                          1                           1                      0               0s                               1                          -0.5                       0                     1                0h                               1                          0.5                        0                     0                1 The risk-free rate is 2%.  What kinds of stocks does Manager 1 invest in?  Group of answer choices Small-cap value stocks Large-cap value stocks Large-cap growth stocks Not enough information…

1. A hedge fund currently invests in $100 million of mortgage-backed securities (MBS) that have a duration of 15 and convexity of -500 (negative five hundred). Which of the following is closest to how much money the fund would gain or lose if interest rates decreased by 1%, using the duration+convexity approximation? Group of answer choices Lose $12 million Lose $10 million Lose $12.5 million Gain $11 million Gain $12 million 2. A hedge fund currently invests in $100 million of mortgage-backed securities (MBS) that have a duration of 15 and convexity of -500 (negative five hundred). Suppose the Hedge fund financed their $100 million of MBS by using seven-day repurchase agreements in addition to their investors’ capital. Assuming they borrow the maximum amount, the required haircut is 10%, and the interest rate is 2% per year, which of the following is closest to how much interest they will owe at the end of the first seven-day term? Group of answer choices $35,000 $40,000 $30,000…

1. A 5-year Treasury bond with a coupon rate of 5% per year (semiannual coupons) currently has a quoted price of $100 in the Wall Street Journal. Assuming the last coupon was 60 days ago and there are 364 days per year, which of the following is closest to what you would pay to buy this bond? Group of answer choices $101.000 $100.750 $101.500 $101.250 $100.500 2. Which TWO of the following are correct reasons that could explain why most CFOs still rely on the CAPM to estimate the cost of capital in spite of the fact that it fails to explain the returns on all stocks? Group of answer choices None of the above More investors still only care about the risks captured by the CAPM, and therefore the cost-of-capital given by the CAPM, than any other model The CAPM estimates always underestimate the cost-of-capital, so CFOs can use the CAPM to deceive shareholders into believing their companies are worth more than is actually true There is not necessarily a reliably better/generally…

While attending a SUNY Brockport international finance class, Kerry feels inspired to venture into global investments. She's intrigued by a Russian bond promising $110 per year in interest and maturing in 5 years, at which point it will return her initial $1,000 investment. Given an interest rate of 12%, how much does Kerry, the astute Brockport student, lay out for the bond today? -$1,110 -$900 -$963.95 -$1,000

1. Ace Ventures, Incorporated, has expected earnings of $5 per share for next year. The firm’s ROE is 15%, and its earnings retention ratio is 40%. If the firm’s market capitalization rate is 10%, which of the following is closest to the present value of its growth opportunities? Group of answer choices $25 None of the above $75 $50 $100 2. Which of the following is an important reason to know the economic theory behind patterns in returns you trade on or recommend to clients? MARK ALL THAT APPLY Group of answer choices Determining appropriate weights and rebalancing your portfolio's asset allocation Impressing your friends with your knowledge Understanding whether your trading strategy will persist into the future Identifying whether the economic conditions are right for your strategy to succeed Knowing the theory increases the statistical significance of your alpha

1. A private equity firm XYZ performs a leveraged buyout in which they purchase all equity and debt of company ABC for $5 billion. XYZ finances this purchase with $1 billion of its own capital and borrows the remaining $4 billion at 20% interest. In one year (unusually short for LBO), XYZ pays off the debt and sells ABC for $7.5 billion. Which of the following is closest to XYZ’s return on their invested capital (the $1 billion)? Hint: draw a balance sheet. Group of answer choices 300% 350% 200% 250% None of the above 2. A firm is planning on paying its first dividend of $2 three years from today. After that, dividends are expected to grow at 6% per year indefinitely. The stock’s required return is 14%. Which of the following is closest to the intrinsic value of a share today? Group of answer choices $17.00 $21.00 $19.00 $18.00 $20.00

Linden deposits $100 into the Brockport Student Credit Union at the start of the school year. This ritual continues for the next 50 years, with an annual compounding interest of 2%. How much will Linden have saved up by the end of her 20th reunion at SUNY Brockport? 2,000 2,750 3,100.25 2,578.33