P04 - Risks (Sol)

7/23/2019 P04 - Risks (Sol)

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MANAGEMENT ADVISORY SERVICES RISK

PORTF0LIO MANAGEMENTBeta Portfolio Beta1. You invet !"## in e$urit% A &it' a (eta of 1.) an* !+## in e$urit% B &it' a (eta of ,#.)#. T'e

(eta of t'e reultin- ortfolio i /M0a. 1.+#. $. #.".(. 1.##. *. #."+.e. #.2#. Bo*ie

). A $o3an% 'ol* t'e follo&in- to$4 ortfolio5

Sto$4 6 of Total Portfolio Beta Coeffi$ient7 )#6 .28 +#6 ."Y #6 1.#

9 1#6 ).#T'e (eta of t'e ortfolio i /M0A. ).# C. .:B. 1.1 D. .2 Glei3

Beta of Ne& Sto$4 in t'e Portfolio. You are 3ana-in- a ortfolio of five to$4 t'at are 'el* in e;ual a3ount. T'e $urrent (eta of

t'e ortfolio i 1.+< an* t'e (eta of Sto$4 A i 1.=. If Sto$4 A i ol*< &'at &oul* t'e (eta of t'erela$e3ent to$4 'ave to (e to ro*u$e a ne& ortfolio (eta of 1.)=> /D0A. #.?= C. 1.)=B. #.:# D. 1.+# Glei3

Aet Beta=. T'e (eta of *e(t i #.+ an* (eta of e;uit% i 1.). T'e *e(t,e;uit% ratio i #.2. Cal$ulate t'e

(eta of t'e aet of t'e fir3. /Au3e no [email protected]. #.: C. 1."B. #.+2 D. None of t'e a(ove B M

". A fir3 e;uit% (eta i #.2 an* t'e *e(t (eta i #.. If t'e 3ar4et value of *e(t i !+# 3illionan* t'at of e;uit% i !1"# 3illion< &'at i t'e (eta of t'e aet of t'e fir3>

A. #.? C. 1.1B. #.2 D. None of t'e a(ove B M

+. T'e 3ar4et value of t'e 'are of Atroiel* Cororation i $urrentl% !)+ 3illion< an* t'(eta i 1.+. Atroiel* 'a a no3inal !" 3illion of 26 $ouon *e(enture outtan*in- &'i$3ature in ? %ear. T'ee *e(enture 'ave a (eta of #.1< an* t'e% $urrentl% %iel* 1#6. 7'att'e (eta of Atroiel* aet> /VD0A. #.2) C. ).=B. #.?= D. 1.1" Gle

=. Co3uSolution In$. to$4 'ave a total 3ar4et value of !=# 3illion an* a *e(t of !# 3illioT'e $urrent Treaur% (ill rate i "6< an* t'e e@e$te* 3ar4et ri4 re3iu3 i :6. A lot of t'return on t'e to$4 a-aint t'e 3ar4et return 'o& a $atter of oint t'rou-' &'i$' a lin$an (e fitte* &it' a loe of +=. 7'at i t'e (eta of t'e $o3an% aet> /D0A. 1.)= C. 1.?=B. #.")= D. 1.""? Gle

"

. Ariona Ro$4< an all,e;uit% fir3< $urrentl% 'a a (eta of 1.)=< 4R F ? er$ent< an* 4M F er$ent. Suoe t'e fir3 ell 1# er$ent of it aet &it' (eta F 1.)= an* ur$'ae ta3e roortion of ne& aet &it' a (eta of 1.1. 7'at &ill (e t'e fir3 ne& overall re;uirerate of return< an* &'at rate of return 3ut t'e ne& aet ro*u$e in or*er to leave t'e to$ri$e un$'an-e*> /M0a. 1=."+=6H 1=."+=6 *. 1=.?=#6H 1=."+=6(. 1=.?=#6H 1+.?##6 e. 1+.?=#6H 1=.?=#6$. 1=."+=6H 1+.?##6 Bri-'a

E;uit% Beta2. A fir3 aet (eta i #.= an* *e(t (eta i ero. If t'e *e(te;uit% ratio i 1."< &'at i t'e e;u

(eta of t'e -iven>A. #.2 C. 1.#B. 1. D. None of t'e a(ove B

?. T'e ree,loat Co3an%< a $o3an% in t'e "6 ta@ (ra$4et< 'a ri4le *e(t in it $aitru$ture &'i$' 3a4e u +#6 of t'e total $aital tru$ture< an* e;uit% i t'e ot'er "#6. T(eta of t'e aet for t'i (uine i #.2 an* t'e e;uit% (eta i5A. #.2# C. #.=B. #.? D. 1 .1+ B

Diviion Beta?. Sun State Minin- In$.< an all,e;uit% fir3< i $oni*erin- t'e for3ation of a ne& *iviion t'at &

in$reae t'e aet of t'e fir3 (% =# er$ent. Sun State $urrentl% 'a a re;uire* rate of retur

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e 1 of

7/23/2019 P04 - Risks (Sol)



of 12 er$ent< . S. Treaur% (on* %iel* ? er$ent< an* t'e 3ar4et ri4 re3iu3 i = er$ent.If Sun State &ant to re*u$e it re;uire* rate of return to 1" er$ent< &'at i t'e 3a@i3u3(eta $oeffi$ient t'e ne& *iviion $oul* 'ave> /D0a. ).) *. 1."(. 1.# e. ).#$. 1.2 Bri-'a3

Given t'e Correlation Coeffi$ient (et&een t'e Sto$4 an* Mar4et Portfolio+1. T'e $orrelation $oeffi$ient (et&een to$4 A an* t'e 3ar4et ortfolio i L#.". T'e tan*ar*

*eviation of return of t'e to$4 i #6 an* t'at of t'e 3ar4et ortfolio i )#6. Cal$ulate t'e(eta of t'e to$4.A. #.: C. 1.1B. 1.# D. #." B M

+). T'e $orrelation $oeffi$ient (et&een to$4 B an* t'e 3ar4et ortfolio i #.2. T'e tan*ar**eviation of t'e to$4 B i =6 an* t'at of t'e 3ar4et i )#6. Cal$ulate t'e (eta of t'e to$4.A. 1.# C. #.2B. 1.+ D. #.? B M

Given t'e itori$al No3inal Return for t'e Sto$4 Mar4et Portfolio+. itori$al no3inal return for to$4 A i 26< L1#6 an* L))6. T'e no3inal return for t'e

3ar4et ortfolio i L"6< L126 an* )+6. Cal$ulate t'e (eta for to$4 A.A. 1."+ C. 1.#B. #."1 D. None of t'e a(ove B M

++. T'e t'ree %ear annual return for to$4 B $o3e out to (e #6< 1#6 an* )"6. T'ree %earannual return for t'e 3ar4et ortfolio are L"6< 126< )+6. Cal$ulate t'e (eta for t'e to$4.A. 1." C. #B. #.?+ D. None of t'e a(ove B M

Required Return2. .G. Penn%a$4er i interete* in fin*in- t'e aroriate *i$ount rate for it ne& roe$t for

3a4in- (lue< in4< an* %ello& &i*-et. T'e avera-e (eta of a -rou of $olore* &i*-et3anufa$turer i 1.+ an* t'eir avera-e *e(t,e;uit% ratio i #.#. Penn%a$4er lan to 'ave a

*e(t,e;uit% ratio of #.)#. If t'e ri4,free rate i "6 an* t'e e@e$te* ri4 re3iu3 on t'e3ar4et ortfolio i :6< &'at i t'e re;uire* return for t'e roe$t> /D0A. :.?)6 C. 1".#26B. ?.#26 D. 1=.?)6 Glei3

Expected Return)2. Sto$4 A 'a an e@e$te* return of 1#6 er %ear an* to$4 B 'a an e@e$te* return of )#6

If ==6 of t'e fun* are invete* in to$4 B< &'at i t'e e@e$te* return on t'e ortfolio of to$A an* to$4 B>A. 1#6 C. 1+.=6B. )#6 D. None of t'e a(ove B

12. lori*a Co3an% /C0 an* Minneota Co3an% /MC0 are (ot' ervi$e $o3anie. T''itori$al return for t'e at t'ree %ear are5 C5 ,1#6<1=6< )=6H MC5 1#6< "6< )6. If an* MC are $o3(ine* in a ortfolio &it' =#6 of t'e fun* invete* in ea$'< $al$ulate t'e@e$te* return on t'e ortfolio.A. 1#6 C. 1"6B. 16 D. None of t'e a(ove. B

1". T'e 'itori$al return *ata for t'e at t'ree %ear for Sto$4 B an* t'e to$4 3ar4et ortfoare5 Sto$4 B5, )+6< #6< )+6< Mar4et Portfolio5, 1#6< 1)6< )#6. Cal$ulate t'e e@e$treturn for Sto$4 B an* t'e 3ar4et ortfolio.A. Sto$4 B 1"6< Mar4et Portfolio5 1+6 C. Sto$4 B )+6< Mar4et Portfolio5 1)6B. Sto$4 B 1+6< Mar4et Portfolio5 1"6 D. None of t'e a(ove B

:. T'e 'itori$al return *ata for t'e at t'ree %ear for Co3an% A to$4 i ,".#6< 1=6< 1=an* t'at of t'e 3ar4et ortfolio i 1#6< 1#6 an* 1"6. Cal$ulate t'e e@e$te* return for tto$4 an* t'e 3ar4et ortfolio.A. RAF26 RMF 1)6 C. RAF1#6 RMF1=6

B. RAF 1)6 RMF26 D. None of t'e a(ove B

:. Mr. 7ilon re$entl% (ou-'t a $o3uter an* *e$i*e* to invet !1##<### uin- an online tra*ia$$ount. e anal%e* t'e to$4 of five *ifferent $o3anie a follo&5

E@e$te* Re turn Stan*ar* Devia tionR an* 8 P'ar3a$euti$al 1#6 1)67al*en Auto3otive 1"6 1=6YMOC In*utrial 1?6 1"6Trut'iel* Ban4 16 167atertone Tire ))6 126

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e ) of

7/23/2019 P04 - Risks (Sol)



Mr. 7ilon *e$i*e to invet !=<### in R an* 8 P'ar3a$euti$al< !=<### in Trut'iel*Ban4< an* !1#<### in ea$' of t'e ot'er t'ree to$4. Bae* on t'i infor3ation< &'at 'oul*Mr. 7ilon au3e to (e 'i ortfolio e@e$te* return>A. 2.?6 C. 1+.2#6B. 1.==6 D. 1=."#6 Glei3

Risk-Adjusted Rate ! Return1#. Dan*% Pro*u$t overall &ei-'te* avera-e re;uire* rate of return i 1# er$ent. It %o-urt

*iviion i ri4ier t'an avera-e< it fre' ro*u$e *iviion 'a avera-e ri4< an* it intitutionalfoo* *iviion 'a (elo&,avera-e ri4. Dan*% a*ut for (ot' *iviional an* roe$t ri4 (%a**in- or u(tra$tin- ) er$enta-e oint. T'u< t'e 3a@i3u3 a*ut3ent i + er$enta-eoint. 7'at i t'e ri4,a*ute* re;uire* rate of return for a lo&,ri4 roe$t in t'e %o-urt*iviion> /E0a. "6 *. 1)6

(. 26 e. 1+6$. 1#6 Bri-'a3

Prt!"i #ariance1?. T'e 'itori$al return *ata for t'e at t'ree %ear for Sto$4 B an* t'e to$4 3ar4et ortfolio

are5 Sto$4 B5, )+6< #6< )+6< Mar4et Portfolio5, 1#6< 1)6< )#6. Cal$ulate t'e varian$e int'e 3ar4et.A. 1:) C. 1)2B. )2 D. None of t'e a(ove B M

1:. lori*a Co3an% /C0 an* Minneota Co3an% /MC0 are (ot' ervi$e $o3anie. T'eir'itori$al return for t'e at t'ree %ear are5 C5 ,1#6<1=6< )=6H MC5 1#6< "6< )6. If Can* MC are $o3(ine* in a ortfolio &it' =#6 of t'e fun* invete* in ea$'< &'at i t'evarian$e of t'e ortfolio &it' =#6 of t'e fun* invete* in C an* =#6 in MC /aro@i3atel%0>A. )#2 C. 122B. )= D. None of t'e a(ove B M

Prt!"i $tandard %e&iatin11. 7'at i t'e tan*ar* *eviation of t'e follo&in- t&o,to$4 ortfolio> /VD0

7ei-'tin- Stan*ar* Deviation Correlation

Sto$4 A "#6 116 .?Sto$4 B +#6 1+6

A. 11.)=6 C. 1).=#6B. 1).)#6 D. 1)".""6 CM Sa3le J),:

#. Sto$4 8 'a a tan*ar* *eviation of return of 1#6. Sto$4 Y 'a a tan*ar* *eviation of retuof )#6. T'e $orrelation $oeffi$ient (et&een to$4 i #.=. If %ou invet "#6 of t'e fun* to$4 8 an* +#6 in to$4 Y< &'at i t'e tan*ar* *eviation of a ortfolio>A. 1#6 C. 1).)6B. )#6 D. None of t'e a(ove B

)#. lori*a Co3an% /C0 an* Minneota Co3an% /MC0 are (ot' ervi$e $o3anie. T''itori$al return for t'e at t'ree %ear are5 C5 ,1#6<1=6< )=6H MC5 1#6< "6< )6. If an* MC are $o3(ine* in a ortfolio &it' =#6 of t'e fun* invete* in ea$'< &'at i t'tan*ar* *eviation of t'e ortfolio &it' =#6 of t'e fun* invete* in C an* =#6 in MC>A. 1+.+6 C. 16B. 126 D. None of t'e a(ove B

Mini'u' Prt!"i RiskProortion of Invet3ent=. Sto$4 A 'a an e@e$te* return of )#6 an* Sto$4 B 'a an e@e$te* return of 1)6. T

ri4ine of to$4 A a 3eaure* (% t'e varian$e i t'ree ti3e t'at of to$4 B. If t$orrelation $oeffi$ient (et&een t'e t&o to$4 i ero< &'at roortion of invet3ent in eato$4 -ive t'e 3ini3u3 ortfolio varian$e /3ini3u3 ri40>A. =#6 in Sto$4 A an* =#6 in Sto$4 BB. )=6 in Sto$4 A an* ?=6 in Sto$4 BC. ?=6 in Sto$4 A an* )=6 in Sto$4 BD. None of t'e a(ove B

?. Sto$4 8 'a an e@e$te* return of )#6 an* Sto$4 Y 'a an e@e$te* return of 1#6. Tri4ine of Sto$4 8 a 3eaure* (% t'e tan*ar* *eviation of return i t&i$e t'at of Sto$4 YIf t'e $orrelation $oeffi$ient (et&een t'e t&o to$4 i ero< &'at roortion of t'e invet3ein ea$' to$4 -ive t'e leat ortfolio ri4 /3ini3u3 ortfolio ri40>A. =#6 in 8 an* =#6 in Y C. )#6 in 8 an* 2#6 in YB. )=6 in 8 an* ?=6 in Y D. None of t'e a(ove B

Mini'u' #ariance Prt!"iProortion of Invet3ent

)1. lori*a Co3an% /C0 an* Minneota Co3an% /MC0 are (ot' ervi$e $o3anie. T''itori$al return for t'e at t'ree %ear are5 C5 ,1#6<1=6< )=6H MC5 1#6< "6< )6. 7'i t'e roortion of fun* to (e invete* in C an* MC to a$'ieve t'e 3ini3u3 varian$ortfolio>

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e of

7/23/2019 P04 - Risks (Sol)



A. C5 =#6 MC5 =#6 C. C5 )#6 MC5 2#6B. C5 )=6 MC5 ?=6 D. None of t'e a(ove B M

Varian$e). lori*a Co3an% /C0 an* Minneota Co3an% /MC0 are (ot' ervi$e $o3anie. T'eir

'itori$al return for t'e at t'ree %ear are5 C5 ,1#6<1=6< )=6H MC5 1#6< "6< )6. 7'ati t'e varian$e of t'e 3ini3u3 varian$e ortfolio of C an* MC>A. 122 C. )#2B. 1:" D. None of t'e a(ove B M

E@e$te* Return". Sto$4 A 'a an e@e$te* return of )#6 an* Sto$4 B 'a an e@e$te* return of 1)6. T'e

ri4ine of Sto$4 A a 3eaure* (% t'e varian$e i t'ree ti3e t'at of Sto$4 B. If t'e$orrelation $oeffi$ient (et&een t'e t&o to$4 i ero< &'at i t'e e@e$te* return on t'e

3ini3u3 varian$e ortfolio>A. 1"6 C. 1)6B. 1+6 D. )#6 B M

2. Sto$4 8 'a an e@e$te* return of )#6 an* to$4 Y 'a 1#6. T'e ri4ine of Sto$4 8 a3eaure* (% t'e tan*ar* *eviation of t'e return i t&i$e t'at of Sto$4 Y. If t'e $orrelation$oeffi$ient (et&een t'e t&o to$4 i ero< &'at i t'e e@e$te* return on t'e ortfolio &it'3ini3u3 ri4 /3ini3u3 varian$e ortfolio0>A. )#6 C. 1)6B. 1=6 D. 1#6 B M

)). lori*a Co3an% /C0 an* Minneota Co3an% /MC0 are (ot' ervi$e $o3anie. T'eir'itori$al return for t'e at t'ree %ear are5 C5 ,1#6<1=6< )=6H MC5 1#6< "6< )6. 7'ati t'e e@e$te* return on t'e 3ini3u3 varian$e ortfolio>A. 1+.26 C. 1#6B. 1"6 D. None of t'e a(ove. B M

$tck ( Market Prt!"i. Stan*ar* an* Poor =## In*e@ i a5

A. Portfolio of $o33on to$4 C. Portfolio of -overn3ent (on*

B. Portfolio of $ororate (on* D. A an* B a(ove B M

Mar4et Varian$e1#. T'e 'itori$al return *ata for t'e at t'ree %ear for Co3an% A to$4 i ,".#6< 1=6< 1=

an* t'at of t'e 3ar4et ortfolio i 1#6< 1#6 an* 1"6. Cal$ulate t'e varian$e of t'e 3ar4et.A. 2 C. 1+?B. 1) D. None of t'e a(ove. B

Varian$e *ue to Mar4et Ri4)=. Tele$o3ute Co3an% varian$e of return i +##. If t'e R,;uare* of t'e re-reion (et&e

t'e $o3an% return an* t'e 3ar4et return i #."< $al$ulate t'e varian$e t'at i *ue to t'3ar4et ri4 for t'e $o3an%.A. )+# C. "##B. 1"# D. More infor3ation i nee*e* B

Covarian$e

11. T'e 'itori$al return *ata for t'e at t'ree %ear for Co3an% A to$4 i ,".#6< 1=6< 1=an* t'at of t'e 3ar4et ortfolio i 1#6< 1#6 an* 1"6. Cal$ulate t'e $ovarian$e (et&een tto$4 return an* t'e 3ar4et return.A. )1 C. 1+B. +) D. None of t'e a(ove B

12. T'e 'itori$al return *ata for t'e at t'ree %ear for Sto$4 B an* t'e to$4 3ar4et ortfoare5 Sto$4 B5, )+6< #6< )+6< Mar4et Portfolio5, 1#6< 1)6< )#6. Cal$ulate t'e $ovarian$e return (et&een Sto$4 B an* t'e 3ar4et ortfolio.A. )+ C. ):)B. )2 D. None of t'e a(ove B

Sto$4 Beta1). T'e 'itori$al return *ata for t'e at t'ree %ear for Co3an% A to$4 i ,".#6< 1=6< 1=

an* t'at of t'e 3ar4et ortfolio i 1#6< 1#6 an* 1"6. Cal$ulate t'e (eta for Sto$4 A.A. 1.# C. #.=?B. 1.?= D. None of t'e a(ove B

1:. T'e 'itori$al return *ata for t'e at t'ree %ear for Sto$4 B an* t'e to$4 3ar4et ortfoare5 Sto$4 B5, )+6< #6< )+6< Mar4et Portfolio5, 1#6< 1)6< )#6. Cal$ulate t'e (eta f

Sto$4 B.A. 1.# C. #.1)=B. #.2" D. None of t'e a(ove B

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e + of

7/23/2019 P04 - Risks (Sol)



)+. Co3uter Co3an% varian$e of return i :##. If t'e R,;uare* of t'e re-reion (et&eent'e $o3an% return an* t'e 3ar4et return i #.+< $al$ulate t'e uni;ue ri4 for t'e $o3an%.A. =+# C. :##B. "# D. More infor3ation i nee*e* B M

Mar4et Ri4 Pre3iu3)#. T'e 'itori$al return *ata for t'e at t'ree %ear for Sto$4 B an* t'e to$4 3ar4et ortfolio

are5 Sto$4 B5, )+6< #6< )+6< Mar4et Portfolio5, 1#6< 1)6< )#6. If t'e ri4,free rate i +6<$al$ulate t'e 3ar4et ri4 re3iu3.A. 1#6 C. 12.16B. 1+6 D. None of t'e a(ove B M

Re;uire* Rate of Return)1. T'e 'itori$al return *ata for t'e at t'ree %ear for Sto$4 B an* t'e to$4 3ar4et ortfolio

are5 Sto$4 B5, )+6< #6< )+6< Mar4et Portfolio5, 1#6< 1)6< )#6. Cal$ulate t'e re;uire* rateof return /$ot of e;uit%0 for Sto$4 B uin- CAPM.A. 1).=6 C. 1+.6B. 2."6 D. None of t'e a(ove B M

T)-$tck Prt!"iVarian$e of Return1+. lori*a Co3an% /C0 an* Minneota Co3an% /MC0 are (ot' ervi$e $o3anie. T'eir

