READ THESEINSTRUCTIONS!

 

1.   This exam is worth a total of 100 points.

 

2.   You should electronicallysubmityour final examwith detailedcalculationsvia email to zlin@fiu.edu.  You willtitlethe email “YOUR NAME – FINAL.  You will title the document YOUR NAME – FINAL.  You will putyour name on atitlepage.  Good luck!

 

 

 

 

 

Problem1 [10 points]

 

 


 

 

 

 

 

 

100


Stock


 

 

 

137

 

 

 

 

 

51


Bond (rF=2%)

 

102

 

100

 

102


Call(E=87)

 

50

 

C

 

0


 

 

 

1-yearcalloption,S=100,E=87, rF=2%(annual)

1 stepperyear

 

 

How much shouldthe calloption worth?


 

Iftotal returnafter taxona certain project is 7.5%,and thereare fivefinancingchoices available to investors:

 

(1)7%interest rateand a60%LTVratio; (2)7.8%interest rateand a70%LTVratio; (3)8.5%interestrateand a80%LTVratio; (4)9.25%interest rateand a90%LTV ratio; (5)9.75%interest rateand a95%LTV ratio;

 

Supposethat there arethreetypes of investors(A,Band C) whosetaxratesare15%, 25% and

35%, respectively. Questions:

(1)        Find outthe financingchoiceforeach typeof investor and the correspondingafter-tax return on equity.

(2)       Which typeof investor has the highest after-taxreturn on their equity?


 

You currentlyhave$2,500,000. You want to invest it in the followingthreeassets: 10-year US Treasurybondwith coupon rate 3.5%,BlandyandGourmangestocks, whohavethe following historical annual returns:

 

Year

Blandy

Gourmange

1

26.0%

47.0%

2

15.0%

-54.0%

3

-14.0%

15.0%

4

-15.0%

7.0%

5

2.0%

-28.0%

6

-10.0%

40.0%

7

22.0%

17.0%

8

30.0%

-23.0%

9

-32.0%

-4.0%

10

28.0%

75.0%

11

28.6%

51.7%

12

16.5%

-59.4%

13

-15.4%

16.5%

14

-16.5%

7.7%

15

2.2%

-30.8%

16

-11.0%

44.0%

17

62.2%

18.7%

18

33.0%

-25.3%

19

-35.2%

-4.4%

20

50.8%

82.5%

21

23.4%

42.3%

22

13.5%

-48.6%

23

-12.6%

13.5%

24

-13.5%

6.3%

25

1.8%

-25.2%

26

-9.0%

36.0%

27

18.8%

15.3%

28

27.0%

-20.7%

29

-28.8%

-3.6%

30

25.2%

67.5%

 

 

 

Yourgoal is tohavetheexpected annual return of7.2%with a minimum portfolio risk. How much moneyshouldyouallocate to thesethree assets?


 

Problem4 [30 points]

 

A real estate investor hasthe followinginformation on an apartment building:

 

    PurchasePriceis $1,125,000 with acquisition costsof $35,000

    33,600 leasable squarefeet

    Initial rent of $1.5/sq. ft. permonthand willincrease at thebeginningofeachyearfor

5 percent peryear.For example, the firstyear rent from month 1 to month12 is

$1.5/sq. ft., the 2ndyear rent from month 1 to month 12is $1.575 ($1.5*(1+5%)), and so on.

    Vacancyrateof 5%ofgross rent permonth.

    Operatingexpenses are25%of effectivegross income

    Threefinancingchoices:

 

1.   Mortgagewith75%LTV ratio, 20years, monthlypayments and 5%annual rate;

2.   Mortgagewith80%LTV ratio, 20years, monthlypayments and 6% annual rate;

3.   Mortgagewith85%LTV ratio, 20years, monthlypayments and 6.5% annual rate;

 

 

      Holdingperiod is 3years(36 months) and the capital improvement expenditureis assumed to be $20,000 atthe end of the firstyearonly(12 months).

    Expected increasein valueis 50%in total when soldinyear 3 (36 months), 5%

sellingexpenses

    75%depreciable with monthlydepreciation.

    Investor’s taxrate is 35%, and capitalgain taxrateis 15%.

 

 

 

Questions:

 

1.   Compute equityafter-tax cash flows from month1 to month 36for each financingchoice.

 

2.   What is the equityafter-taxannualreturn (internal rate ofreturn)foreach financingchoice and which choicewouldyou liketo make?


 

Text Box: Expected  returnProblem5 [15 points]

 

Based on theCapital Asset PricingModel (CAPM) and the diagram below,what is the return of the stock if its beta is 1.5 or 0.5?

 

 

 

 

 

 

 

 

 

 

 

10%

 

 

3 %

 


 

 

RF    3.5%


          1             

RM   12%


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Problem6 [15 points]

 

 

 

 

 

ComputetheIRR, NPV,PI, and payback period for thefollowingtwo projects.  Assume the required return is 12%.

 

 

 

 

 

 

ProjectA

ProjectB

Year

Cashflow

Cashflow

0

-2500

-2500

1

900

50

2

800

600

3

1600

150

4

100

900

5

50

500

6

300

2500

 

 

 

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