Question 96 

An analyst just received the following information for Mythical Interactions, Inc.  A senior equity trader in her group wants to know if he should purchase a large block of the stock.

Earnings retention rate at 65% 

Required rate of return, ke, of 11% 

Return on equity (ROE) of 13%, expected to remain constant 

Estimated Sales per share of $175 

Estimated gross profit margin of 22% 

Estimated depreciation per share of $20 

Estimated interest expense per share of $12 

Corporate tax rate of 40% 

Current market price is $45.50 per share 

Based on the assumptions above, which of the following recommendations is most appropriate? The analyst should advise the trader to:

A) purchase the stock. It is undervalued by approximately $8.00.

B) not purchase the stock. It is overvalued by approximately $10.00.

C) purchase the stock. It is undervalued by approximately $14.20.

D) not purchase the stock. It is overvalued by approximately $14.20.

Question 97 

Which of the following is least likely an example of internal credit enhancement?

A) Bond insurance.

B) Cash reserve funds.

C) Excess servicing spread accounts.

D) Over-collateralization.

Question 98 

If a portfolio manager anticipates a major increase in market interest rates, the most appropriate trading strategy is to purchase: 

A) short-maturity bonds with high coupon rates.

B) long-maturity bonds with low coupon rates.

C) high yield bonds with high coupon rates.

D) bonds with high durations.

Question 99 

A 12-year, $1,000 face value zero-coupon bond is priced to yield 7.0% on a semiannual basis. The price of the bond, and the amount of implicit interest will the bond pay over its life, are closest to: 

     Price       Interest

A)   $438         $562

B)   $444         $556

C)   $438         $556

D)   $444         $562

Question 100 

A 7% coupon bond with semiannual coupons has a convexity in years of 80. The bond is currently priced at a yield to maturity (YTM) of 8.5%. If the YTM decreases to 8%, the predicted effect due to convexity on the percentage change in price would be: 

A) +20 basis points.

B) +40 basis points.

C) +50 basis points.

D) -50 basis points.

Answer 96 

The correct answer was A) purchase the stock. It is undervalued by approximately $8.00. 

To determine whether the trader should purchase the stock, we need to determine if the stock is overvalued or undervalued. Given the information in this problem, we will use the price/earnings (P/E) ratio and the earnings per share (EPS) to calculate an estimated value. 

      The P/E ratio = dividend payout ratio / (ke – g), 

dividend payout ratio = 1 - retention ratio = 1 – 0.35 = 0.65 

g = retention rate × ROE = 0.65 × 0.13 = 0.0845 

P/E = 0.35 / (0.11 – 0.0845) = 13.725 

      EPS = [(sales per share × gross profit margin) – dividends per share – interest expense per share] × (1 - tax rate)

             = [($175 × 0.22) - $20 - $12] × (1 – 0.40) = $3.90

      Value of stock = EPS × P/E = 13.725 × $3.90 = approximately $53.50

Conclusion: The trader should purchase a block of the stock. It is undervalued by the difference between the market price and the estimated value, $53.50 - $45.50, or approximately $8.00.

This question tested from Session 14, Reading 59, LOS b

Answer 97 

The correct answer was A)

Bond insurance is an example of external, not internal, credit enhancement.

This question tested from Session 15, Reading 64, LOS i, (Part 2)

Answer 98 

The correct answer was A) short-maturity bonds with high coupon rates. 

The price volatility of non-callable bonds is inversely related to the level of market yields. As yields increase, bond prices fall, and the price curve gets flatter. Bonds with higher duration will change more in price. Longer maturity bonds with lower coupon rates are more sensitive to interest rate risk and their price will decrease more than short term, high coupon rate bonds. High yield ("junk") bonds with high coupons become more risky in high interest rate environments and therefore would not be appropriate. 

This question tested from Session 15, Reading 63, LOS c

Answer 99 

The correct answer was A) $438    $562

N = 12 × 2 = 24; I/Y = 7 / 2 = 3.5; FV = 1000; PMT = 0; CPT PV = -437.95, or approximately $438. 

So, interest = Face Value – Price = 1000 – 438 = 562.

This question tested from Session 16, Reading 67, LOS e

Answer 100 

The correct answer was A) +20 basis points. 

Convexity adjustment: +(Convexity)(change in i)2 

Convexity adjustment = +(80)(-0.005)(-0.005) = +0.0020 or 0.20% or +20 basis points. 

This question tested from Session 16, Reading 69, LOS g, (Part 1)

看看答案先！谢拉

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