'itori$al return for t'e at t'ree %ear are5 C5 ,1#6<1=6< )=6H MC5 1#6< "6< )6.Cal$ulate t'e varian$e of return for C an* MC.A. C5 1## MC5 )=" C. C5 )1" MC5 1#B. C5 )= MC5 1:" D. None of t'e a(ove B M

Stan*ar* Deviation1=. lori*a Co3an% /C0 an* Minneota Co3an% /MC0 are (ot' ervi$e $o3anie. T'eir

'itori$al return for t'e at t'ree %ear are5 C5 ,1#6<1=6< )=6H MC5 1#6< "6< )6.Cal$ulate t'e tan*ar* *eviation of return for C an* MC.A. C51#6 MC5 1"6 C. C5 126 MC5 1+6B. C5 126 MC5 1"6 D. None of t'e a(ove B M

Covarian$e1#. If t'e $ovarian$e of Sto$4 A &it' Sto$4 B i 1##< &'at i t'e $ovarian$e of Sto$4 B &it' Sto$4

A>A. L1## C. 11##

B. 1## D. Nee* a**itional infor3ation B

1". lori*a Co3an% /C0 an* Minneota Co3an% /MC0 are (ot' ervi$e $o3anie. T''itori$al return for t'e at t'ree %ear are5 C5 ,1#6<1=6< )=6H MC5 1#6< "6< )6Cal$ulate t'e $ovarian$e (et&een t'e return of C an* MC.A. 1== /#.#1===0 C. )=) /#.#)=)0B. 1# /#.#10 D. None of t'e a(ove B

1. Sto$4 M an* Sto$4 N 'ave 'a* return for t'e at t'ree %ear of 1)6. 1#6< ))6 an* "1=6< )+6 ree$tivel%. Cal$u late t'e $ovarian$e (et&een t'e t&o e$uritie.A. L1:2 C. L1)B. 1:2 D. None of t'e a(ove B

). Sto$4 P an* to$4 J 'ave 'a* annual return of ,1#6< 1)6< )26 an* 26< 16< )+

ree$tivel%. Cal$ulate t'e $ovarian$e of return (et&een t'e e$uritie.A. 1+: C. 1##B. 1+: D. None of t'e a(ove B

+. If t'e $orrelation $oeffi$ient (et&een to$4 C an* to$4 D i L1.#6 an* t'e tan*ar* *eviatiof return for to$4 C i 1=6 an* t'at for to$4 D i #6< $al$ulate t'e $ovarian$e (et&eeto$4 C an* to$4 D.A. L+= C. +=B. L+=# D. None of t'e a(ove B

Correlation Coeffi$ient Given Covarian$e an* Stan*ar* Deviation. If t'e $ovarian$e (et&een to$4 A an* to$4 B i 1##< t'e tan*ar* *eviation of to$4 A i 1#

an* t'at of to$4 B i )#6< $al$ulate t'e $orrelation $oeffi$ient (et&een t'e t&o e$uritie.A. L#.= C. #.=B. L1.# D. None of t'e a(ove B

1?. lori*a Co3an% /C0 an* Minneota Co3an% /MC0 are (ot' ervi$e $o3anie. T''itori$al return for t'e at t'ree %ear are5 C5 ,1#6<1=6< )=6H MC5 1#6< "6< )6Cal$ulate t'e $orrelation $oeffi$ient (et&een t'e return of C an* MC.A. #.# C. #."1=

B. L#."1= D. None of t'e a(ove B

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e = of

7/23/2019 P04 - Risks (Sol)



Coeffi$ient of Variation , Given t'e E@e$te* NPV< Stan*ar* Deviation an* Correlation1). Proe$t 1 'a an e@e$te* NPV of !1)#<### an* a tan*ar* *eviation of !)##<###. Proe$t )

'a an e@e$te* NPV of !1##<### an* a tan*ar* *eviation of !1=#<###. T'e $orrelation(et&een t'ee t&o roe$t i #.2#. 7'at i t'e $oeffi$ient of variation for t'e ortfolio ofroe$t>A. 1."? C. 1.=1B. 1.=: D. #." Glei3

$in*"e $tckAvera-e Rate of Return1". Sill Oil Co3an% to$4 'a* ,26< 1)6 an* )"6 rate of return *urin- t'e lat t'ree %ear

ree$tivel%H $al$ulate t'e avera-e rate of return for t'e to$4.A. 1#6 er %ear C. 1)6 er %earB. 26 er %ear D. None of t'e a(ove B M

Mean of Return1. lori*a Co3an% /C0 an* Minneota Co3an% /MC0 are (ot' ervi$e $o3anie. T'eir

'itori$al return for t'e at t'ree %ear are5 C5 ,1#6<1=6< )=6H MC5 1#6< "6< )6.Cal$ulate t'e 3ean of return for ea$' $o3an%.A. C5 1#6< MC5 1"6 C. C5 )#6< MC5)6B. C5 1)6< MC5 "6 D. None of t'e a(ove B M

Stan*ar* Deviation)1. Ma$ro Cororation 'a 'a* t'e follo&in- return for t'e at t'ree %ear< ,)#6< 1#6< +#6.

Cal$ulate t'e tan*ar* *eviation of t'e return.A. 1#6 C. "#6B. #6 D. None of t'e a(ove B M

)). Mi$ro Cororation 'a 'a* return of =6< 1=6 an* )#6 for t'e at t'ree %ear. Cal$ulatet'e tan*ar* *eviation of t'e return.A. 1#6 C. #6B. )).:6 D. None of t'e a(ove B M

Varian$e Stan*ar* Deviation

)#. Me-a Cororation 'a t'e follo&in- return for t'e at t'ree %ear5 26< 1"6 an* )+6.Cal$ulate t'e varian$e of t'e return an* t'e tan*ar* *eviation of t'e return.A . "+ an* 26 C. + an* ".=6B. 1)2 an* 11.6 D. None of t'e a(ove B M

+O$T OF %EBT +APITAL,ie"d-t-Maturit1. 7'at i t'e %iel* to 3aturit% on o@ In$. (on* if it after,ta@ $ot of *e(t i :6 an* it t

rate i +6> /E0A. =.:+6 C. 1."+6B. :6 D. )".+?6 Gle

Iue* at Par1+. A $ouon (on* t'at a% interet annuall% i ellin- at ar value of !1<###< 3ature in = %ea

an* 'a a $ouon rate of :6. T'e %iel* to 3aturit% on t'i (on* i /E0a. ".##6 $. :.##6(. 2.6 *. +=.##6 Bo*

Yiel* to Maturit% Iue* at a Di$ount. T'e Me*iu3 Co3an% (on* 'ave 1# %ear re3ainin- to 3aturit%. Interet i ai* annualt'e (on* 'ave a P1<### fa$e valueH an* t'e $ouon interet rate i : er$ent. 7'at i teti3ate* %iel* to 3aturit% of t'e (on* at t'eir $urrent 3ar4et ri$e of P:##> /M0a. 1#."+ er$ent $. 2.= er$ent(. 1#.## er$ent *. ?.=# er$ent Pol Bo(a*

. T'e Sa*e Co3an% (on* 'ave + %ear re3ainin- to 3aturit%. Interet i ai* annuat'e (on* 'ave a P1<###< fa$e valueH an* t'e $ouon interet rate i :6. 7'at i teti3ate* %iel* to 3aturit% of t'e (on* at t'eir $urrent 3ar4et ri$e of P2):> /M0A. 2.)#6 C. 1.1#6B. 1#.2"6 D. 1+.2#6 Pol Bo(a*

1= A $ouon (on* t'at a% interet of !1## annuall% 'a a ar value of !1<###< 3ature in = %earan* i ellin- to*a% at a !?) *i$ount fro3 ar value. T'e %iel* to 3aturit% on t'i (on* i ./M0a. ".##6 $. 1).##6(. 2.6 *. "#.##6 Bo*

1" A (on* &it' a 1)6 $ouon< 1# %ear to 3aturit% an* ellin- at 22 'a a %iel* to 3aturit% of /Ma. over 1+6 *. (et&een 1#6 an* 1)6

(. (et&een 16 an* 1+6 e. le t'an 1)6$. (et&een 1)6 an* 16 Bo

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e " of

7/23/2019 P04 - Risks (Sol)



). A =,%ear (on* &it' =6 $ouon rate an* !1### fa$e value i ellin- for !2=).1#. Cal$ulate t'e%iel* to 3aturit% of t'e (on*. /Au3e annual interet a%3ent.0A. :.)6 C. 2.?26B. =6 D. None of t'e a(ove B M

1?. A 1#6 $ouon< annual a%3ent< (on* 3aturin- in 1# %ear< i e@e$te* to 3a4e all $ouona%3ent< (ut to a% onl% =#6 of ar value at 3aturit%. 7'at i t'e e@e$te* %iel* on t'i(on* if t'e (on* i ur$'ae* for !:?=> /M0a. 1#.##6. $. 11.##6.(. "."26. *. 2."26. Bo*ie

1#).7'at i t'e %iel* to 3aturit%< to t'e nearet er$ent< for t'e follo&in- (on*5 $urrent ri$e i!:#2< $ouon rate i 11 er$ent< !1<### ar value< interet ai* annuall%< ei-'t %ear to3aturit%> /M0

A. 11 er$ent. C. 1 er$ent.B. 1) er$ent. D. 1+ er$ent. Git3an

Yiel* to Maturit% Iue* at a Pre3iu3. A =,%ear (on* &it' 1#6 $ouon rate an* !1### fa$e value i ellin- for !1#=+.#. Cal$ulate

t'e %iel* to 3aturit% on t'e (on* au3in- annual interet a%3ent.A. 1#.=6 C. 1#6B. 2.")6 D. None of t'e a(ove B M

1##.7'at i t'e aro@i3ate %iel* to 3aturit% for a !1### ar value (on* ellin- for !11)# t'at3ature in " %ear an* a% 1) er$ent interet annuall%> /M0A. 2.= er$ent C. 1).# er$entB. :.+ er$ent D. 1.) er$ent Git3an

1#1.Mu-&u3 In*utrie 'a iue* a (on* &'i$' 'a a !1<### ar value an* a 1= er$entannual $ouon interet rate. T'e (on* &ill 3ature in ten %ear an* $urrentl% ell for !1<)=#.in- t'e aro@i3ation for3ula to $al$ulate t'e %iel* to 3aturit% /YTM0 of t'i (on* reult ina YTM of /M0A. 11.11 er$ent. C. )?.?2 er$ent.B. 1=.## er$ent. D. +).)) er$ent. Git3an

Be!re-tax +st ! %e.t). T'e aro@i3ate (efore,ta@ $ot of *e(t for a 1=,%ear< 1# er$ent< !1<### ar value (on*

ellin- at !:=# i /M0

A. 1# er$ent. C. 1) er$ent.B. 1#." er$ent. D. 1=.+ er$ent. Git3

)". T'e aro@i3ate (efore,ta@ $ot of *e(t for a 1#,%ear< 2 er$ent< !1<### ar value (oellin- at !1<1=# i /M0A. " er$ent. C. 2.2 er$ent.B. 2. er$ent. D. : er$ent. Git3

A!ter-tax +st ! %e.tPer$enta-e12. Ma%lar Cororation 'a ol* !=# 3illion of !1<### ar value< 1)6 $ouon (on*. T'e (on

&ere ol* at a *i$ount an* t'e $ororation re$eive* !:2= er (on*. If t'e $ororate ta@ rate+#6< t'e after,ta@ $ot of t'ee (on* for t'e firt %ear /roun*e* to t'e nearet 'un*re*er$ent0 i /M0

A. ?.16. C. 1).##6.B. +.2?6. D. ?.#:6. CMA #":# 1,

. T'e MNO Co3an% (elieve t'at it $an ell lon-,ter3 (on* &it' a "6 $ouon (ut at a rit'at -ive a %iel*,to,3aturit% of :6. If u$' (on* are art of ne@t %ear finan$in- lan&'i$' of t'e follo&in- 'oul* (e ue* for (on* in t'eir after,ta@ /+#60 $ot,of,$ait$al$ulation> /E0A. ."6 C. +.)6B. =.+6 D. "6 RPCPA 1##1< 1#

". A ver% lar-e fir3 'a a *e(t (eta of ero. If t'e $ot of e;uit% i 116 an* t'e ri4,free rate=6< t'e $ot of *e(t i5 /E0A. =6 C. 116B. "6 D. 1=6 B

12. T'e (efore,ta@ $ot of *e(t for a fir3 &'i$' 'a a +# er$ent 3ar-inal ta@ rate i 1) er$eT'e after,ta@ $ot of *e(t i /E0A. +.2 er$ent. C. ?.) er$ent.B. ".# er$ent. D. 1) er$ent. Git3

)+. If a $ororation 'a an avera-e ta@ rate of +# er$ent< t'e aro@i3ate< annual< after,ta@ $oof *e(t for a 1=,%ear< 1) er$ent< !1<### ar value (on*< ellin- at !:=# i /M0A. 1# er$ent. C. ?." er$ent.B. 1#." er$ent. D. ".# er$ent. Git3

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e ? of

7/23/2019 P04 - Risks (Sol)



)?. T'e aro@i3ate after,ta@ $ot of *e(t for a )#,%ear< ? er$ent< !1<### ar value (on* ellin-at !:"# /au3e a 3ar-inal ta@ rate of +# er$ent0 i /M0A. +.+1 er$ent. C. ? er$ent.B. =.1= er$ent. D. ?.= er$ent. Git3an

)=. If a $ororation 'a an avera-e ta@ rate of +# er$ent< t'e aro@i3ate annual< after,ta@ $otof *e(t for a 1#,%ear< 2 er$ent< !1<### ar value (on* ellin- at !1<1=# i /M0A. ." er$ent. C. " er$ent.B. +.2 er$ent. D. 2 er$ent. Git3an

A3ount"?. A $ororation (orro& !1<###<### at 1# er$ent annual rate of interet. T'e fir3 'a a +#

er$ent ta@ rate. T'e %earl%< after,ta@ $ot of t'i *e(t i

A. ! +#<###. C. !1##<###.B. ! "#<###. D. !1""<""?. Git3an

Rate ! Return. 7'at i t'e rate of return for an invetor &'o a% !1<#=+.+? for a t'ree,%ear (on* &it' a ?6

$ouon an* ell t'e (on* 1 %ear later for !1<#?.1:>A. =6 C. "."+6B. =.#26 D. ?6 Glei3

Present #a"ue ! Face #a"ue. In $al$ulatin- t'e total value of a (on*< 'o& 3u$' *oe t'e !1<### to (e re$eive* uon a

(on* 3aturit% in + %ear a** to t'e (on* ri$e if t'e *i$ount rate i "6>A. !)#?.:1 C. !?").:#B. !?+?.)" D. !?:).#: Glei3

Annua" interest pa'ent=". A =,%ear treaur% (on* &it' a $o3oun* rate of 26 'a a fa$e value of !1###. 7'at it'e annual interet a%3ent>A. !2# C. !1##B. !+# D. None of t'e a(ove B M

Bnd Price1:. A $ororation 'a ro3ie* to a% !1#<### )# %ear fro3 to*a% for ea$' (on* ol* no&.

interet &ill (e ai* on t'e (on* *urin- t'e t&ent% %ear< an* t'e (on* are ai* to offer a :interet rate. Aro@i3atel% 'o& 3u$' 'oul* an invetor a% for ea$' (on*>A. !1#<### C. !1<?2+B. !:<1?+ D. !:## Glei

=?. A ,%ear (on* &it' 1#6 $o3oun* rate an* !1### fa$e value %iel* 26 APR. Au3iannual $o3oun*in- a%3ent< $al$ulate t'e ri$e of t'e (on*.A . !1#=1.=+ C. !1###.##B. !:=1.:" D. !2=?.:" B

=2. A t'ree %ear (on* 'a 2.16 $o3oun* rate an* fa$e value of !1###. If t'e %iel* to 3aturon t'e (on* i 1#6< $al$ulate t'e ri$e of t'e (on* au3in- t'at t'e (on* 3a4e e3

annual $o3oun* interet a%3ent.A . !:+:.)+ C. !1#=?.=+B. !2=?.:" D. !1###.## B

=:. A four,%ear (on* 'a an 26 $o3oun* rate an* a fa$e value of !1###. If t'e $urrent ri$e t'e (on* i !2?#.=1< $al$ulate t'e %iel* to 3aturit% of t'e (on* /au3in- annual interea%3ent0.A. 26 C. 1#6B. 1)6 D. "6 B

+O$T OF PREFERRE% +APITALMarket #a"ue+2. A fir3 'a an iue of referre* to$4 outtan*in- t'at 'a a tate* annual *ivi*en* of !

T'e re;uire* return on t'e referre* to$4 'a (een eti3ate* to (e 1" er$ent. T'e value t'e referre* to$4 i QQQQQ.A. !"+ C. !)=B. !1" D. !=# Git3

%i&idend per $/are Gi&en)1. A fir3 'a iue* referre* to$4 at it !1)= er 'are ar value. T'e to$4 &ill a% a !

annual *ivi*en*. T'e $ot of iuin- an* ellin- t'e to$4 &a !+ er 'are. T'e $ot of treferre* to$4 i /E0A. ?.) er$ent. C. 1).+ er$ent.B. 1) er$ent. D. 1= er$ent. Git3


7/23/2019 P04 - Risks (Sol)



):. A fir3 'a *eter3ine* it $an iue referre* to$4 at !11= er 'are ar value. T'e to$4 &illa% a !1) annual *ivi*en*. T'e $ot of iuin- an* ellin- t'e to$4 i ! er 'are. T'e $otof t'e referre* to$4 i /E0A. ".+ er$ent. C. 1#.? er$ent.B. 1#.+ er$ent. D. 1) er$ent. Git3an

)#. 7'at i t'e after,ta@ $ot of referre* to$4 t'at ell for != er 'are an* offer a !#.?=*ivi*en* &'en t'e ta@ rate i =6> /E0A. =.)=6 C. 1#.=#6B. :.?=6 D. 1=6 Glei3

)#. A fir3 'a iue* 1# er$ent referre* to$4< &'i$' ol* for !1## er 'are ar value. T'e$ot of iuin- an* ellin- t'e to$4 &a !) er 'are. T'e fir3 3ar-inal ta@ rate i +#

er$ent. T'e $ot of t'e referre* to$4 i /E0A. .: er$ent. C. :.2 er$ent.B. ".1 er$ent. D. 1#.) er$ent. Git3an

)1. A referre* to$4 i ol* for !1#1 er 'are< 'a a fa$e value of !1## er 'are< un*er&ritin-fee of != er 'are< an* annual *ivi*en* of !1# er 'are. If t'e ta@ rate i +#6< t'e $ot offun* /$aital0 for t'e referre* to$4 i /E0A. ".)6 C. 1#.+6B. 1#.#6 D. =.)6 CMA #":) 1,1+

)). Glo(al Co3an% Pre 'a !1=# ar value referre* to$4 &it' a 3ar4et ri$e of !1)# a'are. T'e or-aniation a% a !1= er 'are annual *ivi*en*. Glo(al $urrent 3ar-inal ta@rate i +#6. oo4in- to t'e future< t'e $o3an% anti$iate 3aintainin- it $urrent $aitaltru$ture. 7'at i t'e $o3onent $ot of referre* to$4 to Glo(al> /E0a. +6 $. 1#6(. =6 *. 1).=6 Glei3

). Malone% In$. !1<### ar value referre* to$4 ai* it !1## er 'are annual *ivi*en* onAril + of t'e $urrent %ear. T'e referre* to$4 $urrent 3ar4et ri$e i !:"# a 'are on t'e*ate of t'e *ivi*en* *itri(ution. Malone% 3ar-inal ta@ rate /$o3(ine* fe*eral an* tate0 i

+#6< an* t'e fir3 lan to 3aintain it $urrent $aital tru$ture relation'i. T'e $o3onent$ot of referre* to$4 to Malone% &oul* (e $loet to /E0A. "6 C. 1#6B. ".)=6 D. 1#.+6 Glei3

)+. A3(r% In$. i -oin- to ue an un*er&riter to ell it referre* to$4. our un*er&riter 'a-iven eti3ate /(elo&0 on t'eir fee an* t'e ellin- ri$e of t'e to$4< a &ell a t'e e@e$te*ivi*en* for ea$'5

ee Sellin- Pri$e Divi*en*n*er&riter 1 != !1#1 !1#n*er&riter ) ? 1#) 11n*er&riter :? ?n*er&riter + :2 2

7'i$' un*er&riter &ill ro*u$e t'e lo&et $ot of fun* for t'e referre* to$4> /E0A. n*er&riter 1. C. n*er&riter .B. n*er&riter ). D. n*er&riter +. Gle

%i&idend Rate Gi&en

)=. A$3e Cororation i ellin- !)= 3illion of $u3ulative< non,arti$iatin- referre* to$4. Tiue &ill 'ave a ar value of !"= er 'are &it' a *ivi*en* rate of "6. T'e iue &ill (e oto invetor for !"2 er 'are< an* iuan$e $ot &ill (e !+ er 'are. T'e $ot of referrto$4 to A$3e i /E0A. =.+)6. C. ".##6.B. =.?+6. D. ".#:6. CMA #":# 1,

11=.Mar Co3an% lan to iue o3e P1## referre* to$4 &it' an 116 *ivi*en*. T'e to$4ellin- on t'e 3ar4et for P:?< an* Mar 3ut a% flotation $ot of =6 of t'e 3ar4et ri$eT'e $o3an% i un*er t'e +#6 $ororate ta@ rate. T'e $ot of referre* to$4 for MaCo3an% iA. ?.1"6 C. 11.+6B. ".2#6 D. 11.:+6 Pol Bo(a*

A'unt"2. A $ororation 'a !=<###<### in 2 er$ent referre* to$4 outtan*inan* a +# er$ent t

rate. T'e after,ta@ $ot of t'e referre* to$4 iA. !+##<###. C. !"""<""?.B. !)+#<###. D. !1"#<###. Git3

EBIT Required":. A $ororation 'a !1#<###<### in 1# er$ent referre* to$4 outtan*inan* a +# er$ent t

rate. T'e a3ount of earnin- (efore interet an* ta@e /EBIT0 re;uire* to a% t'e referr*ivi*en* i

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e : of

7/23/2019 P04 - Risks (Sol)



A. !1<###<###. C. ! "##<###.B. ! +##<###. D. !1<"""<""?. Git3an

Financia" Breake&en?#. A $ororation 'a !=<###<### in 1# er$ent (on* an* !<###<### in 1) er$ent referre*

to$4 outtan*in-. T'e fir3 finan$ial (rea4even /au3in- a +# er$ent ta@ rate0 iA. ! 2"#<###. C. !1<1##<###.B. ! ?1"<###. D. !1<+##<### Git3an

+O$T OF +OMMON E1IT,Retained Earnin*s Breakpint)". A $o3an% 'a !1<=##<### of outtan*in- *e(t an* !1<###<### of outtan*in- $o33on

e;uit%. Mana-e3ent lan to 3aintain t'e a3e roortion of finan$in- fro3 ea$' our$e ifa**itional roe$t are un*erta4en. If t'e $o3an% e@e$t to 'ave !"#<### of retaine*

earnin- availa(le for reinvet3ent in ne& roe$t in t'e $o3in- %ear< &'at *ollar a3ount ofne& invet3ent $an (e un*erta4en &it'out iuin- ne& e;uit%> /E0A. !# C. !:#<###B. !)+<### D. !1=#<### CIA #=:+ IV,+?

