02 Jan a.Calculate the expected

Q 1.

You are a shareholder in a C corporation. The corporation earns $ 1.72$1.72 per share before taxes. Once it has paid? taxes, it will distribute the rest of its earnings to you as a dividend. The corporate tax rate is 35 %35%?, and your personal tax rate on? (both dividend and? non-dividend) income is 30 %30%. How much is left for you after all taxes are? paid?

Q 2

You are a shareholder in an S corporation. The corporation earns $ 2.06$2.06 per share before taxes. As a pass through? entity, you will receive $ 2.06$2.06 for each share that you own. Your marginal tax rate is 30 %30%. How much per share is left for you after all taxes are? paid?

Q 3

You are the CEO of a company and you are considering entering into an agreement to have your company buy another company. You think the price might be too?high, but you will be the CEO of the?combined, much larger company. You know that when the company gets?bigger, your pay and prestige will increase. What is the nature of the agency conflict here and how is it related to ethical?considerations?

Q 4

What four financial statements can be found in a? firm’s 10-K? filing? What checks are there on the accuracy of these? statements?

What four financial statements can be found in a? firm’s 10-K? filing? ? (Select the best choice? below.)

A.

Balance? sheet, income? statement, statement of cash? flows, and Statement of income and expenses

B.

Balance? sheet, cash? budget, earnings? statement, and statement of? stockholders’ equity

C.

Balance? sheet, income? statement, statement of cash? flows, and statement of? stockholders’ equity

D.Balance? sheet, asset and liability? statement, statement of cash? flows, and statement of? stockholders’ equity

What checks are there on the accuracy of these? statements? ? (Select the best choice? below.)

A.Financial statements in form? 10-K are required to be audited by a neutral third? party, who checks them and ensures that the financial statements are prepared according to GAAP and that the information contained is reliable.

B. The accuracy of the? firm’s financial statements is certified by the? firm’s board of? directors, which is the only required check.

C.It is up to each investor to certify the accuracy of the financial statements.

D.Financial statements are always sufficiently accurate so no checks are needed.

Q 5

Consider a project that requires an initial investment of $ 100 comma 000$100,000 and will produce a single cash flow of $ 153 comma 000$153,000 in 44 years.

a. What is the NPV of this project if the 44?-year interest rate is 5.1 %5.1% ?(EAR)?

b. What is the NPV of this project if the 44?-year interest rate is 9.9 %9.9% ?(EAR)?

c. What is the highest 44?-year interest rate such that this project is still? profitable?

Q 6

?CBS’s five-year borrowing rate is 1.73 %1.73% and JPMorgan? Chases’ is 2.83 %2.83%. Which would you? prefer? $ 500$500 from CBS paid today or a promise that the firm will pay you $ 550$550 in five? years? Which would you choose if JPMorgan Chase offered you the same? alternative?

You would? prefer: ?(Select the best choice? below.)

A.

$ 550$550 from JPMorgan Chase 55 years and $ 500$500 from CBS today.

B.

$ 550$550 from JPMorgan Chase 55 years and $ 550$550 from CBS in 55 years.

C.

$ 500$500 from JPMorgan Chase today and $ 500$500 from CBS today.

D.

$ 500$500 from JPMorgan Chase today and $ 550$550 from CBS in 55 years.

Q 7

Your best taxable investment opportunity has an EAR of 6.3 %6.3%. Your best? tax-free investment opportunity has an EAR of 2.7 %2.7%. If your tax rate is 25 %25%?, which opportunity provides the higher? after-tax interest? rate?

Q 8

Consider the price paths of the following two stocks over six time? periods:

1

2

3

4

5

6

Stock 1

$ 7$7

$ 9$9

$ 11$11

$ 9$9

$ 10$10

$ 13$13

Stock 2

$ 14$14

$ 10$10

$ 7$7

$ 15$15

$ 14$14

$ 17$17

Neither stock pays dividends. Assume you are an investor with the disposition effect and you bought at time 1 and right now it is time 3. Assume throughout this question that you do no trading? (other than what is? specified) in these stocks.

a. Which? stock(s) would you be inclined to? sell? Which would you be inclined to hold? onto?

b. How would your answer change if right now is time? 6?

c. What if you bought at time 3 instead of 1 and today is time? 6?

d. What if you bought at time 3 instead of 1 and today is time? 5?

Q 9

Each of the six firms in the table below is expected to pay the listed dividend payment every year in perpetuity.

Firm

Dividend? ($ million)

Cost of Capital? (%/year)

S1

10.210.2

8.38.3

S2

10.210.2

12.412.4

S3

10.210.2

14.814.8

B1

102.0102.0

8.38.3

B2

102.0102.0

12.412.4

B3

102.0102.0

14.814.8

a.Using the cost of capital in the? table, calculate the market value of each firm.

b. Rank the three S firms by their market values and look at how their cost of capital is ordered. What would be the expected return for a? self-financing portfolio that went long on the firm with the largest market value and shorted the firm with the lowest market? value? Repeat using the B firms.

c. Rank all six firms by their market values. How does this ranking order the cost of? capital? What would be the expected return for a? self-financing portfolio that went long on the firm with the largest market value and shorted the firm with the lowest market? value?

d. Repeat part

?(c?)

but rank the firms by the dividend yield instead of the market value. What can you conclude about the dividend yield ranking compared to the market value? ranking?

Q 10

Consider the following? stocks, all of which will pay a liquidating dividend one year from now and nothing in the? interim:

Market Capitalization

?($ million)

Expected Liquidating Dividend? ($ million)

Beta

Stock A

807807

1 comma 0001,000

0.670.67

Stock B

801801

1 comma 0001,000

1.411.41

Stock C

898898

1 comma 0001,000

1.311.31

Stock D

888888

1 comma 0001,000

1.071.07

a.Calculate the expected return of each stock.

b. What is the correlation between the expected return and market capitalization of the? stocks?