. Grav% Co3an% e@e$t earnin- of P# 3illion ne@t %ear. It *ivi*en* a%out ratio i +#6<an* it e;uit%aet ratio i +#6. Grav% ue no referre* to$4.At &'at a3ount of finan$in- &ill t'ere (e a (rea4 oint in Grav% 3ar-inal $ot of $aital> /E0A. P+= 3illion. C. P)# 3illion.B. P# 3illion. D. P12 3illion. Pol Bo(a*illa

. Grav% Co3an% e@e$t earnin- of P# 3illion ne@t %ear. It *ivi*en* a%out ratio i +#6<an* it *e(t ratio i "#6. Grav% ue no referre* to$4.At &'at a3ount of finan$in- &ill t'ere (e a (rea4 oint in Grav% 3ar-inal $ot of $aital> /E0A. P+= 3illion. C. P)# 3illion.B. P# 3illion. D. P12 3illion. Pol Bo(a*illa

. Grav% Co3an% e@e$t earnin- of P# 3illion ne@t %ear. It *ivi*en* a%out ratio i +#6<an* it *e(te;uit% ratio i 1.=#. Grav% ue no referre* to$4.At &'at a3ount of finan$in- &ill t'ere (e a (rea4 oint in Grav% 3ar-inal $ot of $aital> /E0

A. P+= 3illion. C. P)# 3illion.B. P# 3illion. D. P12 3illion. Pol Bo(a*illa

)?. Ste'enon Son 'a a $aital tru$ture t'at $onit of )# er$ent e;uit% an* 2# er$e*e(t. T'e $o3an% e@e$t to reort ! 3illion in net in$o3e t'i %ear< an* "# er$ent of t'net in$o3e &ill (e ai* out a *ivi*en*. o& lar-e 3ut t'e fir3 $aital (u*-et (e t'i %e&it'out it 'avin- to iue an% ne& $o33on to$4> /E0a. ! 1.)# 3illion *. ! #.)+ 3illion(. !1.## 3illion e. ! ".## 3illion$. ! 1.=# 3illion Bri-'a

. Durin- t'e at five %ear< Alen Co3an% 'a* $onitentl% ai* =#6 of earnin- availa(le$o33on a *ivi*en*. Ne@t %ear< t'e Alen Co3an% roe$t it net in$o3e< (efore t'e P13illion referre* *ivi*en*< at P" 3illion.T'e $aital tru$ture for t'e $o3an% i 3aintaine* at5

De(t )=.#6Preferre* Sto$4 1=.#6

Co33on E;uit% "#.#67'at i t'e retaine* earnin- (rea4oint ne@t %ear /M0A. P=<?"#<### C. P+<###<###B. P+<2##<### D. P"<###<### Pol Bo(a*

?+. A fir3 e@e$t to 'ave availa(le !=##<### of earnin- in t'e $o3in- %ear< &'i$' it &ill retafor reinvet3ent uroe. Given t'e follo&in- tar-et $aital tru$ture< at &'at level of totne& finan$in- &ill retaine* earnin- (e e@'aute*> /E0

Sour$e of $aital Tar-et 3ar4et roortionon-,ter3 *e(t +#6Preferre* to$4 1#Co33on to$4 e;uit% =#

A. !=##<### C. !1<###<###B. !2##<### D. !1<=##<### Git3

?=. A $ororation e@e$t to 'ave earnin- availa(le to $o33on 'are'ol*er /net rofit 3inreferre* *ivi*en*0 of !1<###<### in t'e $o3in- %ear. T'e fir3 lan to a% +# er$ent earnin- availa(le in $a' *ivi*en*. If t'e fir3 'a a tar-et $aital tru$ture of +# er$elon-,ter3 *e(t< 1# er$ent referre* to$4< an* =# er$ent $o33on to$4 e;uit%< &'at $ait(u*-et $oul* t'e fir3 uort &it'out iuin- ne& $o33on to$4> /E0

A. !)<###<### C. !1<)##<###B. ! "##<### D. ! 2##<### Git3

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e 1# of

7/23/2019 P04 - Risks (Sol)



Expected Rate ! Return". Suer Co3uter Co3an% to$4 i ellin- for 1## er 'are to*a%. It i e@e$te* t'at t'i

to$4 &ill a% a *ivi*en* of = *ollar er 'are< an* t'en (e ol* for !1)# er 'are at t'e en*of one %ear. Cal$u late t'e e@e$te* rate of return for t'e 'are'ol*er.A. )#6 C. 1#6B. )=6 D. 1=6 B M

%iscunted +as/ F") Met/dCurrent Sto$4 Pri$e)2. 7alla$e In$. i e@e$te* to a% out a *ivi*en* of !) in t'e ne@t %ear< ! t'e %ear after t'at< an*

!= t'e %ear u(e;uent to t'at. T'ereafter< t'e *ivi*en* are e@e$te* to in$reae at a$ontant rate of 26. If t'e re;uire* rate of return i 1"6< &'at i t'e $urrent to$4 ri$e> /D0A. !++.++ C. !"".21B. !=#.+# D. !??.=# Glei3

):. O@for* Ea-le< In$. lan to retain an* reinvet all of it earnin- for t'e ne@t # %ear.Invetor (elieve t'at< (e-innin- on t'e lat *a% of %ear 1< t'e fir3 &ill (e-in to a% an annual*ivi*en* of !1) er 'are in eretuit%. If t'e re;uire* return i 1=6< &'at 'oul* (e t'eto$4 ellin- ri$e> /D0A. !2#.## C. !).1=B. !+).## D. !1.)1 Glei3

#. 7'at &oul* (e t'e $urrent *eire* to$4 ri$e of a 'are of Bo&*en Cororation to$4 t'ata% a !) *ivi*en* an* &ill (e &ort' !11# in 1 %ear> A 1)6 return on e;uit% i re;uire*. /M0A. !:2.)1 C. !11#B. !1## D. !11) Glei3

=+. Invetor< In$. to$4 i e@e$te* to -enerate a *ivi*en* an* ter3inal value one %ear fro3no& of P=?.##. T'e to$4 'a a (eta of 1.< t'e ri4,free interet rate i "6< an* t'e e@e$te*3ar4et return i 116. 7'at 'oul* (e t'e e;uili(riu3 ri$e of Invetor to$4 in t'e 3ar4etno&>A. P=#."?. C. P=.??B. P+.2=. D. P+1.)) Pol Bo(a*illa

Pri$e,Earnin- Ratio1. a3oni$a Motor ut reorte* earnin- er 'are of !).##. T'e to$4 'a a ri$e earnin-ratio of +#< o t'e to$4 $urrent ri$e i !2# er 'are. Anal%t e@e$t t'at one %ear fro3no& t'e $o3an% &ill 'ave an EPS of !).+#< an* it &ill a% it firt *ivi*en* of !1.## er

'are. T'e to$4 'a a re;uire* return of 1# er$ent. 7'at ri$e earnin- ratio 3ut t'e to$'ave one %ear fro3 no& o t'at invetor realie t'eir e@e$te* return> /D0a. ++.## *. +#.##(. ".)= e. "."?$. +.1? Bri-'a

%i&idend Gr)t/ Mde" 2 Retained Earnin*sDivi*en* Gro&t' Rate)#. a4e Co. 'a ai* a *ivi*en* !) er 'are out of earnin- of !+ er 'are. If t'e (oo4 val

er 'are i !)=< &'at i t'e e@e$te* -ro&t' rate in *ivi*en* /-0>A. 1"6 C. 26B. 1)6 D. +6 B

)). a4e Co. 'a ai* a *ivi*en* ! er 'are out of earnin- of != er 'are. If t'e (oo4 val

er 'are i !+#< &'at i t'e e@e$te* -ro&t' rate in *ivi*en*>A. 1).=6 C. =6B. 26 D. 6 B

1=. M Co. a% out "#6 of it earnin- a *ivi*en*. It return on e;uit% i )#6. 7'at i tta(le *ivi*en* -ro&t' rate for t'e fir3>A. 6 C. 26B. =6 D. 1)6 B

"=. C'arlene o&n to$4 in a $o3an% &'i$' 'a $onitentl% ai* a -ro&in- *ivi*en* over tlat five %ear. T'e firt %ear C'arlene o&ne* t'e to$4< 'e re$eive* !1.?1 er 'are an*t'e fift' %ear< 'e re$eive* !).2: er 'are. 7'at i t'e -ro&t' rate of t'e *ivi*en* over tlat five %ear>A. ? er$ent C. 1) er$entB. 1+ er$ent D. = er$ent Git3

"?. Youn- Soo4 o&n to$4 in a $o3an% &'i$' 'a $onitentl% ai* a -ro&in- *ivi*en* over tlat 1# %ear. T'e firt %ear Youn- Soo4 o&ne* t'e to$4< 'e re$eive* !+.=# er 'are ain t'e 1#t' %ear< 'e re$eive* !+.:) er 'are. 7'at i t'e -ro&t' rate of t'e *ivi*en* ovt'e lat 1# %ear>

A. = er$ent C. ) er$entB. + er$ent D. 1 er$ent Git3


7/23/2019 P04 - Risks (Sol)



Pat Divi*en* Given). Allion En-ine Cororation 'a eta(li'e* a tar-et $aital tru$ture of +# er$ent *e(t an*

"# er$ent $o33on e;uit%. T'e $urrent 3ar4et ri$e of t'e fir3 to$4 i P # F !)2H it lat*ivi*en* &a D# F !).)#< an* it e@e$te* *ivi*en* -ro&t' rate i " er$ent. 7'at &illAllion 3ar-inal $ot of retaine* earnin-< 4 < (e> /E0a. 1=.26 *. 1+.6(. 1.:6 e. :.?6$. ?.:6 Bri-'a3

11+.T'e Tauru Co3an% lat *ivi*en* &a P.##< it -ro&t' rate i "6 an* t'e to$4 no& ellfor P". Ne& to$4 $an (e ol* to net t'e fir3 P).+# er 'are. 7'at i Tauru Co3an%$ot of retaine* earnin->A. 1+.26 C. 1=.216B. 1=.)"6 D. :.":6 Pol Bo(a*illa

11?.T'e earnin-< *ivi*en*< an* to$4 ri$e of arr% Te$'ni$< In$. are e@e$te* to -ro& at ?6er %ear after t'i %ear. arr% $o33on to$4 ell for P) er 'are< it lat *ivi*en* &aP).## an* t'e $o3an% a% P).1+ at t'e en* of t'e $urrent %ear. arr% 'oul* a% P).=#flotation $ot.A. 1#.++6 C. 1".#6B. :.#6 D. 1?.++6 Pol Bo(a*illa

Pat E@e$te* Divi*en* Given=). T'e *ivi*en* an* to$4 ri$e of Mi4e% Co3an% are e@e$te* to -ro& at ? er$ent er %ear

after t'i %ear. Mi$4e% $o33on to$4 ell for P)= er 'are< it lat *ivi*en* &a P).=#an* t'e $o3an% &ill a% P)."?= at t'e en* of t'e $urrent %ear. Mi$4e% 'oul* a% P).=#flotation $ot.7'at i t'e e@e$te* return on retaine* earnin- for Mi$4e% Co3an%> /M0a. 1?.?# er$ent $. 12.+= er$ent(. 12.2: er$ent *. 1:.?) er$ent Pol Bo(a*illa

%i&idend Gr)t/ Mde" 2 +''n $tck9ero,-ro&t' Sto$4 Re;uire* Rate of Return. Dori Cororation to$4 'a a 3ar4et ri$e of !)#.## an* a% a $ontant *ivi*en* of !).=

7'at i t'e re;uire* rate of return on it to$4> /E0A. 1.#6 C. 1).#6B. 1).=6 D. 11.=6 Gle

9ero,-ro&t' Sto$4 Current Pri$e2. niveral Air i a no -ro&t' fir3 an* 'a t&o 3illion 'are outtan*in-. It i e@e$te* to ea

a $ontant )# 3illion er %ear on it aet. If all earnin- are ai* out a *ivi*en* an* t$ot of $aital i 1#6< $al$ulate t'e $urrent ri$e er 'are for t'e to$4.A. !)## C. !1=#B. !1## D. !=# B

=#. A fir3 'a an e@e$te* *ivi*en* ne@t %ear of !1.)# er 'are< a ero -ro&t' rate of *ivi*en*an* a re;uire* return of 1# er$ent. T'e value of a 'are of t'e fir3 $o33on to$4 QQQQQQ.A. !1)# C. !1)B. !1# D. !1## Git3

Current Deire* Pri$e+. rotfell Airline i e@e$te* to a% an u$o3in- *ivi*en* of !.):. T'e $o3an% *ivi*en*

e@e$te* to -ro& at a tea*%< $ontant rate of =6 &ell into t'e future. rotfell $urrentl% '1<"##<### 'are of $o33on to$4 outtan*in-. If t'e re;uire* rate of return for rotfell 1)6< &'at i t'e (et eti3ate for t'e $urrent ri$e of rotfell $o33on to$4> /E0A. !"=.2# C. !+?.##B. !").=1 D. !)?.+1 Gle

1#. Caino Co. i e@e$te* to a% a *ivi*en* of !" er 'are at t'e en* of %ear one an* t'e*ivi*en* are e@e$te* to -ro& at a $ontant rate of 26 er %ear forever. If t'e re;uire* raof return on t'e to$4 i )#6< &'at i $urrent value of t'e to$4 to*a%>A. !# C. !1##B. !=# D. !=+ B

=+. E33% ou< In$. 'a an e@e$te* *ivi*en* ne@t %ear of !=."# er 'are< a -ro&t' rate *ivi*en* of 1# er$ent< an* a re;uire* return of )# er$ent. T'e value of a 'are of E33ou< In$. $o33on to$4 i QQQQQQ.A. !)2.## C. !)).+#

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e 1) of

7/23/2019 P04 - Risks (Sol)



B. !=".## D. !12."? Git3an

==. A fir3 'a e@erien$e* a $ontant annual rate of *ivi*en* -ro&t' of : er$ent on it $o33onto$4 an* e@e$t t'e *ivi*en* er 'are in t'e $o3in- %ear to (e !).?#. T'e fir3 $an earn1) er$ent on i3ilar ri4 involve3ent. T'e value of t'e fir3 $o33on to$4 i QQQQQQ.A. !)).=#'are C. !:#'areB. !:'are D. !#'are Git3an

11. 7orl*Tour Co. 'a ut no& ai* a *ivi*en* of !" er 'are /Do0< t'e *ivi*en* are e@e$te*

to -ro& at a $ontant rate of =6 er %ear forever. If t'e re;uire* rate of return on t'e to$4 i1=6< &'at i t'e $urrent value on to$4< after a%in- t'e *ivi*en*>A. !" C. !+#B. !=" D. !+2 B M

Gro&t' Rate+2. Given t'at t'e $ot of $o33on to$4 i 12 er$ent< *ivi*en* are !1.=# er 'are< an* t'e

ri$e of t'e to$4 i !1).=# er 'are< &'at i t'e annual -ro&t' rate of *ivi*en*> /E0A. + er$ent C. " er$entB. = er$ent D. 2 er$ent Git3an

Pat Divi*en* Given=. Suoe t'at Nefertiti re$entl% ur$'ae* a 'are of to$4 for !+=. T'e 3ot re$ent *ivi*en*

&a !< an* *ivi*en* are e@e$te* to -ro& at a eretual rate of =6 in*efinitel%. 7'at 'oul*(e 'er re;uire* return on t'e to$4> /E0A. 1)."?6 C. "."?6B. 1).##6 D. =.##6 Glei3

11.T'e eonar* Co3an% lat *ivi*en* &a P.##H it -ro&t' rate i "6 an* t'e to$4 no& ellfor P". Ne& to$4 $an (e ol* to net t'e fir3 P).+# er 'are. 7'at i eonar* Co3an%$ot of ne& $o33on to$4>A. 1+.26 C. 1=.216B. 1=.)"6 D. :.":6 Pol Bo(a*illa

". A $o3an% 'a 1#<### outtan*in- 'are &it' a 3ar4et value of !)= ea$'. It ut ai* a !1

er 'are *ivi*en*. Divi*en* are e@e$te* to -ro& at a $ontant rate of 1#6. If flotation $otare =6 of t'e ellin- ri$e< t'e $ot of ne& e;uit% finan$in- i $al$ulate* (% t'e follo&in-for3ula5 /E0

A.dividend at time zero

+ dividend growth ratemarket price

F

$1+ 10%

$25

4% + 10% = 14%

B.dividend at time zero

+ dividend growth ratenet proceeds

F

$1+ 10%

$23.75

4.21% + 10% = 14.21%

C.epected dividend at end o! period

+ dividend growth rate

market price

F$25

$1.10 L .1#

F .#++ L .1# F 1+.+#6

D.shareoneiss"ing proceedsnet

periodo! endatdividendepectedL *ivi*en* -ro&t' rate

F 10.$23.75

$1#1.1+

F .#+" L .1# F 1+."6 CIA #=:+ IV,

=. T'e Mint Co3an% lat *ivi*en* &a P+.=#H it -ro&t' rate i " er$ent an* t'e to$4 noell for P"#. lotation $ot i P=.##7'at i Mint Co3an% $ot of ne& $o33on to$4>a. 2."? er$ent $. 1+.12 er$ent(. 1+."? er$ent *. 1.=# er$ent Pol Bo(a*

?. A $o3an% ut ai* a !).## er 'are *ivi*en* on it $o33on to$4 /D# F !).##0. T*ivi*en* i e@e$te* to -ro& at a $ontant rate of ? er$ent er %ear. T'e to$4 $urrentl% elfor !+) a 'are. If t'e $o3an% iue a**itional to$4< it 3ut a% it invet3ent (an4er

flotation $ot of !1.## er 'are. 7'at i t'e $ot of e@ternal e;uit%< 4 e> /E0a. 11.?"6 *. 1).))6(. 11.226 e. 1).#6$. 11.:26 Bri-'a


7/23/2019 P04 - Risks (Sol)



2. Ne&3a< In$. ai* a $a' *ivi*en* to it $o33on 'are'ol*er over t'e at 1) 3ont'!).)# er 'are. T'e $urrent 3ar4et value of t'e $o33on to$4 i !+# er 'are< ainvetor are anti$iatin- t'e $o33on *ivi*en* to -ro& at a rate of "6 annuall%. T'e $ot iue ne& $o33on to$4 &ill (e =6 of t'e 3ar4et value. T'e $ot of a ne& $o33on to$iue &ill (e /E0A. 11.=#6 C. 11.26B. 11.?:6 D. 1).1+6 CMA #":# 1,

:. Your $o3an% to$4 ell for !=# er 'are< it lat *ivi*en* /D#0 &a !).##< it -ro&t' ratea $ontant = er$ent< an* t'e $o3an% &ill in$ur a flotation $ot of 1= er$ent if it ell ne$o33on to$4. 7'at i t'e fir3 $ot of ne& e;uit%< 4e> /E0a. :.)#6 *. 11.?=6(. :.:+6 e. 1).#6$. 1#.=#6 Bri-'a

1:. T'e follo&in- *etail &ere u33arie* for ar-a Cororation5

Year Per S'are Divi*en*1::? P).::1::2 .)=1::: .+=)### .?#)##1 +.##)##) +.):

ar-a Cororation i e@e$te* to a% *ivi*en* at t'e en* of )## (ae* on t'e avera-*ivi*en* -ro&t'. T'e $urrent 3ar4et ri$e of Buena $o33on 'are i P"). T'e iuane@ene er 'are i P).##.T'e 3ar-inal $ot of ne& $o33on 'are iA. 1+.:=6 C. 1:."#6B. 1).=#6 D. 1=.)#6 Pol Bo(a*

E@e$te* Divi*en* Given+#. A(er*een Cororation 'a a $urrent 3ar4et ri$e of !1## er 'are on it $o33on to$4

&ill a% a !+ *ivi*en* ne@t %ear on it $o33on to$4. 7'at i t'e 3ar4et re;uire* return ot'i invet3ent if t'e *ivi*en* i e@e$te* to eretuall% -ro& at =6> /E0

A. +6 C. ?6B. =6 D. :6 Gle

+1. A fir3 'a $o33on to$4 &it' a 3ar4et ri$e of !)= er 'are an* an e@e$te* *ivi*en* of

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e 1+ of

7/23/2019 P04 - Risks (Sol)



er 'are at t'e en* of t'e $o3in- %ear. T'e -ro&t' rate in *ivi*en* 'a (een = er$ent. T'e$ot of t'e fir3 $o33on to$4 e;uit% i /E0A. = er$ent. C. 1# er$ent.B. 2 er$ent. D. 1 er$ent. Git3an

+1. T'e $o33on to$4 of t'e Ni$ola Cororation i $urrentl% ellin- at !2# er 'are. T'elea*er'i of t'e $o3an% inten* to a% a !+ er 'are *ivi*en* ne@t %ear. 7it' t'ee@e$tation t'at t'e *ivi*en* &ill -ro& at =6 eretuall%< &'at &ill t'e 3ar4et re;uire* returnon invet3ent (e for Ni$ola $o33on to$4> /E0A. =6. C. ?.=6.B. =.)=6. D. 1#6. Glei3

+). B% uin- t'e *ivi*en* -ro&t' 3o*el< eti3ate t'e $ot of e;uit% $aital for a fir3 &it' a to$4ri$e of !#.##< an eti3ate* *ivi*en* at t'e en* of t'e firt %ear of !.## er 'are< an* an

e@e$te* -ro&t' rate of 1#6. /E0A. )1.16 C. 1#.#6B. 11.#6 D. )#.#6 CMA 1):+ 1,)2

+. 7'at return on e;uit% *o invetor ee3 to e@e$t for a fir3 &it' a !=# 'are ri$e< ane@e$te* *ivi*en* of !=.=#< a (eta of .:< an* a $ontant -ro&t' rate of +.=6> /M0A. 1=.#=6 C. 1=.:=6B. 1=.=#6 D. 1".?)6 Glei3

1. M$o3 Co. i e@e$te* to a% a *ivi*en* of !+ er 'are at t'e en* of %ear one an* t'e*ivi*en* are e@e$te* to -ro& at a $ontant rate of +6 forever. If t'e $urrent ri$e of t'eto$4 i !)= er 'are< $al$ulate t'e re;uire* rate of return on t'e 3ar4et $aitaliation rate fort'e fir3 to$4.A. +6 C. )#6B. 1"6 D. None of t'e a(ove. B M

++. Blair Brot'er to$4 $urrentl% 'a a ri$e of !=# er 'are an* i e@e$te* to a% a %ear,en**ivi*en* of !).=# er 'are /D1 F !).=#0. T'e *ivi*en* i e@e$te* to -ro& at a $ontant rateof + er$ent er %ear. T'e $o3an% 'a inuffi$ient retaine* earnin- to fun* $aital roe$tan* 3ut< t'erefore< iue ne& $o33on to$4. T'e ne& to$4 'a an eti3ate* flotation $ot

of ! er 'are. 7'at i t'e $o3an% $ot of e;uit% $aital> /E0a. 1#.1+6 *. :.)6(. :.)16 e. :.##6$. :.+=6 Bri-'a3

+=. T'e DC Cororation i rearin- to evaluate t'e $aital e@en*iture rooal for t'e $o3i%ear. Be$aue t'e fir3 e3lo% *i$ounte* $a' flo& 3et'o* of anal%e< t'e $ot of $aifor t'e fir3 3ut (e eti3ate*. T'e follo&in- infor3ation for DC Cororation i rovi*e*. Mar4et ri$e of $o33on to$4 i !=# er 'are. T'e *ivi*en* ne@t %ear i e@e$te* to (e !).=# er 'are. E@e$te* -ro&t' in *ivi*en* i a $ontant 1#6. Ne& (on* $an (e iue* at fa$e value &it' a 16 $ouon rate. T'e $urrent $aital tru$ture of +#6 lon-,ter3 *e(t an* "#6 e;uit% i $oni*ere*

(e oti3al. Anti$iate* earnin- to (e retaine* in t'e $o3in- %ear are ! 3illion. T'e fir3 'a a +#6 3ar-inal ta@ rate.If t'e fir3 3ut au3e a 1#6 flotation $ot on ne& to$4 iuan$e< &'at i t'e $ot of ne$o33on to$4> /M0

A. 1+.=#6. C. 1=.)6.B. 1=.="6. D. 1=.=#6. CMA 1)2# 1,

+). A fir3 'a $o33on to$4 &it' a 3ar4et ri$e of !== er 'are an* an e@e$te* *ivi*en*!).21 er 'are at t'e en* of t'e $o3in- %ear. T'e *ivi*en* ai* on t'e outtan*in- toover t'e at five %ear are a follo&5

Year Divi*en* 1 ! ).## ) ).1+ ).): + ).+= = ).")

T'e $ot of t'e fir3 $o33on to$4 e;uit% i /E0A. +.1 er$ent. C. 1).1 er$ent.B. =.1 er$ent. D. 1=.+ er$ent. Git3

++. A fir3 'a $o33on to$4 &it' a 3ar4et ri$e of !1## er 'are an* an e@e$te* *ivi*en*!=."1 er 'are at t'e en* of t'e $o3in- %ear. A ne& iue of to$4 i e@e$te* to (e ol* !:2< &it' !) er 'are rereentin- t'e un*erri$in- ne$ear% in t'e $o3etitive $ait3ar4et. lotation $ot are e@e$te* to total !1 er 'are. T'e *ivi*en* ai* on touttan*in- to$4 over t'e at five %ear are a follo&5

Year Divi*en* 1 ! +.##

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e 1= of

7/23/2019 P04 - Risks (Sol)



) +.)2 +.=2 + +.:# = =.)+

T'e $ot of t'i ne& iue of $o33on to$4 i /E0A. =.2 er$ent. C. 1#.2 er$ent.B. ?.? er$ent. D. 1).2 er$ent. Git3an

. T'e ABC Co3an% i e@e$te* to 'ave a $ontant annual -ro&t' rate of = er$ent. It 'a ari$e er 'are of P) an* a% an e@e$te* *ivi*en* of P).+#. It $o3etitor< t'e DECo3an% i e@e$te* to 'ave a -ro&t' rate of 1#6< 'a a ri$e er 'are of P?)< an* a% ane@e$te* P+.2#'are *ivi*en*. T'e re;uire* rate of return on e;uit% for t'e t&o $o3anieare5

RPCPA 1##1 A. B. C. D.

ABC 1.26 :."6 1).=6 1".)6DE 1=.+6 2."6 1".?6 12.)6

+". it-eral* i interete* in invetin- in a $ororation &it' a lo& $ot of e;uit% $aital. B% uin-t'e *ivi*en* -ro&t' 3o*el< &'i$' of t'e follo&in- $ororation 'a t'e lo&et $ot of e;uit%$aital>

Sto$4 Pri$e Divi*en* Gro&t' RateC.S. In$. !)= != 26e&i Cor. # 1#6S$re&tae In$. )# + "67or3&oo* Cor. )2 ? ?6

A. C.S. In$. C. S$re&tae In$.B. e&i Cor. D. 7or3&oo* Cor. Glei3

Current Sto$4 Pri$e)1. Re* Tur4e% Co3an% &ill a% a *ivi*en* of P1.=# er 'are at t'e en* of ne@t 1) 3ont'.

T'e re;uire* rate of return for Re* in 'are i 1#6 an* t'e $ontant -ro&t' rate i =6. T'earo@i3ate $urrent 3ar4et ri$e er $o33on 'are of Re* Tur4e% to$4 iA. P#.## C. P1=.##B. P1#.## D. P)"." Pol Bo(a*illa

Earnin- er S'are Divi*en* er S'areJuetion 2" an* 2? are (ae* on t'e follo&in- infor3ation. Pol Bo(a*illa

Gar*ner Co3an% to$4 i $urrentl% ellin- for P1)# a 'are. T'e fir3 i e@e$te* to eaP1#.2# er 'are an* to a% a %ear,en* *ivi*en* of P?.)#. Invetor re;uire a :6 return.

2". If Gar*ner reinvet retaine* earnin- in roe$t &'oe a--re-ate return i e;ual to t'to$4 e@e$te* rate of return< &'at &ill (e ne@t %ear Earnin- er S'are>A. P11.1) C. P?.+)B. P1#.2# D. P11.??

2?. If Gar*ner reinvet retaine* earnin- in roe$t &'oe a--re-ate return i e;ual to t'to$4 e@e$te* rate of return an* it &ill $ontinue t'e $ontant *ivi*en* -ro&t' rate< 'o3u$' i t'e %ear,en* *ivi*en* ne@t %ear>A. P?.+) C. P?.)#B. P?.= D. P:.##

+apita" Asset Pricin* Mde"Al'a+?. Se$urit% A 'a an e@e$te* rate of return of #.1# an* a (eta of 1.1. T'e 3ar4et e@e$te* rate

return i #.#2 an* t'e ri4,free rate i #.#=. T'e al'a of t'e to$4 i /M0a. 1.?6. $. 2.6.(. ,1.?6. *. =.=6. Bo*

Beta+2. Bae* on t'e follo&in- infor3ation a(out to$4 ri$e in$reae an* *e$reae< 3a4e

eti3ate of t'e to$4 (eta5 Mont' 1 F Sto$4 L1.=6< Mar4et L1.16H Mont' ) F Sto$4 L).#6Mar4et L1.+6H Mont' F Sto$4 ,).=6< Mar4et ,).#6. /E0A. Beta i -reater t'an 1.#. C. Beta e;ual 1.#. GleB. Beta i le t'an 1.#. D. T'ere i no $onitent attern of return.

)". T'e (eta of t'e $o3uter $o3an% i 1.? an* t'e tan*ar* error of t'e eti3ate i #.. 7'i t'e ran-e of value for (eta< t'at 'a :=6 $'an$e of (ein- ri-'t> /D0A . 1.+,).# C. 1.=,).#B. 1.1,). D. None of t'e a(ove B

Re;uire* rate of return /Given Ri4 Pre3iu30+:

. Ar&i$ Co3an% 'a a (eta $oeffi$ient of #.2. T'e 3ar4et ri4 re3iu3 i $urrentl% ?6< an* tri4,free rate i =6. 7'at i t'e re;uire* rate of return on t'e to$4 of Ar&i$ Co3an%> /E0A. 1#."6 C. 1).#6B. 11.#6 D. 1).26 Gle

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e 1" of

7/23/2019 P04 - Risks (Sol)



=#. in* t'e re;uire* rate of return for e;uit% invetor of a fir3 &it' a (eta of 1.) &'en t'e ri4,free rate i "6< t'e 3ar4et ri4 re3iu3 i +6< an* t'e return on t'e 3ar4et i 1#6. /E0A. +.2#6 C. 1#6B. "6 D. 1#.2#6 Glei3

=1. T'e $o33on to$4 of Ant'on% Steel 'a a (eta of 1.)#. T'e ri4,free rate i = er$ent an* t'e3ar4et ri4 re3iu3 /4M , 4R0 i " er$ent. Au3e t'e fir3 &ill (e a(le to ue retaine*earnin- to fun* t'e e;uit% ortion of it $aital (u*-et. 7'at i t'e $o3an% $ot of retaine*earnin-< 4> /M0a. ?.#6 *. 1).)6(. ?.)6 e. 1).+6$. 11.#6 Bri-'a3

=. T'e (eta of a fir3 in S&iterlan* i 1.)=. T'e ri4,free rate i +6 an* 3ar4et ri4 re3iu3 i2.+6. Cal$ulate t'e re;uire* rate of return for t'i fir3.A. 1+.=6 C. 1#.=6B. 2.+6 D. None of t'e a(ove B M

+1. If t'e (eta of Mi$rooft i 1.)"< ri4,free rate i =.=6 an* t'e 3ar4et ri4 re3iu3 i 26<$al$ulate t'e e@e$te* return for Mi$rooft. /E0A. 1)."6 C. 1.:6B. 1=."6 D. 11.6 B M

+. If t'e (eta of General Ele$tri$ i 1.):< ri4,free rate i =.=6 an* t'e 3ar4et ri4 re3iu3 i 26<$al$ulate t'e e@e$te* rate of return for General Ele$tri$5 /E0A. 1=.26 C. 1)."6B. 1.:6 D. 11.6 B M

=). If Treaur% (ill %iel* +.#6< an* t'e 3ar4et ri4 re3iu3 i :.#6< t'en a ortfolio &it' a (eta of1.= &oul* (e e@e$te* to %iel* /E0A. :.#6 C. 1?.=6B. 1=.#6 D. 1:.=6 Glei3

Re;uire* rate of return /Given Mar4et Return0+). If t'e (eta of E@@on i #.?< ri4,free rate i =.=6 an* t'e 3ar4et rate of return i 1.=6<

$al$ulate t'e e@e$te* rate of return fro3 E@@on5 /E0A. 1)."6 C. 1.:6

B. 1=. "6 D. 11 .6 B

11".If t'e fir3 (eta i 1.?=< t'e ri4,free rate i 26< an* t'e avera-e return on t'e 3ar4et i 1)6&'at &ill (e t'e fir3 $ot of e;uit% uin- t'e CAPM aroa$'>A. 1".#=6 C. 1=.##6B. 1+.)?6 D. 1+.##6 Pol Bo(a*

1)1.ABC Cor. to$4 (eta i #.=#. If t'e 3ar4et return i 1"6< an* t'e ri4,free rate i "6< &'i t'e re;uire* rate of return on ABC to$4> /E0A. 116 C. 1.##6B. 1)6 D. 1+.##6 Pol Bo(a*

=. in- t'e Caital Aet Pri$in- Mo*el /CAPM0< t'e re;uire* rate of return for a fir3 &it' a (eof 1.)= &'en t'e 3ar4et return i 1+6 an* t'e ri4,free rate i "6 i /E0

A. ".#6. C. 1?.=6.B. ?.=6. D. 1".#6. CMA #":) 1

?. A fir3 'a a (eta of 1.). T'e 3ar4et return e;ual 1+ er$ent an* t'e ri4,free rate of retue;ual " er$ent. T'e eti3ate* $ot of $o33on to$4 e;uit% i /E0A. " er$ent. C. 1+ er$ent.B. ?.) er$ent. D. 1=." er$ent. Git3

=+. T'e ri4,free rate an* t'e e@e$te* 3ar4et rate of return are #.#" an* #.1)< ree$tiveA$$or*in- to t'e $aital aet ri$in- 3o*el /CAPM0< t'e e@e$te* rate of return on e$urit% &it' a (eta of 1.) i e;ual to /E0a. #.#". *. #.1)(. #.1++. e. #.12$. #.1). Bo*

==. Au3e t'at t'e ri4,free interet rate i 26< t'e re;uire* rate of return on t'e 3ar4et ortfo/$ontainin- all to$40 i 1=6< an* t'e (eta $oeffi$ient of a arti$ular to$4 i .:. A$$or*in- tt'e $aital aet ri$in- 3o*el< t'e re;uire* rate of return on t'at arti$ular to$4 i /E0A. ".6 C. 1=.#6B. 1+.6 D. )1.=6 CIA 11:1 IV,

=". Colt< In$. i lannin- to ue retaine* earnin- to finan$e anti$iate* $aital e@en*iture. T(eta $oeffi$ient for Colt to$4 i 1.1=< t'e ri4,free rate of interet i 2.=6< an* t'e 3ar4return i eti3ate* at 1).+6. If a ne& iue of $o33on to$4 &ere ue* in t'i 3o*el< t'

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e 1? of

7/23/2019 P04 - Risks (Sol)



flotation $ot &oul* (e ?6. B% uin- t'e Caital Aet Pri$in- Mo*el /CAPM0 e;uation R FR L U/RM , R0< t'e $ot of uin- retaine* earnin- to finan$e t'e $aital e@en*iture i /M0A. 1.)16 C. 1).+#6B. 1).::6 D. 1+.)"6 CMA #":# 1,1

Re;uire* Rate of Return Given itori$al Return of Sto$4 an* Mar4et Portfolio1. T'e 'itori$al return *ata for t'e at t'ree %ear for Co3an% A to$4 i ,".#6< 1=6< 1=

an* t'at of t'e 3ar4et ortfolio i 1#6< 1#6 an* 1"6. If t'e ri4,free rate of return i +6&'at i t'e $ot of e;uit% $aital /re;uire* rate of return of $o3an% A $o33on to$40 uiCAPM> /D0A. 1)6 C. 126B. 1+6 D. None of t'e a(ove B

Beta=?. If t'e ri4,free rate i "6< t'e e@e$te* return on t'e 3ar4et i 1)6< an* t'e e@e$te* retu

on Poo4ie to$4 i 1)6< &'at i t'e (eta of Poo4ie to$4> /E0A. 1.# C. ).#B. 1.= D. ).= Gle

Mar4et Return12. T'e follo&in- *ata are relate* to ABC to$45

Re;uire* return on ABC $o33on 1=6Beta $oeffi$ient 1.=Ri4,free rate :6

T'e re;uire* 3ar4et return iA. 1.#6 C. )=.#6B. 12.#6 D. 1".#6 Pol Bo(a*

Ri4 Pre3iu3 Given Ri4 ree Rate an* Mar4et Return1?. If t'e avera-e annual rate of return for $o33on to$4 i 16< an* treaur% (ill i .26< &'

i t'e avera-e 3ar4et ri4 re3iu3>A. 16 C. :.)6B. .26 D. None of t'e a(ove B

Ri4 Pre3iu3 Given itori$al Return of Sto$4 an* Mar4et Portfolio1+. T'e 'itori$al return *ata for t'e at t'ree %ear for Co3an% A to$4 i ,".#6< 1=6< 1=

an* t'at of t'e 3ar4et ortfolio i 1#6< 1#6 an* 1"6. If t'e ri4,free rate of return i +6&'at i t'e 3ar4et ri4 re3iu3> /D0A. 26 C. 1"6

B. +6 D. None of t'e a(ove B

Current Sto$4 Pri$e=". A $o33on to$4 $urrentl% 'a a (eta of 1.< t'e ri4,free rate i an annual rate of " er$e


7/23/2019 P04 - Risks (Sol)



an* t'e 3ar4et return i an annual rate of 1) er$ent. T'e to$4 i e@e$te* to -enerateer,'are (enefit of !=.)# *urin- t'e $o3in- erio*. A to@i$ ill reult in a la&uit an*otential fine< an* t'e (eta of t'e to$4 u3 to 1.". T'e ne& e;uili(riu3 ri$e of t'e to$4A. &ill (e !?."2.B. &ill (e !+..C. $annot (e *eter3ine* fro3 t'e infor3ation -iven.D. &ill (e !.. Git3an

=?. A $o33on to$4 $urrentl% 'a a (eta of 1.?< t'e ri4,free rate i ? er$ent annuall%< an* t'e3ar4et return i 1) er$ent annuall%. T'e to$4 i e@e$te* to -enerate er 'are (enefit of!".?# *urin- t'e $o3in- erio*. A en*in- la&uit 'a ut (een *i3ie* an* t'e (eta oft'e to$4 *ro to 1.+. T'e ne& e;uili(riu3 ri$e of t'e to$4A. &ill (e !==.2.B. &ill (e !+.).

C. &ill (e !+?.2".D. $annot (e *eter3ine* fro3 t'e infor3ation -iven. Git3an

Mar4et Return Ri4,ree Rate=2. Sto$4 'a a (eta of 1.) an* an e@e$te* return of 1=."6< an* to$4 K 'a a (eta of #.2 an*

an e@e$te* return of 1).+6. 7'at 3ut (e t'e e@e$te* return on t'e 3ar4et an* t'e ri4,free rate of return< to (e $onitent &it' t'e $aital aet ri$in- 3o*el> /D0A. Mar4et i 1+6H ri4,free i "6. C. Mar4et i 1+6H ri4,free i +6.B. Mar4et i 1).+6H ri4,free i #6. D. Mar4et i 1+6H ri4,free i 1."6. Glei3

Effe$t of C'an-e in Beta on Rate of Return=:. If t'e return on t'e 3ar4et ortfolio i 1#6 an* t'e ri4,free rate i =6< &'at i t'e effe$t on a

$o3an% re;uire* rate of return on it to$4 of an in$reae in t'e (eta $oeffi$ient fro3 1.) to1.=> /M0A. 6 in$reae C. No $'an-eB. 1.=6 in$reae D. 1.=6 *e$reae Glei3

Effe$t of C'an-e in Ri4 Pre3iu3 on Rate of Return"#. An invetor &a e@e$tin- a 1=6 return on 'i ortfolio &it' (eta of 1.)= (efore t'e 3ar4et

ri4 re3iu3 in$reae* fro3 "6 to :6. Bae* on t'i $'an-e< &'at return &ill no& (e

e@e$te* on t'e ortfolio> /M0A. 1=.##6 C. 12.?=6B. 12.##6 D. )).=#6 Glei3

Effe$t of C'an-e in Beta an* Ri4,free Rate on Rate of Return"1. 7'at 'aen to e@e$te* ortfolio return if t'e ortfolio (eta in$reae fro3 1.# to ).#< t

ri4,free rate *e$reae fro3 =6 to +6< an* t'e 3ar4et ri4 re3iu3 re3ain at 26> /M0A. It in$reae fro3 1)6 to 1:6. C. It in$reae fro3 16 to )#6.B. It in$reae fro3 16 to 1"6. D. It re3ain un$'an-e*. Gle

Net Preent Value"). Co3ute$' i an all,e;uit% fir3 t'at i anal%in- a otential 3a $o33uni$ation roe

&'i$' &ill re;uire an initial< after,ta@ $a' outla% of !1##<###< an* &ill ro*u$e after,ta@ $ainflo& of !1)<### er %ear for 1# %ear. In a**ition< t'i roe$t &ill 'ave an after,ta@ alva-value of !)#<### at t'e en* of Year 1#. If t'e ri4,free rate i = er$ent< t'e return on aavera-e to$4 i 1# er$ent< an* t'e (eta of t'i roe$t i 1.2#< t'en &'at i t'e roe$NPV> /D0A. !1#<"== C. ,!?<+#?

B. !<)+ D. ,!)<#1) Gle

Certaint% E;uivalent Ca' lo&:. A roe$t 'a an e@e$te* $a' flo& of !)##< in %ear 1. T'e ri4,free rate i "6< t'e 3ar4

rate of return i 1"6< an* t'e roe$t (eta i 1.=6. Cal$ulate t'e $ertaint% e;uivalent $aflo& for %ear 1.A . !1?=.)1 C. !))2.#B. !1"+.): D. None of t'e a(ove B

+#. A roe$t 'a an e@e$te* $a' flo& of !## in %ear . T'e ri4,free rate i =6< t'e 3ar4ri4 re3iu3 i 26 an* t'e roe$t (eta i 1.)=. Cal$ulate t'e $ertaint% e;uivalent $a' flofor %ear .A. !))2.= C. !##B. !1:?.)= D. None of t'e a(ove B

Co3re'enive". T'e (eta an* e@e$te* return for t'ree invet3ent (ein- $oni*ere* (% S4% In$. are -iv

(elo&.

Invet3ent Beta E@e$te* ReturnA 1.+ 1)6

B #.2 116C 1.= 16

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e 1: of

7/23/2019 P04 - Risks (Sol)



T'e return on t'e 3ar4et i 116 an* t'e ri4,free rate i "6. If t'e Caital Aet Pri$in- Mo*el/CAPM0 i ue* for $al$ulatin- t'e re;uire* rate of return< &'i$' invet3ent 'oul* t'e3ana-e3ent of S4% 3a4e> /M0A. B onl%. C. B an* C onl%.B. A an* C onl%. D. A< B< an* C. CMA Sa3 J),1#

"+. T'e e@e$te* return< tan*ar* *eviation< an* (eta $oeffi$ient of four to$4 are -iven(elo&5

E@e$te* Return Stan*ar* Deviation Beta Coeffi$ientM 126 ."= .:N )#6 .: 1.)O )#6 .+ 1.=J )16 1.) 1.?

Given an e@e$te* return on t'e 3ar4et ortfolio of 126 an* a ri4,free rate of 1)6< &'i$'

to$4/0 i/are0 overvalue* or un*ervalue*>A. M an* N are un*ervalue*H O an* J are overvalue*.B. M i un*ervalue*H N< O< an* J are overvalue*.C. M< N< O< an* J are overvalue*.D. M< N< O< an* J are un*ervalue*. Glei3

Juetion 1 an* ) are (ae* on t'e follo&in- infor3ation. Bri-'a3T'e a$4on Co3an% 'a ut ai* a *ivi*en* of !.## er 'are on it $o33on to$4< an* ite@e$t t'i *ivi*en* to -ro& (% 1# er$ent er %ear< in*efinitel%. T'e fir3 'a a (eta of 1.=#H t'eri4,free rate i 1# er$entH an* t'e e@e$te* return on t'e 3ar4et i 1+ er$ent. T'e fir3invet3ent (an4er (elieve t'at ne& iue of $o33on to$4 &oul* 'ave a flotation $ot e;ual to =er$ent of t'e $urrent 3ar4et ri$e.

"=. o& 3u$' 'oul* an invetor (e &illin- to a% for t'i to$4 to*a%> /E0a. !").21 *. !==.##(. !?#.## e. !#.##$. !+.?=

"". 7'at &ill (e a$4on $ot of ne& $o33on to$4 if it iue ne& to$4 in t'e 3ar4etla$eto*a%> /E0

a. 1=.)=6 *. 1).+?6(. 1".)6 e. :.2=6$. 1?.##6

Ar.itra*e Pricin* T/er 3APT4"?. T'e ar(itra-e ri$in- t'eor% /APT0 e@lain aet return in ter3 of 3ultile 3a$roe$ono3

fa$tor. Au3e t'at t'e 3a$roe$ono3i$ varia(le are t'e -ro *o3eti$ ro*u$t< inflatioreal interet rate< *ifferen$e in %iel* of *ifferent -ra*e of $ororate (on*< an* *ifferen$ein %iel* on lon- veru 'ort,ter3 -overn3ent (on*.T'e fa$tor return or ri4 re3iu3 /4i 0 an* t'e fa$tor enitivit% or (eta $oeffi$ient /U 0 for ea$varia(le are -iven (elo&5

Varia(le F 1 ) + = 4 i F . # .#+ .#? .#= .#U F .= . . .+ ."

If t'e ri4,free interet rate i .#=< t'e e@e$te* rate of return a$$or*in- to t'e APT iA. 1."6 C. 2.6B. 1#.6 D. =.#6 Gle

Mar*ina" +st ! +apita"Mar-inal Cot of De(t Cot of E;uit%"2. A $o3an% 'a !"=#<### of 1#6 *e(t outtan*inan* !=##<### of e;uit% finan$in-. T

re;uire* return of t'e e;uit% 'ol*er i 1=6< an* t'ere are no retaine* earnin- $urrentavaila(le for invet3ent uroe. If ne& outi*e e;uit% i raie*< it &ill $ot t'e fir3 1"6. Ne*e(t &oul* 'ave a (efore,ta@ $ot of :6< an* t'e $ororate ta@ rate i =#6. 7'en $al$ulatint'e 3ar-inal $ot of $aital< t'e $o3an% 'oul* ai-n a $ot of Wit AX to e;uit% $aital anWit BX to t'e after,ta@ $ot of *e(t finan$in-. CIA 11:+ IV,+< 11:" IV,

A. B. C. D.it A 1=6 1=6 1"6 1"6it B +.=6 =.#6 +.=6 =.#6

Mar-inal Cot of Caital)). T'e Nunal Cororation fin* t'at it i ne$ear% to *eter3ine it 3ar-inal $ot of $ait

Nunal $urrent $aital tru$ture $all for +=6 *e(t< 1=6 referre* to$4 an* +#6 $o33oe;uit%. T'e $ot of t'e variou our$e of finan$in- are a follo&5 *e(t< after,ta@ =."referre* to$4< :6H retaine* earnin-< 1)6H an* ne& $o33on to$4< 1.)6. If t'e fir3 'P1) 3illion retaine* earnin-< an* Nunal 'a an oortunit% to invet in an attra$tive roet'at $ot P+= 3illion< &'at i t'e 3ar-inal $ot of $aital of Nunal Cororation> /D0A. 2.26 C. :.:=6B. 2.:16 D. 1).+#6 Pol Bo(a*

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e )# of

7/23/2019 P04 - Risks (Sol)



=#. T'e Beta Cororation a4 %ou to *eter3ine it 3ar-inal $ot of $aital. Beta $urrent $aitaltru$ture $onit of +=6 *e(t< 1=6 referre* to$4 an* +#6 $o33on e;uit%. T'e earate3ar-inal $ot of t'e variou $o3onent of t'e $aital tru$ture are a follo&5 *e(t< after,ta@ =.# er$entH referre* to$4< : er$entH retaine* earnin-< 1) er$entH an* ne& $o33onto$4< 1.= er$ent. If Beta 'a P1= 3illion inveti(le retaine* earnin-< an* Beta 'a anoortunit% to invet in an attra$tive roe$t t'at $ot P"# 3illion< &'at i t'e 3ar-inal $ot of$aital of Beta Cororation>a. 2.+# er$ent $. P:.## er$ent(. 2." er$ent *. P:.22 er$ent Pol Bo(a*illa

Invet3ent De$iion22. A fir3 $urrent invet3ent oortunit% $'e*ule an* t'e &ei-'te* 3ar-inal $ot of $aital

$'e*ule are 'o&n (elo&.

Inve t3ent Oor tunit% S$'e*ule IRR Ini ti al Inve t3ent

A 1=6 )##<###B 1) ##<###C 1: 1##<###D 1# +##<###E 1" ##<###

7ei-'te* Mar-inal Cot of CaitalRan-e of total ne& finan$in- 7MCC

!# , !)=#<### ?.=6)=#<##1 , =##<### 2.:

=##<##1 , 1<###<### 1#.#1<###<##1 , 1<=##<### 1).#

T'e invet3ent oortunitie &'i$' 'oul* (e ele$te* are /D0A. A< B< C< an* D. C. A< B< D< an* E.B. A< B< C< an* E. D. B< C< D< an* E. Git3an

Opti'a" +apita" Bud*et":. T'e 3ana-er of Kenforet Gro$er are tr%in- to *eter3ine t'e $o3an% oti3al $aital

(u*-et for t'e u$o3in- %ear. Kenforet i $oni*erin- t'e follo&in- roe$t5

Proe$t Sie Rate of Return Ri4A !)##<### 1"6 i-'B =##<### 1+ Avera-e

C +##<### 1) o&D ##<### 11 i-'E 1##<### 1# Avera-e )##<### 1# o&G +##<### ? o&

T'e $o3an% eti3ate t'at it 7ACC i 11 er$ent. All roe$t are in*een*ent. T'$o3an% a*ut for ri4 (% a**in- ) er$enta-e oint to t'e 7ACC for 'i-',ri4 roe$t anu(tra$tin- ) er$enta-e oint fro3 t'e 7ACC for lo&,ri4 roe$t. 7'i$' of t'e roe$t &t'e $o3an% a$$et> /M0a. A< B< C< E< *. A< B< C< D< E(. B< D< < G e. A< B< C< $. A< B< C< E Bri-'a

In!"atin Rate?#

. If a 'are of to$4 rovi*e* an 12.#6 no3inal rate of return over t'e reviou %ear &'ile treal rate of return &a 1+.#6< t'en t'e inflation rate &a /D0A. .=16 C. ?.??6B. +.##6 D. 1).2"6 Gle

5EIG6TE% A#ERAGE +O$T OF +APITALRe!inancin*Cot of Co33on Sto$41=. ealt' an* 7ealt' Co3an% i finan$e* entirel% (% $o33on to$4 &'i$' i ri$e* to offer

1=6 e@e$te* return. If t'e $o3an% reur$'ae )=6 of t'e $o33on to$4 an* u(titutan e;ual value of *e(t %iel*in- "6< &'at i t'e e@e$te* return on t'e $o33on to$4 aftrefinan$in-> /I-nore [email protected]. )+6 C. 1=6B. 126 D. None of t'e a(ove B

1?. Earn an* earn Co3an% i finan$e* entirel% (% Co33on to$4 &'i$' i ri$e* to offer a )#e@e$te* return. If t'e $o3an% reur$'ae =#6 of t'e to$4 an* u(titute an e;ual valof *e(t %iel*in- 26< &'at i t'e e@e$te* return on t'e $o33on to$4 after refinan$in->A. )#6 C. )6B. )26 D. None of t'e a(ove B

). A fir3 'a a *e(t,to,e;uit% ratio of 1.#. If it 'a* no *e(t< it $ot of e;uit% &oul* (e 16. $ot of *e(t i 1#6. 7'at i it $ot of e;uit% if t'ere are no ta@e>A. )16 C. 1=6

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e )1 of

7/23/2019 P04 - Risks (Sol)



B. 126 D. 1"6 B M

)). A fir3 'a ero *e(t in it $aital tru$ture. It overall $ot of $aital i 1#6. T'e fir3 i$oni*erin- a ne& $aital tru$ture &it' "#6 *e(t. T'e interet rate on t'e *e(t &oul* (e 26.Au3in- t'ere are no ta@e it $ot of e;uit% $aital &it' t'e ne& $aital tru$ture &oul* (e5A. 26 C. 16B. 1"6 D. 1#6 B M

)+. A fir3 'a a *e(t,to,e;uit% ratio of #.=#. It $ot of *e(t i 1)6. It overall $ot of $aital i1"6. 7'at i it $ot of e;uit% if t'ere are no ta@e>A. 16 C. 1=6B. 1"6 D. 126 B M

)". A fir3 'a a *e(t,to,e;uit% ratio of 1. It $ot of e;uit% i 1"6< an* it $ot of *e(t i 26. If

t'ere are no ta@e< &'at &oul* (e it $ot of e;uit% if t'e *e(t,to,e;uit% ratio &ere #>A. 26 C. 1)6B. 1#6 D. 1+6 B ME. 1"6

Earnin- er S'are1". ealt' an* 7ealt' Co3an% i finan$e* entirel% (% $o33on to$4 &'i$' i ri$e* to offer a

1=6 e@e$te* return. T'e $o33on to$4 ri$e i !+#'are. T'e earnin- er 'are ie@e$te* to (e !". If t'e $o3an% reur$'ae )=6 of t'e $o33on to$4 an* u(titute ane;ual value of *e(t %iel*in- "6< &'at i t'e e@e$te* value of earnin- er 'are afterrefinan$in-> /I-nore [email protected]. !".## C. !?.=)B. !?.)# D. None of t'e a(ove B M

12. Earn an* earn Co3an% i finan$e* entirel% (% $o33on to$4< &'i$' i ri$e* to offer a )#6e@e$te* rate of return. T'e to$4 ri$e i !"# an* t'e earnin- er 'are i !1). If t'e$o3an% reur$'ae =#6 of t'e to$4 an* u(titute an e;ual value of *e(t %iel*in- 26<&'at i t'e e@e$te* earnin- er 'are value after refinan$in->A. !1).## C. !1: .)#B. !)+.## D. None of t'e a(ove B M

Ordinar 5A++ +'putatinCot of E;uit% Caital?1. A $o3an% 'a !1 3illion in 'are'ol*er e;uit% an* !) 3illion in *e(t e;uit% /26 (on*0.

after,ta@ &ei-'te*,avera-e $ot of $aital i 1)6< (ut it ue 1=6 a t'e 'ur*le rate in $ait(u*-etin- *e$iion. Durin- t'e at %ear< it oeratin- in$o3e (efore ta@ an* interet &a!=##<###. It ta@ rate i +#6. 7'at i t'e $o3an% $ot of e;uit% $aital> /D0A . 26 C. 1=6B. 1)6 D. )".+6 Gle

Cot of Co33on E;uit% 7ACCJuetion 1+ an* 1= are (ae* on t'e follo&in- infor3ation5 RPCPA 1#T'e 3ar4et value of 8Y9 Co3an% $o33on to$4 i eti3ate* at P"# 3illion. T'e 3ar4et valof it interet,(earin- *e(t i eti3ate* at P+# 3illion< an* t'e avera-e (efore ta@ %iel* on t'elia(ilitie i 1=6 er %ear. T'e $o3an% i u(e$t to an in$o3e ta@ rate of +#6

. T'e avera-e $ot of 8Y9 $o33on to$4 e;uit% ia. 1).=6 *. 1?6(. 1+.=6 e. An&er not -iven. />0$. 1"6

. T'e avera-e $ot of $aital for 8Y9 Co3an% a a &'ole i eti3ate* to (ea. 1).:6 *. )=6(. 11.16 e. An&er not -iven. />0$. )1.=6

7ACC , De(t< Co33on E;uit%11. A fir3 i finan$e* &it' =#6 ri4,free *e(t an* =#6 e;uit%. T'e ri4,free rate i 1#6< t'e fir3

$ot of e;uit% $aital i )#6< an* t'e fir3 3ar-inal ta@ rate i =6. 7'at i t'e fir3&ei-'te* avera-e $ot of $aital> /E0A. 1. )=6 C. )#.##6B. 1#.##6 D. None of t'e a(ove B

1). A fir3 i finan$e* &it' #6 ri4,free *e(t an* ?#6 e;uit%. T'e ri4,free rate i 26< t'e fir3$ot of e;uit% $aital i 1=6< an* t'e fir3 3ar-inal ta@ rate i =6. 7'at i t'e fir3

&ei-'te* avera-e $ot of $aital>A. 2.##6 C. 1=.##6B. 1).#"6 D. )1.+6 B

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e )) of

7/23/2019 P04 - Risks (Sol)



1. A fir3 i finan$e* &it' +#6 ri4,free *e(t an* "#6 e;uit%. T'e ri4,free rate i ?6< t'e fir3$ot of e;uit% $aital i 126< an* t'e fir3 3ar-inal ta@ rate i =6. 7'at i t'e fir3&ei-'te* avera-e $ot of $aital>A. 12 .##6 C. 1."#6B. ?.##6 D. 1).")6 B M

1=. A fir3 i finan$e* &it' #6 ri4,free *e(t< "#6 $o33on e;uit% an* 1#6 referre* e;uit%. T'eri4,free rate i =6< t'e fir3 $ot of $o33on e;uit% i 1=6< an* t'at of referre* e;uit% i1#6. T'e 3ar-inal ta@ rate i #6. 7'at i t'e fir3 &ei-'te* avera-e $ot of $aital>A. 1# .#=6 C. 1).=6B. 11.#=6 D. None of t'e a(ove B M

=. T'e M N Co3an% i finan$e* (% !) 3illion /3ar4et value0 in *e(t an* ! 3illion /3ar4etvalue0 in e;uit%. T'e $ot of *e(t i 1#6 an* t'e $ot of e;uit% i 1=6. Cal$ulate t'e

&ei-'te* avera-e $ot of $aital. /Au3e no [email protected] /E0A. 1#6 C. 16B. 1=6 D. None of t'e a(ove B M

". T'e M N Co3an% i finan$e* (% !1# 3illion in *e(t /3ar4et value0 an* !# 3illion in e;uit%/3ar4et value0. T'e $ot of *e(t i 26 an* t'e $ot of e;uit% i 1"6. Cal$ulate* t'e &ei-'te*avera-e $ot of $aital au3in- no ta@e. /E0A. 1+6 C. 1)6B. 1"6 D. None of t'e a(ove B M

2. A fir3 'a a total value of !1 3illion an* *e(t value* at !+##<###. 7'at i t'e after,ta@&ei-'te* avera-e $ot of $aital if t'e after ta@ $ot of *e(t i 1)6 an* t'e $ot of e;uit% i1=6>A. 1 .=6B. 1 .26C. )? .#6D. It i3oi(le to *eter3ine t'e 7ACC &it'out *e(t an* e;uit% (eta B M

:. T'e CR Cor. 3aintain a *e(t,e;uit% ratio of #.=. T'e $ot of e;uit% for CR Cor. i 1=6 an*t'e after,ta@ $ot of *e(t i :6. 7'at i t'e after,ta@ &ei-'te* avera-e $ot of $aital>

A. 11. 2"6 C . 1.##6B. 1).##6 D. None of t'e a(ove B M

?). If a $o3an% *eire* lon-,run roortion of fun* to (e rovi*e* $onit of "#6 $o33to$4 an* retaine* earnin- &it' an after,ta@ $ot of 1=6< an* +#6 (on* &it' an after,ta$ot of 26< it &ei-'te*,avera-e $ot of $aital &ill (e5 /E0A. 1.?6 D. 1).)6B. 1=6 E. 26C. 1#.26 C

?. 7'at i t'e &ei-'te* avera-e $ot of $aital for a fir3 &it' e;ual a3ount of *e(t an* e;ufinan$in-< a 1=6 (efore,ta@ $o3an% $ot of e;uit% $aital< a =6 ta@ rate< an* a 1)6 $ouorate on it *e(t t'at i ellin- at ar value> /E0A. 2.??=6 C. 11.+#6B. :."#6 D. 1.=#6 Gle

#. T'e 3ar4et value of C'arter Cruie Co3an% e;uit% i !1= 3illion< an* t'e 3ar4et value

it ri4,free *e(t i != 3illion. If t'e re;uire* rate of return on t'e e;u it% i )#6 an* t'at on t*e(t i 26< $al$ulate t'e $o3an% $ot of $aital. /Au3e no [email protected]. 1?6 C. 2.16B. )#6 D. None of t'e a(ove B

. ABC Co3an% $ot of e;uit% i 126< it (efore,ta@ $ot of *e(t i 26< an* it $ororate trate i +#6. Given t'e follo&in- (alan$e 'eet< $al$ulate t'e after,ta@ &ei-'te*,avera-e $oof $aital.

Aet ia(ilitieCa' P 1## A$$ount a%a(le P )##A$$ount Re$eiva(le +## A$$rue* ta@e *ue )##Inventorie )## on-,ter3 *e(t +##Plant e;ui3ent 1<## E;uit% 1<)##

P)<### P)<###

A. 1+.?6 C. :.?6B. 1#.6 D. 1".26 RPCPA 1#

7ACC , De(t< Preferre* Co33on Sto$4?+. 7'at i t'e &ei-'te* avera-e $ot of $aital for a fir3 &it' +#6 *e(t< )#6 referre* to

an* +#6 $o33on e;uit% if t'e ree$tive $ot for t'ee $o3onent are 26 after,ta@< 1

after,ta@< an* 1?6 (efore,ta@> T'e fir3 ta@ rate i =6. /E0A. 1#.))6 C. 11.+26B. 1#.=)6 D. 1)."#6 Gle


7/23/2019 P04 - Risks (Sol)



?=. 7'at i t'e &ei-'te* avera-e $ot of $aital for a fir3 uin- "=6 $o33on e;uit% &it' a returnof 1=6< )=6 *e(t &it' a return of "6< 1#6 referre* to$4 &it' a return of 1#6< an* a ta@ rateof =6> /E0A. 1#.6 C. 11.?)=6B. 11.)=6 D. 1).)=#6 Glei3

=+. A fir3 'a *eter3ine* it $ot of ea$' our$e of $aital an* oti3al $aital tru$ture< &'i$' i$o3oe* of t'e follo&in- our$e an* tar-et 3ar4et value roortion5

Sour$e of $aital Tar-et 3ar4et roortion After,ta@ $oton-,ter3 *e(t +#6 "6 Preferre* to$4 1# 11 Co33on to$4 e;uit% =# 1=

T'e &ei-'te* avera-e $ot of $aital i /E0A. " er$ent. C. 11 er$ent.

B. 1#.? er$ent. D. 1= er$ent. Git3an

. KCG< In$. 'a t'e follo&in- 3i@ of fun* an* $ot

T%e A3ount CotDe(t P 1=#<### 126Preferre* to$4 =##<### 1=6Co33on e;uit% ?##<### 1)6Total fun* P1<=#<###

7'at i KCG $ot of $aital> /E0a. 1+.))6 $. 1=.))6(. 1).))6 *. 1.??6 RPCPA 1#:?

Invet3ent De$iion?2. A fir3 'a *eter3ine* it $ot of ea$' our$e of $aital an* oti3al $aital tru$ture &'i$' i

$o3oe* of t'e follo&in- our$e an* tar-et 3ar4et value roortion.

Sour$e of Caital Tar-et Mar4et roortion After,ta@ Coton-,ter3 De(t =6 :6Preferre* Sto$4 1# 1+Co33on Sto$4 E;uit% == )#

T'e fir3 i $oni*erin- an invet3ent oortunit%< &'i$' 'a an internal rate of return of 1#er$ent. T'e roe$tA. 'oul* not (e $oni*ere* (e$aue it internal rate of return i le t'an t'e $ot of

lon-,ter3 *e(t.

B. 'oul* (e $oni*ere* (e$aue it internal rate of return i -reater t'an t'e $ot of *e(t.C. 'oul* not (e $oni*ere* (e$aue it internal rate of return i le t'an t'e &ei-'t

avera-e $ot of $aital.D. 'oul* (e $oni*ere* (e$aue it internal rate of return i -reater t'an t'e &ei-'t

avera-e $ot of $aital. Git3

1n"e&erin* and Re"e&erin* Beta Aet Beta):. T'e e;uit% (eta of a levere* fir3 i 1.). T'e (eta of *e(t i #.) T'e fir3 3ar4et value *e

to e;uit% ratio i #.". 7'at i t'e aet (eta if t'e ta@ rate i ero>A. 1.) C. #.2)=B. #.) D. None of t'e a(ove B

)+. T'e Granite Pavin- Co. &i'e to 'ave *e(t,to,e;uit% ratio of 1.=. Currentl% it i an unlever

/all e;uit%0 fir3 &it' a (eta of 1.1. 7'at &ill (e t'e (eta of t'e fir3 if it -oe t'rou-' t'e $aitretru$turin- ro$e an* attain t'e tar-et *e(t,to,e;uit% ratio> Au3e a ta@ rate of #6.A. ).)" C. 1.=B. 1."= D. None of t'e a(ove B

De(t Beta)2. T'e (eta of an all e;uit% fir3 i 1.) If t'e fir3 $'an-e it $aital tru$ture to =#6 *e(t a

=#6 e;uit% uin- 26 *e(t finan$in-< &'at &ill (e t'e (eta of t'e levere* fir3> T'e (eta *e(t i #.). /Au3e no [email protected]. 1.) C. ).)B. ).+ D. None of t'e a(ove B

E;uit% Beta#. T'e aet (eta of a levere* fir3 i 1.#=. T'e (eta of *e(t i #.=. If t'e *e(t e;uit% ratio

#.=< &'at i t'e e;uit% (eta> /Au3e ero [email protected]. 1.#= C. #.=B. 1.+# D. None of t'e a(ove B

+/an*e in +apita" $tructureCot of De(t

)=. If a fir3 i unlevere* an* 'a a $ot of e;uit% $aital :6< &'at &oul* t'e $ot of e;uit% (et'e fir3 (e$a3e levere* at a *e(t,e;uit% ratio of )> T'e e@e$te* $ot of *e(t i ?6/Au3e no [email protected]. 1=.##6 C. 16

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e )+ of

7/23/2019 P04 - Risks (Sol)



B. 1".#6 D. 1+.=6 B M

Cot of E;uit% Caital , nlevere*12. T'e Mar(le Pavin- Co. 'a an e;uit% $ot of $aital of 1?6. T'e *e(t to e;uit% ratio i 1.= an*

a $ot of *e(t i 116. 7'at i t'e $ot of e;uit% if t'e fir3 &a unlevere*> /Au3e a ta@ rateof 60A. .#"6 C. 1".:?6B. 1+.#6 D. None of t'e a(ove B M

1:. A fir3 'a a *e(t,to,e;uit% ratio of 1. It $ot of e;uit% i 1"6< an* it $ot of *e(t i 26. Ift'e $ororate ta@ rate &a .)=< &'at &oul* it $ot of e;uit% (e if t'e *e(t,to,e;uit%,ratio &ere#>A. 1) .=?6 C. 1".##6B. 1.26 D. None of t'e a(ove B M

)#. A fir3 'a a *e(t,to,e;uit% ratio of #.=. It $ot of e;uit% i ))6< an* it $ot of *e(t i 1"6. Ift'e $ororate ta@ rate i .+#< &'at &oul* it $ot of e;uit% (e if t'e *e(t,to,e;uit% ratio &ere #>A. )1 .:?6 C. )#.")6B. 1".##6 D. None of t'e a(ove B M

=. A fir3 i rooin- to un*erta4e a $ale e@anion. T'e fir3 i finan$e* (% +#6 *e(t an*"#6 e;uit%. T'e e@e$te* return on t'e fir3 e;uit% i )#6 an* t'e interet rate ion *e(t i1)6. If t'e ta@ rate i =6< &'at i t'e re;uire* rate of return if t'e roe$t i all e;uit%finan$e*>A. 1 .116 C . 1=.2?6B. 1?.=26 D. None of t'e a(ove B M

Cot of E;uit% Caital , evere*)1. T'e Granite Pavin- Co. &ant to (e levere* at a *e(t e;uit% ratio of 1.= T'e $ot of *e(t i

116 an* t'e $ot of e;uit% for an all e;uit% fir3 i 1+6. 7'at &ill (e t'e fir3 $ot of levere*e;uit%> Au3e a ta@ rate of 6.A. 1+6 C. 1?6B. )16 D. )=6 B M

Cot of E;uit% Caital , Ne&1?. A fir3 'a ero *e(t in it $aital tru$ture. It overall $ot of $aital i 26. T'e fir3 i

$oni*erin- a ne& $aital tru$ture &it' =#6 *e(t. T'e interet rate on t'e *e(t &oul* (e =6.

Au3in- t'at t'e $ororate ta@ rate i +#6< it $ot of e;uit% $aital &it' t'e ne& $aittru$ture &oul* (e>A. :.)6 C. 116B. :.26 D. None of t'e a(ove B

Ne& 7ACC)). T'e Granite Pavin- Co3an% 'a a *e(t e;uit% ratio of 1.=. T'e $ot of *e(t i 116 an* t

unlevere* e;uit% i 1+6. Cal$ulate t'e &ei-'te* avera-e $ot of $aital for t'e fir3 if t'e trate i 6. /D0A. ?.?6 C. 11 .))6B. )=.16 D. None of t'e a(ove B

). T'e Granite Pavin- Co3an% 'a a *e(t total value ratio of #.=. T'e $ot of *e(t i 26 at'at of unlevere* e;uit% i 1)6. Cal$ulate t'e &ei-'te* avera-e $ot of $aital if t'e ratio

#6.A. 1+.26 C. 1).#6B. 1#.)6 D. None of t'e a(ove B

?". D i lannin- to en* i-nifi$ant a3ount of 3one% on Reear$' an* Develo3ent ovt'e ne@t fe& %ear an* feel t'at it 3a% not (e a(le to ue all t'e ta@ 'iel* -enerate* (%+#6 *e(t ratio. T'e $o3an% i $oni*erin- lo&erin- t'eir *e(t ratio to )#6. T'e $o3an$urrentl% 'a a (efore,ta@ $ot of *e(t of 26 an* a (efore,ta@ $ot of e;uit% of 16< an* u(e$t to a ta@ rate of =6. 7'at &oul* (e t'e ne& 7ACC for D if t'e% lo&er t'e *eratio to )#6< -iven t'at t'e lo&er *e(t ratio &ill re*u$e t'e (efore,ta@ $ot of *e(t to ?.26>/D7ron- an&er ori-inal 7ACC &a (ae* on (efore,ta@ $ot of *e(tA. :.116 C. 116B. 1#.+=6 D. 11.26 Gle

De$iion Anal%i??. Data$o3 In*utrie< &'i$' 'a no $urrent *e(t< 'a a (eta of .:= for it $o33on to$

Mana-e3ent i $oni*erin- a $'an-e in t'e $aital tru$ture to #6 *e(t an* ?#6 e;uit%. T'$'an-e &oul* in$reae t'e (eta on t'e to$4 to 1.#=< an* t'e after,ta@ $ot of *e(t &ill (?.=6. T'e e@e$te* return on e;uit% i 1"6< an* t'e ri4,free rate i "6. S'oul* Data$o33ana-e3ent ro$ee* &it' t'e $aital tru$ture $'an-e> /D0

A. No< (e$aue t'e $ot of e;uit% $aital &ill in$reae.B. Ye< (e$aue t'e $ot of e;uit% $aital &ill *e$reae.C. Ye< (e$aue t'e &ei-'te*,avera-e $ot of $aital &ill *e$reae.D. No< (e$aue t'e &ei-'te*,avera-e $ot of $aital &ill in$reae. CMA #":# 1,

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e )= of

7/23/2019 P04 - Risks (Sol)



%i&idend Gr)t/ Mde"Gro&t' Rate?2. Grate&a% In$. 'a a &ei-'te* avera-e $ot of $aital of 11.= er$ent. It tar-et $aital

tru$ture i == er$ent e;uit% an* += er$ent *e(t. T'e $o3an% 'a uffi$ient retaine*earnin- to fun* t'e e;uit% ortion of it $aital (u*-et. T'e (efore,ta@ $ot of *e(t i :er$ent< an* t'e $o3an% ta@ rate i # er$ent. If t'e e@e$te* *ivi*en* ne@t erio* /D 10 i!= an* t'e $urrent to$4 ri$e i !+=< &'at i t'e $o3an% -ro&t' rate> /M0a. )."26 *. ".?=6(. .++6 e. 2.1"6$. +."+6 Bri-'a3

Ta@ Rate?:. eav% Metal Cor. i a teel 3anufa$turer t'at finan$e it oeration &it' +# er$ent *e(t< 1#

er$ent referre* to$4< an* =# er$ent e;uit%. T'e interet rate on t'e $o3an% *e(t i 11er$ent. T'e referre* to$4 a% an annual *ivi*en* of !) an* ell for !)# a 'are. T'e$o3an% $o33on to$4 tra*e at !# a 'are< an* it $urrent *ivi*en* /D#0 of !) a 'are ie@e$te* to -ro& at a $ontant rate of 2 er$ent er %ear. T'e flotation $ot of e@ternal e;uit%i 1= er$ent of t'e *ollar a3ount iue*< &'ile t'e flotation $ot on referre* to$4 i 1#er$ent. T'e $o3an% eti3ate t'at it 7ACC i 1).# er$ent. Au3e t'at t'e fir3 &ill not'ave enou-' retaine* earnin- to fun* t'e e;uit% ortion of it $aital (u*-et. 7'at i t'e$o3an% ta@ rate> /D0a. #.6 *. 2.1)6(. ).2?6 e. +#.:26$. =.?=6 Bri-'a3

Sto$4 Pri$e2#. ABC Co3an% outtan*in- $o33on to$4 ell for P+) a 'are< earnin- P+.2# er 'are

an* i e@e$te* to a% P).1# *ivi*en*. T'e fir3 earnin-< *ivi*en*< an* to$4 ri$e 'ave(een -ro&in- at 26 a %ear an* are e@e$te* to $ontinue to -ro& at t'i rate in*efinitel%.If t'e fir3 a**ition to retaine* earnin- &a re,invete* at an 26 rate rat'er t'an t'e $ot of$aital< &'at &oul* (e t'e ri$e of t'e to$4 at t'e en* of t'e %ear< au3in- t'at t'i ne&-ro&t' rate i t'e a3e rate a it 'a in reviou %ear on it ori-inal $aital>A. P1.)# C. P)+.?1

B. P)).2# D. P.)# RPCPA 1##1

7ACC , De(t Co33on Sto$421. A $o3an% 'a *eter3ine* t'at it oti3al $aital tru$ture $onit of +# er$ent *e(t an*

er$ent e;uit%. Au3e t'e fir3 &ill not 'ave enou-' retaine* earnin- to fun* t'e e;uortion of it $aital (u*-et. Alo< au3e t'e fir3 a$$ount for flotation $ot (% a*utin- t$ot of $aital. Given t'e follo&in- infor3ation< $al$ulate t'e fir3 &ei-'te* avera-e $ot $aital. /M0

4* F 26 P# F !)=Net in$o3e F !+#<### Gro&t' F #6Pa%out ratio F =#6 S'are outtan*in- F 1#<###Ta@ rate F +#6 lotation $ot on a**itional e;uit% F 1=6

a. ?."#6 *. 1.":6(. 2.#=6 e. 1+.)26$. 11.216 Bri-'a

2)

. la'ert% Ele$tri$ 'a a $aital tru$ture t'at $onit of ?# er$ent e;uit% an* # er$ent *eT'e $o3an% lon-,ter3 (on* 'ave a (efore,ta@ %iel* to 3aturit% of 2.+ er$ent. T'$o3an% ue t'e DC aroa$' to *eter3ine t'e $ot of e;uit%. la'ert% $o33on to$urrentl% tra*e at !+= er 'are. T'e %ear,en* *ivi*en* /D 10 i e@e$te* to (e !).=# 'are< an* t'e *ivi*en* i e@e$te* to -ro& forever at a $ontant rate of ? er$ent a %ear. T'$o3an% eti3ate t'at it &ill 'ave to iue ne& $o33on to$4 to 'el fun* t'i %earroe$t. T'e flotation $ot on ne& $o33on to$4 iue* i 1# er$ent< an* t'e $o3an% trate i +# er$ent. 7'at i t'e $o3an% &ei-'te* avera-e $ot of $aital< 7ACC> /E0a. 1#.?6 *. ?.+26(. 1#.#6 e. :.2:6$. 11.16 Bri-'a

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2. illiar* Cor. &ant to $al$ulate it &ei-'te* avera-e $ot of $aital /7ACC0. T'e $o3an%CO 'a $olle$te* t'e follo&in- infor3ation5• T'e $o3an% lon-,ter3 (on* $urrentl% offer a %iel* to 3aturit% of 2 er$ent.

• T'e $o3an% to$4 ri$e i !) a 'are /P# F !)0.

• T'e $o3an% re$entl% ai* a *ivi*en* of !) a 'are /D # F !).##0.

• T'e *ivi*en* i e@e$te* to -ro& at a $ontant rate of " er$ent a %ear /- F "60.

• T'e $o3an% a% a 1# er$ent flotation $ot &'enever it iue ne& $o33on to$4 / F1# er$ent0.

• T'e $o3an% tar-et $aital tru$ture i ?= er$ent e;uit% an* )= er$ent *e(t.

• T'e $o3an% ta@ rate i +# er$ent.

• T'e fir3 &ill (e a(le to ue retaine* earnin- to fun* t'e e;uit% ortion of it $aital(u*-et.

7'at i t'e $o3an% 7ACC> /M0

a. 1#."?6 *. 1).#)6(. 11.))6 e. 1).="6$. 11.+?6 Bri-'a3

2+. An anal%t 'a $olle$te* t'e follo&in- infor3ation re-ar*in- C'rito'er Co.5• T'e $o3an% $aital tru$ture i ?# er$ent e;uit% an* # er$ent *e(t.

• T'e %iel* to 3aturit% on t'e $o3an% (on* i : er$ent.

• T'e $o3an% %ear,en* *ivi*en* i fore$ate* to (e !#.2# a 'are.

• T'e $o3an% e@e$t t'at it *ivi*en* &ill -ro& at a $ontant rate of : er$ent a %ear.

• T'e $o3an% to$4 ri$e i !)=.

• T'e $o3an% ta@ rate i +# er$ent.T'e $o3an% anti$iate t'at it &ill nee* to raie ne& $o33on to$4 t'i %ear. It invet3ent(an4er anti$iate t'at t'e total flotation $ot &ill e;ual 1# er$ent of t'e a3ount iue*.Au3e t'e $o3an% a$$ount for flotation $ot (% a*utin- t'e $ot of $aital. Given t'iinfor3ation< $al$ulate t'e $o3an% 7ACC. /M0a. 1#.+16 *. 1.==6(. 1).="6 e. :.):6$. 1#.?26 Bri-'a3

Juetion 1 ) are (ae* on t'e follo&in- infor3ation. Bri-'a3B%ron Cororation reent $aital tru$ture< &'i$' i alo it tar-et $aital tru$ture< i +# er$ent*e(t an* "# er$ent $o33on e;uit%. Au3e t'at t'e fir3 'a no retaine* earnin-. T'e$o3an% earnin- an* *ivi*en* are -ro&in- at a $ontant rate of = er$entH t'e lat *ivi*en*

/D#0 &a !).##H an* t'e $urrent e;uili(riu3 to$4 ri$e i !)1.22. B%ron $an raie all t'e *efinan$in- it nee* at 1+ er$ent. If B%ron iue ne& $o33on to$4< a )# er$ent flotation $ot &(e in$urre*. T'e fir3 3ar-inal ta@ rate i +# er$ent.

2=. 7'at i t'e $o3onent $ot of t'e e;uit% raie* (% ellin- ne& $o33on to$4> /E0a. 1?.#6 *. 1+."6(. 1".+6 e. 1).#6$. 1=.#6

2". 7'at i t'e fir3 &ei-'te* avera-e $ot of $aital> /E0a. 1#.26 *. 1".+6(. 1."6 e. 12.#6$. 1+.)6

Juetion 2 t'rou-' +1 are (ae* on t'e follo&in- infor3ation. CMA Sa3 J.? to Ro-er In$. oerate a $'ain of retaurant lo$ate* in t'e Sout'eat. T'e firt retaurant &oene* in 1:21< an* t'e $o3an% 'a tea*il% -ro&n to it reent ie of +2 retaurant. T(oar* of *ire$tor re$entl% arove* a lar-e,$ale re3o*elin- of t'e retaurant< an* t'e $o3ai no& $oni*erin- t&o finan$in- alternative.T'e firt alternative &oul* $onit of

Bon* t'at &oul* 'ave a :6 $ouon rate an* &oul* net !1:.) 3illion after flotation $ot Preferre* to$4 &it' a tate* rate of "6 t'at &oul* %iel* !+.2 3illion after a +6 flotati

$ot Co33on to$4 t'at &oul* %iel* !)+ 3illion after a =6 flotation $ot

T'e e$on* alternative &oul* $onit of a u(li$ offerin- of (on* t'at &oul* 'ave an 116 $ouorate an* &oul* net !+2 3illion after flotation $ot.Ro-er reent $aital tru$ture< &'i$' i $oni*ere* oti3al< $onit of +#6 lon-,ter3 *e(1#6 referre* to$4< an* =#6 $o33on to$4. T'e $urrent 3ar4et value of t'e $o33on to$4!# er 'are< an* t'e $o33on to$4 *ivi*en* *urin- t'e at 1) 3ont' &a ! er 'arInvetor are e@e$tin- t'e -ro&t' rate of *ivi*en* to e;ual t'e 'itori$al rate of "6. Ro-eru(e$t to an effe$tive in$o3e ta@ rate of +#6.2?. T'e after,ta@ $ot of t'e $o33on to$4 rooe* in Ro-er firt finan$in- alternative &oul*

A. 1".##6 C. 1"."#6B. 1".=6 D. 1?.1"6

22. Au3in- t'e after,ta@ $ot of $o33on to$4 i 1=6< t'e after,ta@ &ei-'te* 3ar-inal $ot$aital for Ro-er firt finan$in- alternative $onitin- of (on*< referre* to$4< an* $o33oto$4 &oul* (e

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e )? of

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A. ?.)2=6 C. 1#.)2=6B. 2.?)=6 D. 11.?##6

2:. T'e after,ta@ &ei-'te* 3ar-inal $ot of $aital for Ro-er e$on* finan$in- alternative$onitin- olel% of (on* &oul* (eA. =.16 C. ".)?6B. =.+#6 D. "."#6

:#. T'e interet rate on t'e (on* i -reater for t'e e$on* alternative $onitin- of ure *e(t t'anit i for t'e firt alternative $onitin- of (ot' *e(t an* e;uit% (e$aueA. T'e *iverit% of t'e $o3(ination alternative $reate -reater ri4 for t'e invetor.B. T'e ure *e(t alternative &oul* floo* t'e 3ar4et an* (e 3ore *iffi$ult to ell.C. T'e ure *e(t alternative $arrie t'e ri4 of in$reain- t'e ro(a(ilit% of *efault.D. T'e $o3(ination alternative $arrie t'e ri4 of in$reain- *ivi*en* a%3ent.

Juetion ?# ?1 are (ae* on t'e follo&in- infor3ation. Git3anBalan$e S'eet

General Tal$ MineDe$e3(er 1< )##

AetCurrent aet Ca' ! )=<### A$$ount re$eiva(le 1)#<### Inventorie ##<### Total $urrent aet ! ++=<###Net fi@e* aet ! =##<### Total aet ! :+=<###

ia(ilitie an* to$4'ol*er e;uit%

Current lia(ilitie A$$ount a%a(le ! 2#<### Note a%a(le =#<###

A$$rual =#<### Total $urrent lia(ilitie ! +2#<###on-,ter3 *e(t/1=# (on* iue* at !1<### ar0 1=#<### Total lia(ilitie ! "#<###

Sto$4'ol*er e;uit% Co33on to$4/?<)## 'are outtan*in-0 ! 12#<###Retaine* earnin- 1=<###

Total to$4'ol*er e;uit% ! 1=<### Total lia(ilitie an* to$4'ol*er e;uit% ! :+=<###

?#. Sour$e of $aital After ,ta@ $oton-,ter3 *e(t 26

Co33on to$4 e;uit% 1:Given t'i after,ta@ $ot of ea$' our$e of $aital< t'e &ei-'te* avera-e $ot of $aital uin- (oo

&ei-'t for General Tal$ Mine iA. 11." er$ent. C. 1"." er$ent.B. 1=.= er$ent. D. 1?.= er$ent.

?1. General Tal$ Mine 'a $o3ile* t'e follo&in- *ata re-ar*in- t'e 3ar4et value an* $ot of t'

e$ifi$ our$e of $aital.Sour$e of $aital After ,ta@ $ot on-,ter3 *e(t 26 Co33on to$4 e;uit% 1:

Mar4et ri$e er 'are of $o33on to$4 !=#Mar4et value of lon-,ter3 *e(t !:2# er (on*T'e &ei-'te* avera-e $ot of $aital uin- 3ar4et value &ei-'t iA. 11.? er$ent. C. 1=.2 er$ent.B. 1.= er$ent. D. 1?.= er$ent.

7ACC , De(t< Preferre* Co33on Sto$4:1. on-treet Cororation 'a a tar-et $aital tru$ture t'at $onit of # er$ent *e(t< =

er$ent $o33on e;uit%< an* )# er$ent referre* to$4. T'e ta@ rate i # er$ent. T'$o3an% 'a roe$t in &'i$' it &oul* li4e to invet &it' $ot t'at total !1<=##<##on-treet &ill retain !=##<### of net in$o3e t'i %ear. T'e lat *ivi*en* &a !=< t'e $urreto$4 ri$e i !?=< an* t'e -ro&t' rate of t'e $o3an% i 1# er$ent. If t'e $o3an% raie$aital t'rou-' a ne& e;uit% iuan$e< t'e flotation $ot are 1# er$ent. T'e $ot of referreto$4 i : er$ent an* t'e $ot of *e(t i ? er$ent. /Au3e *e(t an* referre* to$4 'ave nflotation $ot.0 7'at i t'e &ei-'te* avera-e $ot of $aital at t'e fir3 oti3al $ait(u*-et> /M0

a. 1).=26 *. 1).+6(. 12. 1=6 e. 11 .:+6$. 1).126 Bri-'a

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e )2 of

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:). 7ile% ne& finan$in- &ill (e in roortion to t'e 3ar4et value of it reent finan$in-< 'o&n(elo&.

Boo4 Value /!### O3itte*0on-,ter3 *e(t !?<###Preferre* to$4 /1## 'are0 1<###Co33on to$4 /)## 'are0 ?<###

T'e fir3 (on* are $urrentl% ellin- at 2#6 of ar< -eneratin- a $urrent 3ar4et %iel* of :6<an* t'e $ororation 'a a +#6 ta@ rate. T'e referre* to$4 i ellin- at it ar value an*a% a "6 *ivi*en*. T'e $o33on to$4 'a a $urrent 3ar4et value of !+# an* i e@e$te* toa% a !1.)# er 'are *ivi*en* t'i fi$al %ear. Divi*en* -ro&t' i e@e$te* to (e 1#6 er%ear. 7ile% &ei-'te*,avera-e $ot of $aital i /roun* %our $al$ulation to tent' of aer$ent0 /M0a. 1.#6 $. :."6(. 2.6 *. :.#6 CMA 1)22 1,+

:. at$' Cororation tar-et $aital tru$ture i +# er$ent *e(t< =# er$ent $o33on to$4< an*1# er$ent referre* to$4. Infor3ation re-ar*in- t'e $o3an% $ot of $aital $an (eu33arie* a follo&5• T'e $o3an% (on* 'ave a no3inal %iel* to 3aturit% of ? er$ent.

• T'e $o3an% referre* to$4 ell for !+) a 'are an* a% an annual *ivi*en* of !+ a'are.

• T'e $o3an% $o33on to$4 ell for !)2 a 'are< an* i e@e$te* to a% a *ivi*en* of!) a 'are at t'e en* of t'e %ear /i.e.< D1 F !).##0. T'e *ivi*en* i e@e$te* to -ro& at a$ontant rate of ? er$ent a %ear.

• T'e fir3 &ill (e a(le to ue retaine* earnin- to fun* t'e e;uit% ortion of it $aital(u*-et.

• T'e $o3an% ta@ rate i +# er$ent.7'at i t'e $o3an% &ei-'te* avera-e $ot of $aital /7ACC0> /M0

a. :.)=6 *. 1#.=:6(. :.?#6 e. 11.#6$. 1#.#6 Bri-'a3

Juet ion ?1 t'rou-' ?+ are (ae* on t'e fo ll o& in- infor3ation. CMA #":) 1,1 to +

7illia3< In$.< &'i$' i interete* in 3eaurin- it overall $ot of $aital 'a -at'ere* t'e follo&in-*ata. n*er t'e ter3 *e$ri(e* (elo&< t'e $o3an% $an ell unli3ite* a3ount of all intru3ent. 7illia3 $an raie $a' (% ellin- !1<###< 26< )#,%ear (on* &it' annual interet

a%3ent. In ellin- t'e iue< an avera-e re3iu3 of !# er (on* &oul* (e re$eive*< an*

t'e fir3 3ut a% flotation $ot of !# er (on*. T'e after,ta@ $ot of fun* i eti3ate* to +.26.

7illia3 $an ell 26 referre* to$4 at !1#= er 'are. T'e $ot of iuin- an* ellit'e referre* to$4 i e@e$te* to (e != er 'are.

7illia3 $o33on to$4 i $urrentl% ellin- for !1## er 'are. T'e fir3 e@e$t to $a' *ivi*en* of !? er 'are ne@t %ear< an* t'e *ivi*en* are e@e$te* to re3ain $ontanT'e to$4 &ill 'ave to (e un*erri$e* (% ! er 'are< an* flotation $ot are e@e$te* ta3ount to != er 'are.

7illia3 e@e$t to 'ave availa(le !1##<### of retaine* earnin- in t'e $o3in- %eaon$e t'ee retaine* earnin- are e@'aute*< t'e fir3 &ill ue ne& $o33on to$4 a t'e foof $o33on to$4 e;uit% finan$in-.

7illia3 referre* $aital tru$ture i

on-,ter3 *e(t #6Preferre* to$4 )#

Co33on to$4 =#

:+. T'e $ot of fun* fro3 t'e ale of $o33on to$4 for 7illia3< In$. iA. ?.#6 C. ?.+6B. ?."6 D. 2.16

:=. T'e $ot of fun* fro3 retaine* earnin- for 7illia3< In$. iA. ?.#6 C. ?.+6B. ?."6 D. 2.16

:". If 7illia3< In$. nee* a total of !)##<###< t'e fir3 &ei-'te*,avera-e $ot of $aital &oul* A. 1:.26 C. ".=6B. +.26 D. ".26

:?. If 7illia3< In$. nee* a total of !1<###<###< t'e fir3 &ei-'te* avera-e $ot of $aital &ou(eA. ".26 C. ".=6B. +.26 D. )?.+6

7ACC , De(t< Co33on Retaine* Earnin-:2. Do(on Dairie 'a a $aital tru$ture t'at $onit of "# er$ent lon-,ter3 *e(t an* +

er$ent $o33on to$4. T'e $o3an% CO 'a o(taine* t'e follo&in- infor3ation5• T'e (efore,ta@ %iel* to 3aturit% on t'e $o3an% (on* i 2 er$ent.

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e ): of

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• T'e $o3an% $o33on to$4 i e@e$te* to a% a !.## *ivi*en* at %ear en* /D1 F!.##0< an* t'e *ivi*en* i e@e$te* to -ro& at a $ontant rate of ? er$ent a %ear. T'e$o33on to$4 $urrentl% ell for !"# a 'are.

• Au3e t'e fir3 &ill (e a(le to ue retaine* earnin- to fun* t'e e;uit% ortion of it$aital (u*-et.

• T'e $o3an% ta@ rate i +# er$ent.7'at i t'e $o3an% &ei-'te* avera-e $ot of $aital /7ACC0> /M0a. 1).##6 *. 2.##6(. 2.#6 e. ?."26$. :.+6 Bri-'a3

Juetion 1 an* ) are (ae* on t'e follo&in- infor3ation. Bri-'a3Be$4er Gla Cororation e@e$t to 'ave earnin- (efore interet an* ta@e *urin- t'e $o3i%ear of !1<###<###< an* it e@e$t it earnin- an* *ivi*en* to -ro& in*efinitel% at a $ontanannual rate of 1).= er$ent. T'e fir3 'a !=<###<### of *e(t outtan*in- (earin- a $ouon intererate of 2 er$ent< an* it 'a 1##<### 'are of $o33on to$4 outtan*in-. itori$all%< Be$4er 'aai* =# er$ent of net earnin- to $o33on 'are'ol*er in t'e for3 of *ivi*en*. T'e $urrent ri$of Be$4er $o33on to$4 i !+#< (ut it &oul* in$ur a 1# er$ent flotation $ot if it &ere to ell neto$4. T'e fir3 ta@ rate i +# er$ent.

::. 7'at i t'e fir3 $ot of retaine* earnin-> /M0a. 1=.#6 *. 1".=6(. 1=.=6 e. 1?.#6$. 1".#6

1##

. 7'at i Be$4er $ot of ne&l% iue* to$4> /E0a. 1".#6 *. 1?.=6(. 1".=6 e. 12.#6$. 1?.#6

Juetion 1 t'ru are (ae* on t'e follo&in- infor3ation. Bri-'aT'e Glo(al A*vertiin- Co3an% 'a a 3ar-inal ta@ rate of +# er$ent. T'e $o3an% $an rai*e(t at a 1) er$ent interet rate an* t'e lat *ivi*en* ai* (% Glo(al &a !#.:#. Glo(a$o33on to$4 i ellin- for !2.=: er 'are< an* it e@e$te* -ro&t' rate in earnin- an*ivi*en* i = er$ent. If Glo(al iue ne& $o33on to$4< t'e flotation $ot in$urre* &ill (e er$ent. Glo(al lan to finan$e all $aital e@en*iture &it' # er$ent *e(t an* ?# er$ee;uit%.

1#1. 7'at i Glo(al $ot of retaine* earnin- if it $an ue retaine* earnin- rat'er t'an iue ne$o33on to$4> /E0a. 1).))6 *. :.""6(. 1?.))6 e. 1".##6$. 1#.6

1#). 7'at i t'e $ot of $o33on e;uit% raie* (% ellin- ne& to$4> /E0

a. 1).))6 *. :.""6(. 1?.))6 e. 1".##6$. 1#.6

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e # of

7/23/2019 P04 - Risks (Sol)



1#. 7'at i t'e fir3 &ei-'te* avera-e $ot of $aital if t'e fir3 'a uffi$ient retaine* earnin- tofun* t'e e;uit% ortion of it $aital (u*-et> /E0a. 11.:=6 *. 1."6(. 1).))6 e. 1+.)16$. 1).226

Juetion "" t'rou-' ": are (ae* on t'e follo&in- infor3ation. Glei3T'e Cororation i rearin- to evaluate $aital e@en*iture rooal for t'e $o3in- %ear.Be$aue t'e fir3 e3lo% *i$ounte* $a' flo& 3et'o*< t'e $ot of $aital for t'e fir3 3ut (eeti3ate*. T'e follo&in- infor3ation for Cororation i rovi*e*5 T'e 3ar4et ri$e of $o33on to$4 i !"# er 'are. T'e *ivi*en* ne@t %ear i e@e$te* to (e ! er 'are. E@e$te* -ro&t' in *ivi*en* i a $ontant 1#6. Ne& (on* $an (e iue* at fa$e value &it' a 1#6 $ouon rate.

T'e $urrent $aital tru$ture of +#6 lon-,ter3 *e(t an* "#6 e;uit% i $oni*ere* to (eoti3al.

Anti$iate* earnin- to (e retaine* in t'e $o3in- %ear are ! 3illion. T'e fir3 'a a +#6 3ar-inal ta@ rate.

1#+. T'e after,ta@ $ot of t'e ne& (on* iue iA. +6 C. 1#6B. "6 D. 1+6

1#=. T'e $ot of uin- retaine* earnin- for finan$in- iA. =6 C. 1#6B. :6 D. 1=6

1#". If t'e $o3an% 3ut au3e a )#6 flotation $ot on ne& to$4 iuan$e< &'at i t'e $ot ofne& $o33on to$4>A. ".)=6 C. 1".)=6B. 1=6 D. 1#6

1#?. T'e 3a@i3u3 $aital e@anion t'at $an (e uorte* in t'e $o3in- %ear &it'out reortin- toe@ternal e;uit% finan$in- iA. !) 3illion.B. ! 3illion.C. != 3illion.

D. Cannot *eter3ine fro3 t'e infor3ation -iven.


7/23/2019 P04 - Risks (Sol)



Juetion ?# an* ?1 are (ae* on t'e follo&in- a**itional infor3ation.7it'out reu*i$e to %our an&er to t'e four re$e*in- ;uetion< au3e t'at t'e after,ta@ $otof *e(t finan$in- i 1#6< t'e $ot of retaine* earnin- i 1+6< an* t'e $ot of ne& $o33on to$4i 1"6.

1#2. If $aital e@anion nee* to (e !? 3illion for t'e $o3in- %ear< &'at i t'e after,ta@ &ei-'te*,avera-e $ot of $aital>a. 11.1+6 $. 1."6(. 1).?+6 *. 1"6

1#:. 7'at i t'e 3ar-inal $ot of $aital for an% roe$te* $aital e@anion in e@$e of !? 3illion>a. 1#6 $. 1."6(. 1).?+6 *. 1"6

Juetion "+ t'ru ": are (ae* on t'e follo&in- infor3ation. Git3anA fir3 'a *eter3ine* it oti3al tru$ture &'i$' i $o3oe* of t'e follo&in- our$e an* tar-et3ar4et value roortion.

Sour$e of $aital Tar-et 3ar4et Proortion QQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQ on-,ter3 *e(t "#6Co33on to$4 e;uit% +#

DEBT5 T'e fir3 $an ell a 1=,%ear< !1<### ar value< 2 er$en t (on* for !1<#=#. A flotation $ot of) er$ent of t'e fa$e value &oul* (e re;uire* in a**ition to t'e re3iu3 of !=#.

COMMON STOCK5 A fir3 $o33on to$4 i $urrentl% ellin- for !?= er 'are. T'e *ivi*en*e@e$te* to (e ai* at t'e en* of t'e $o3in- %ear i !=. It *ivi*en* a%3ent 'ave (een -ro&in-at a $ontant rate for t'e lat five %ear. ive %ear a-o< t'e *ivi*en* &a !.1#. It i e@e$te*t'at to ell< a ne& $o33on to$4 iue 3ut (e un*erri$e* !) er 'are an* t'e fir3 3ut a% !1er 'are in flotation $ot. A**itionall%< t'e fir3 'a a 3ar-inal ta@ rate of +# er$ent.

"+. T'e fir3 (efore,ta@ $ot of *e(t i

A. ?.? er$ent. C. 11.) er$ent.B. 1#." er$ent. D. 1).? er$ent.

"=. T'e fir3 after,ta@ $ot of *e(t i

A. +." er$ent. C. ? er$ent.B. " er$ent. D. ?.? er$ent.

"". T'e fir3 $ot of a ne& iue of $o33on to$4 iA. 1#.) er$ent. C. 1".? er$ent.B. 1+. er$ent. D. 1?.# er$ent.

"?. T'e fir3 $ot of retaine* earnin- iA. 1#.) er$ent. C. 1".? er$ent.B. 1+. er$ent. D. 1?.# er$ent.

"2. T'e &ei-'te* avera-e $ot of $aital u to t'e oint &'en retaine* earnin- are e@'aute* iA. ".2 er$ent. C. :.++ er$ent.B. ?.? er$ent. D. 11.): er$ent.

":. Au3in- t'e fir3 lan to a% out all of it earnin- a *ivi*en*< t'e &ei-'te* avera-e $oof $aital iA. :." er$ent. C. 11." er$ent.B. 1#.: er$ent. D. 1).1 er$ent.

7ACC De(t< Preferre*< Co33on Sto$4 Retaine* Earnin-Juetion 1 t'ru + are (ae* on t'e follo&in- infor3ation. Bri-'a. Ro an* Son In$. 'a a tar-et $aital tru$ture t'at $all for +# er$ent *e(t< 1# er$ereferre* to$4< an* =# er$ent $o33on e;uit%. T'e fir3 $urrent after,ta@ $ot of *e(t i er$ent< an* it $an ell a 3u$' *e(t a it &i'e at t'i rate. T'e fir3 referre* to$4 $urrenell for !:# a 'are an* a% a *ivi*en* of !1# er 'areH 'o&ever< t'e fir3 &ill net onl% !2# 'are fro3 t'e ale of ne& referre* to$4. Ro $o33on to$4 $urrentl% ell for !+# er 'ar(ut t'e fir3 &ill net onl% !+ er 'are fro3 t'e ale of ne& $o33on to$4. T'e fir3 re$entl% aa *ivi*en* of !) er 'are on it $o33on to$4< an* invetor e@e$t t'e *ivi*en* to -roin*efinitel% at a $ontant rate of 1# er$ent er %ear. Au3e t'e fir3 'a uffi$ient retainearnin- to fun* t'e e;uit% ortion of it $aital (u*-et.

11#. 7'at i t'e fir3 $ot of retaine* earnin-> /E0a. 1#.#6 *. 1".=6

(. 1).=6 e. 12.#6$. 1=.=6

111. 7'at i t'e fir3 $ot of ne&l% iue* $o33on to$4> /E0


7/23/2019 P04 - Risks (Sol)



a. 1#.#6 *. 1".=6(. 1).=6 e. 12.#6$. 1=.=6

11). 7'at i t'e fir3 $ot of ne&l% iue* referre* to$4> /E0a. 1#.#6 *. 1".=6(. 1).=6 e. 12.#6$. 1=.=6

11. 7'at i t'e fir3 &ei-'te* avera-e $ot of $aital> /E0a. :.=6 *. 11.+6(. 1#.6 e. 11.:6$. 1#.26

Juetion =? t'ru " are (ae* on t'e follo&in- infor3ation. Git3anA fir3 'a *eter3ine* it oti3al $aital tru$ture &'i$' i $o3oe* of t'e follo&in- our$e an*tar-et 3ar4et value roortion.

Sour$e of $aital Tar-et 3ar4et roortionon-,ter3 *e(t )#6Preferre* to$4 1#Co33on to$4 e;uit% ?#

DEBT5 T'e fir3 $an ell a 1),%ear< !1<### ar value< ? er$ent (on* for !:"#. A flotation $ot of )er$ent of t'e fa$e value &oul* (e re;uire* in a**ition to t'e *i$ount of !+#.

PREERRED STOCK5 T'e fir3 'a *eter3ine* it $an iue referre* to$4 at !?= er 'are arvalue. T'e to$4 &ill a% a !1# annual *ivi*en*. T'e $ot of iuin- an* ellin- t'e to$4 i ! er'are.

COMMON STOCK5 A fir3 $o33on to$4 i $urrentl% ellin- for !12 er 'are. T'e *ivi*en*e@e$te* to (e ai* at t'e en* of t'e $o3in- %ear i !1.?+. It *ivi*en* a%3ent 'ave (een-ro&in- at a $ontant rate for t'e lat four %ear. our %ear a-o< t'e *ivi*en* &a !1.=#. It ie@e$te* t'at to ell< a ne& $o33on to$4 iue 3ut (e un*erri$e* !1 er 'are in floatation$ot. A**itionall%< t'e fir3 3ar-inal ta@ rate i +# er$ent.

=?. T'e fir3 (efore,ta@ $ot of *e(t iA. ?.? er$ent. C. 11.) er$ent.B. 1#." er$ent. D. 1).? er$ent.

=2. T'e fir3 after,ta@ $ot of *e(t iA. .)= er$ent. C. 2 er$ent.B. +." er$ent. D. 2.1 er$ent.

=:. T'e fir3 $ot of referre* to$4 iA. ?.) er$ent. C. 1. er$ent.B. 2. er$ent. D. 1.: er$ent.

"#. T'e fir3 $ot of a ne& iue of $o33on to$4 iA. ? er$ent. C. 1.) er$ent.B. :.#2 er$ent. D. 1+.+ er$ent.

"1. T'e fir3 $ot of retaine* earnin- i

A. 1#.) er$ent. C. 1).+ er$ent.B. 1.: er$ent. D. 1." er$ent.

"). T'e &ei-'te* avera-e $ot of $aital u to t'e oint &'en retaine* earnin- are e@'aute* iA. ?.= er$ent. C. 1#.+ er$ent.B. 2."= er$ent. D. 11.# er$ent.

". T'e &ei-'te* avera-e $ot of $aital after all retaine* earnin- are e@'aute* iA. 1." er$ent. C. 11.== er$ent.B. 11.# er$ent. D. 1#.+ er$ent.

7ACC , Cot of Preferre* Sto$411+. An*eron Co3an% 'a four invet3ent oortunitie &it' t'e follo&in- $ot /ai* at t F

an* e@e$te* return5

Proe$t Cot E@e$te* ReturnA !)<### 1".#6B <### 1+.=C =<### 11.=D <### :.=

T'e $o3an% 'a a tar-et $aital tru$ture t'at $onit of +# er$ent $o33on e;uit%< +

er$ent *e(t< an* )# er$ent referre* to$4. T'e $o3an% 'a !1<### in retaine* earnin-T'e $o3an% e@e$t it %ear,en* *ivi*en* to (e !.## er 'are /D1 F !.##0. T'e *ivi*ei e@e$te* to -ro& at a $ontant rate of = er$ent a %ear. T'e $o3an% to$4 ri$e

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e of

7/23/2019 P04 - Risks (Sol)



$urrentl% !+).?=. If t'e $o3an% iue ne& $o33on to$4< t'e $o3an% &ill a% itinvet3ent (an4er a 1# er$ent flotation $ot.T'e $o3an% $an iue $ororate (on* &it' a %iel* to 3aturit% of 1# er$ent. T'e $o3an%i in t'e = er$ent ta@ (ra$4et. o& lar-e $an t'e $ot of referre* to$4 (e /in$lu*in-flotation $ot0 an* it till (e rofita(le for t'e $o3an% to invet in all four roe$t> /D0a. ?.?=6 *. 11.=+6(. 2.:#6 :.))6 e. 1)."26$. 1#.+"6 /7ron- an&er< Retaine* earnin- i not in$lu*e* in t'e $o3utation0 Bri-'a3

+apita" Asset Pricin* Mde" 3+APM4Beta Coeffi$ient11=. Bra*'a& Steel 'a a $aital tru$ture &it' # er$ent *e(t /all lon-,ter3 (on*0 an* ?#

er$ent $o33on e;uit%. T'e %iel* to 3aturit% on t'e $o3an% lon-,ter3 (on* i 2 er$ent<an* t'e fir3 eti3ate t'at it overall $o3oite 7ACC i 1# er$ent. T'e ri4,free rate of

interet i =.= er$ent< t'e 3ar4et ri4 re3iu3 i = er$ent< an* t'e $o3an% ta@ rate i +#er$ent. Bra*'a& ue t'e CAPM to *eter3ine it $ot of e;uit%. 7'at i t'e (eta onBra*'a& to$4> /M0a. 1.#? *. #.1#(. 1.+2 e. 1.=$. 1.1 Bri-'a3

7ACC , De(t Co33on E;uit%1. T'e 3ar4et value of C'ar$oal Cororation $o33on to$4 i !)# 3illion< an* t'e 3ar4et

value of it ri4,free *e(t i != 3illion. T'e (eta of t'e $o3an% $o33on to$4 i 1.)=< an*t'e 3ar4et ri4 re3iu3 i 26. If t'e treaur% (ill rate i =6< &'at i t'e $o3an% $ot of$aital. /Au3e no [email protected] /E0A. 16 C. 1?6B. 1+."6 D. None of t'e a(ove B M

). T'e 3ar4et value of 8Y9 $ororation $o33on to$4 i +# 3illion an* t'e 3ar4et value of t'eri4,free *e(t i "# 3illion. T'e (eta of t'e $o3an% $o33on to$4 i #.2< an* t'e e@e$te*3ar4et ri4 re3iu3 on t'e 3ar4et i 1#6. If t'e treaur% (ill rate i "6< &'at i t'e fir3$ot of $aital> /Au3e no [email protected] /E0A. :.)6 C. 1#6

B. 1+6 D. None of t'e a(ove B M

11". Billi$4 Brot'er i eti3atin- it 7ACC. T'e $o3an% 'a $olle$te* t'e follo&in- infor3ation5• It $aital tru$ture $onit of +# er$ent *e(t an* "# er$ent $o33on e;uit%.

• T'e $o3an% 'a )#,%ear (on* outtan*in- &it' a : er$ent annual $ouon t'at atra*in- at ar.

• T'e $o3an% ta@ rate i +# er$ent.

• T'e ri4,free rate i =.= er$ent.

• T'e 3ar4et ri4 re3iu3 i = er$ent.

• T'e to$4 (eta i 1.+.7'at i t'e $o3an% 7ACC> /E0a. :.?16 *. 11.126(. :.""6 e. 11.1#6$. 2.16 Bri-'a

11?. el3 Air$raft 'a a $aital tru$ture t'at $onit of "# er$ent *e(t an* +# er$ent $o33to$4. T'e fir3 &ill (e a(le to ue retaine* earnin- to fun* t'e e;uit% ortion of it $ait(u*-et. T'e $o3an% re$entl% iue* (on* &it' a %iel* to 3aturit% of : er$ent. T'e ri4,frerate i " er$ent< t'e 3ar4et ri4 re3iu3 i " er$ent< an* el3 (eta i e;ual to 1.=. If t'$o3an% ta@ rate i = er$ent< &'at i t'e $o3an% &ei-'te* avera-e $ot of $ait/7ACC0> /M0a. 2.6 *. 1#.:26(. :.=16 e. 11.2+6$. :.:=6 Bri-'a

Juetion +) an* + a re (ae* on t 'e follo& in- info r3ation. CMA #":= 1,?

Martin CororationState3ent of inan$ial Poition

De$e3(er 1< )888/Dollar in 3illion0

Aet ia(ilitie an* e;uit% Current aet ! ?= Current lia(ilitie ! +" Plant an* e;ui3ent )=# on-,ter3 *e(t /1)60 "+

Co33on e;uit%5Co33on to$4< !1 ar 1#A**itional ai*,in $aital 1##

Retaine* earnin- 1#=Total aet !)= Total lia(ilitie 'are'ol*er e;uit% !)=

A**itional Data

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e + of

7/23/2019 P04 - Risks (Sol)



T'e lon-,ter3 *e(t &a ori-inall% iue* at ar /!1<### er (on*0 an* i $urrentl% tra*in-at !1<)=# er (on*.

Martin Cororation $an no& iue *e(t at 1=# (ai oint over .S. Treaur% (on*. T'e $urrent ri4,free rate /.S. Treaur% (on*0 i ?6. Martin $o33on to$4 i $urrentl% ellin- at !) er 'are. T'e e@e$te* 3ar4et return i $urrentl% 1=6. T'e (eta value for Martin i 1.)=. Martin effe$tive $ororate in$o3e ta@ rate i +#6.

112. Martin Cororation $urrent net $ot of *e(t iA. =.=6 C. =.16B. ?.#6 D. 2.=6

11:. in- t'e Caital Aet Pri$in- Mo*el /CAPM0< Martin Cororation $urrent $ot of $o33on

e;uit% iA. 2.?=6 C. 1=.##6B. 1#.##6 D. 1?.##6

Juetion ++ t'rou-' +" are (ae* on t'e follo&in- infor3ation. CMA 1):+ 1,)= to )?DJ9 Tele$o3 i $oni*erin- a roe$t for t'e $o3in- %ear t'at &ill $ot !=#<###<###. DJ9 lan toue t'e follo&in- $o3(ination of *e(t an* e;uit% to finan$e t'e invet3ent5 Iue !1=<###<### of )#,%ear (on* at a ri$e of 1#1< &it' a $ouon rate of 26< an*

flotation $ot of )6 of ar. e !=<###<### of fun* -enerate* fro3 earnin-. T'e e;uit% 3ar4et i e@e$te* to earn 1)6. .S. Treaur% (on* are $urrentl% %iel*in- =6. T'e(eta $oeffi$ient for DJ9 i eti3ate* to (e ."#. DJ9 i u(e$t to an effe$tive $ororate in$o3e ta@rate of +#6.

1)#. T'e (efore,ta@ $ot of DJ9 lanne* *e(t finan$in-< net of flotation $ot< in t'e firt %ear iA. 2.#26 C. ?.:)6B. 1#.##6 D. 2.##6

1)1. Au3e t'at t'e after,ta@ $ot of *e(t i ?6 an* t'e $ot of e;uit% i 1)6. Deter3ine t'e

&ei-'te*,avera-e $ot of $aital.A. 1#.=#6 C. :.=#6B. 2.=#6 D. ".#6

1)). T'e Caital Aet Pri$in- Mo*el /CAPM0 $o3ute t'e e@e$te* return on a e$urit% a**in- t'e ri4,free rate of return to t'e in$re3ental %iel* of t'e e@e$te* 3ar4et return< &'i$i a*ute* (% t'e $o3an% (eta. Co3ute DJ9 e@e$te* rate of return.A. :.)#6 C. ?.)#6B. 1).)#6 D. 1).##6

7ACC , De(t< Preferre* Co33on Sto$41). o'non In*utrie finan$e it roe$t &it' +# er$ent *e(t< 1# er$ent referre* to$4< a

=# er$ent $o33on to$4.• T'e $o3an% $an iue (on* at a %iel* to 3aturit% of 2.+ er$ent.

• T'e $ot of referre* to$4 i : er$ent.

• T'e ri4,free rate i ".=? er$ent.

• T'e 3ar4et ri4 re3iu3 i = er$ent.

• o'non In*utrie (eta i e;ual to 1..

• Au3e t'at t'e fir3 &ill (e a(le to ue retaine* earnin- to fun* t'e e;uit% ortion of $aital (u*-et.

• T'e $o3an% ta@ rate i # er$ent.7'at i t'e $o3an% &ei-'te* avera-e $ot of $aital /7ACC0> /M0a. 2.6 *. 1#.:)6(. 2.:=6 e. 1.1=6$. :.?:6 Bri-'a

1)+. Co3an% 8 i interete* in $al$ulatin- it &ei-'te*,avera-e $ot of $aital. Co3an% 8 'a$urrent finan$ial tru$ture t'at i $o3oe* of =#6 *e(t< +#6 $o33on to$4< an* 1#6referre* to$4. I-nore t'e effe$t of $ot of retaine* earnin-. T'e (eta of Co3an% 8 toi #.?< an* t'e $urrent ri4,free rate of return i +6. T'e 3ar4et ri4 re3iu3 i "6. Treferre* *ivi*en* on Co3an% 8 referre* to$4 i et at !).)=< an* t'e net iuan$e rier 'are /&'i$' 'aen to (e t'e a3e a t'e $urrent ri$e er 'are0 of referre* to$4!#. De(t iue* (% Co3an% 8 %iel* an 116 tate* interet rate to invetor. T'e 3ar-inta@ rate for Co3an% 8 i +#6. 7'at i t'e &ei-'te*,avera-e $ot of $aital for Co3an% /D0a. #.#?+ $. #.#""#(. #.#2)# *. #.#? Gle

Ne& 7ACC after C'an-e in Caital Stru$ture. Boton Cororation 'a a $o3an% $ot of $aital of )#6. T'e $o3an% i finan$e* &it' !

3illion ri4,free *e(t an* 1# 3illion of $o33on to$4< &'i$' 'a a (eta ).#. T'e ri4,free ra

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e = of

7/23/2019 P04 - Risks (Sol)



i =6< an* t'e e@e$te* return on t'e 3ar4et ortfolio i 1=6. If t'e fir3 iue !1# 3illion3ore $o33on to$4< t'e ne& $o3an% $ot of $aital &ill (e5 /Au3e no [email protected] /M0A. )#6 C. )6B. 1=.6 D. None of t'e a(ove B M

+. i;ui* Cororation i finan$e* &it' !)= 3illion of ri4,free *e(t an* =# 3illion of $o33onto$4< &'i$' 'a a (eta of 1.". T'e ri4,free rate i +6< an* t'e e@e$te* return on t'e 3ar4etortfolio i 16. If t'e $o3an% iue !)= 3illion 3ore $o33on to$4 an* ue t'ero$ee* to (u% (a$4 all outtan*in- *e(t< t'e $o3an% $ot of $aital &ill (e5 /D0A. +6 C. 1."6B. 12.+6 D. None of t'e a(ove B M

+'pre/ensi&eJuetion 1 t'ru " are (ae* on t'e follo&in- infor3ation. Bri-'a3

Rollin Cororation 'a a tar-et $aital tru$ture $onitin- of )# er$ent *e(t< )# er$entreferre* to$4< an* "# er$ent $o33on e;uit%. Au3e t'e fir3 'a inuffi$ient retaine* earnin-to fun* t'e e;uit% ortion of it $aital (u*-et. It (on* 'ave a 1) er$ent $ouon< ai*e3iannuall%< a $urrent 3aturit% of )# %ear< an* ell for !1<###. T'e fir3 $oul* ell< at ar< !1##referre* to$4 t'at a% a 1) er$ent annual *ivi*en*< (ut flotation $ot of = er$ent &oul* (ein$urre*. Rollin (eta i 1.)< t'e ri4,free rate i 1# er$ent< an* t'e 3ar4et ri4 re3iu3 i =er$ent. Rollin i a $ontant -ro&t' fir3 t'at ut ai* a *ivi*en* of !).##< ell for !)?.## er'are< an* 'a a -ro&t' rate of 2 er$ent. T'e fir3 oli$% i to ue a ri4 re3iu3 of +er$enta-e oint &'en uin- t'e (on*,%iel*,lu,ri4,re3iu3 3et'o* to fin* 4. lotation $oton ne& $o33on to$4 total 1# er$ent< an* t'e fir3 3ar-inal ta@ rate i +# er$ent.

1)=. 7'at i Rollin $o3onent $ot of *e(t> /E0a. 1#.#6 *. 2.#6(. :.16 e. ?.)6$. 2."6

1)". 7'at i Rollin $ot of referre* to$4> /E0a. 1#.#6 *. 1)."6(. 11.#6 e. 1.)6$. 1).#6

1)?. 7'at i Rollin $ot of retaine* earnin- uin- t'e CAPM aroa$'> /E0a. 1."6 *. 1"."6(. 1+.16 e. 1".:6

$. 1".#6

1)2. 7'at i t'e fir3 $ot of retaine* earnin- uin- t'e DC aroa$'> /E0a. 1."6 *. 1"."6(. 1+.16 e. 1".:6$. 1".#6

1):. 7'at i Rollin $ot of retaine* earnin- uin- t'e (on*,%iel*,lu,ri4,re3iu3 aroa$/E0a. 1."6 *. 1"."6(. 1+.16 e. 1".:6$. 1".#6

1#. 7'at i Rollin 7ACC< if t'e fir3 'a inuffi$ient retaine* earnin- to fun* t'e e;uit% orti

of it $aital (u*-et> /E0a. 1."6 *. 1"."6(. 1+.16 e. 1".:6$. 1".#6

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e " of

7/23/2019 P04 - Risks (Sol)



LE#ERAGEFinancia" Le&era*eIn$o3e State3ent i-ure Given+=. A fir3 'a EBIT of !?=<###< interet e@ene of !?=<###< referre* *ivi*en* of !"<### an* a

ta@ rate of +# er$ent. T'e fir3 *e-ree of finan$ial levera-e at a (ae EBIT level of !?=<###i QQQQQQ.A. #.:? C. 1.)?B. 1.): D. 1.#: Git3an

Per$ent In$reae in EBIT an* NIAT Given11. T'i %ear< Nelon In*utrie in$reae* earnin- (efore interet an* ta@e /EBIT0 (% 1?6.

Durin- t'e a3e erio*< net in$o3e after ta@ in$reae* (% +)6. T'e *e-ree of finan$iallevera-e t'at e@ite* *urin- t'e %ear i /E0A. 1.?#. C. ).+?.

B. +.)#. D. =.:#. CMA #":# 1,1"

Senitivit% Anal%i1). A $o3an% i $oni*erin- t'e earl% retire3ent of it 1#6< 1#,%ear (on* a%a(le. Before

retirin- t'e (on*< t'e $o3an% $aital tru$ture &a

Current lia(ilitie !1)=<###on-,ter3 lia(ilitie5 Note a%a(le /*ue in = %ear0 )##<### Bon* a%a(le ##<### Pre3iu3 on (on* a%a(le )=<###O&ner e;uit%5 Co33on to$4 /!= ar value0 1=#<### Pai*,in $aital in e@$e of ar =#<### Retaine* earnin- +=#<###

If t'e (on* $an (e retire* at 1#.=6< t'e /M0 CIA 11: IV,+2A. De(t,e;u it% ratio &ill in$reae. C. Aet turnover ratio &ill *e$reae.B. inan$ial levera-e &ill *e$reae. D. Return on o&ner e;uit% &ill *e$reae.

De-ree of inan$ial evera-e Boo4 Value er S'areJuetion :" an* :? are (ae* on t'e follo&in- infor3ation. CIA #=:= IV,= "

Preente* (elo& are artial %ear,en* finan$ial tate3ent *ata for $o3anie A an* B. Co3an% A Co3an% BCa' !1## !)##A$$ount Re$eiva(le un4no&n 1##

Inventorie un4no&n 1##Net i@e* Aet )## 1##A$$ount Pa%a(le 1## =#on-,Ter3 De(t )## =#Co33on Sto$4 1## )##Retaine* Earnin- 1=# 1##

Co3an% A Co3an% BSale !"## !=<2##Cot of Goo* Sol* ## =<###A*3initrative E@ene 1## =##Dere$iation E@ene 1## 1##Interet E@ene )# 1#In$o3e Ta@ E@ene +# :=

Net In$o3e +# :=

1. T'e *e-ree of finan$ial levera-e of Co3an% B< to t&o *e$i3al la$e< i /E0A. 1.# C. 1.1)B. 1.#= D. 1.)=

1+. If Co3an% A 'a "# $o33on 'are outtan*in-< t'en it 'a a (oo4 value er 'are< to tnearet $ent< of /E0A. !1."? C. !+.1?B. !).=# D. !=.##

Tta" Le&era*e1=. A $o3an% 'a unit ale of ##<###< t'e unit varia(le $ot i !1.=#< t'e unit ale ri$e

!).##< an* t'e annual fi@e* $ot are !=#<###. urt'er3ore< t'e annual interet e@ene !)#<###< an* t'e $o3an% 'a no referre* to$4. A$$or*in-l%< t'e *e-ree of total levera-e /E0A. 1.2?= C. 1.)=B. 1.=# D. 1.)# Gle

+'pre/ensi&e

Juetion )" t'rou-' )2 are (ae* on t'e follo&in- infor3ation. CMA #":) 1,2 to

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e ? of

7/23/2019 P04 - Risks (Sol)



Carlile Co3an% $urrentl% ell +##<### (ottle of erfu3e ea$' %ear. Ea$' (ottle $ot !.2+ toro*u$e an* ell for !1.##. i@e* $ot are !)2<### er %ear. T'e fir3 'a annual interete@ene of !"<###< referre* to$4 *ivi*en* of !)<### er %ear< an* a +#6 ta@ rate.Carlile ue t'e follo&in- for3ula to *eter3ine t'e $o3an% levera-e.

#& ' ()*perating everage =

#& ' () ' ,)

-/,inancia everage =

-/ ' / ' # #1 ' t÷

#& ' ()ota everage =

#& ' () ' ,) ' / ' #1 ' t÷

I f5 J F Juantit%C F i@e* $otVC F Varia(le $otS F Sel lin- ri$eI F Intere t e@eneP F Preferre* *ivi*en*t F Ta@ rate

EBIT F Earnin- (efore interet an* ta@e

1". T'e *e-ree of oeratin- levera-e for Carlile Co3an% i /E0A. ).+ C. ).1B. 1.?2 D. 1.)

1?. T'e *e-ree of finan$ial levera-e for Carlile Co3an% i /E0A. ).+ C. 1.=B. 1.?2 D. 1.)

12. If Carlile Co3an% *i* not 'ave referre* to$4< t'e *e-ree of total levera-e &oul* /M0A. De$reae in roortion to a *e$reae in finan$ial levera-e.B. In$reae in roortion to an in$reae in finan$ial levera-e.C. Re3ain t'e a3e.D. De$reae (ut not (e roortional to t'e *e$reae in finan$ial levera-e.

Juetion 22 t'rou-' :1 are (ae* on t'e fol lo&in- infor3ation. CIA 11:+ IV,= to A ne& $o3an% re;uire !1 3illion of finan$inan* i $oni*erin- t&o arran-e3ent a 'o&n t'e ta(le (elo&5

Arran-e3entA3ount of

E;uit% Raie*A3ount of De(t

inan$in-Before,Ta@Cot of De(t

Z1 !?##<### !##<### 26 er annu3Z) !##<### !?##<### 1#6 er annu3

In t'e firt %ear of oeration< t'e $o3an% i e@e$te* to 'ave ale revenue of !=##<###< $oof ale of !)##<###< an* -eneral an* a*3initrative e@ene of !1##<###. T'e ta@ rate i #6an* t'ere are no ot'er ite3 on t'e in$o3e tate3ent. All earnin- are ai* out a *ivi*en* %ear,en*.1:. If t'e $ot of e;uit% i 1)6< t'e &ei-'te*,avera-e $ot of $aital un*er arran-e3ent Z1< to t

nearet full er$enta-e oint< &oul* (eA. 26 C. 116

B. 1#6 D. 1)6

1+#. 7'i$' of t'e follo&in- tate3ent $o3arin- t'e t&o finan$in- arran-e3ent i true>A. T'e $o3an% &ill 'ave a 'i-'er e@e$te* -ro 3ar-in un*er arran-e3ent Z1.B. T'e $o3an% &ill 'ave a 'i-'er *e-ree of oeratin- levera-e un*er arran-e3ent Z).C. T'e $o3an% &ill 'ave 'i-'er interet e@ene un*er arran-e3ent Z1.D. T'e $o3an% &ill 'ave 'i-'er e@e$te* ta@ e@ene un*er arran-e3ent Z1.

1+1. n*er finan$in- arran-e3ent Z)< t'e *e-ree of finan$ial levera-e /D0< roun*e* to t&*e$i3al la$e< &oul* (eA. 1.#: C. 1.)B. 1.1+ D. 1.=+

1+). he ret"rn on e"it6 wi e 8ist 9: and the det ratio wi e 8ist "nder arrangement ;2< as compared with arrangement ;1.

A. B. C. D.

it A i-'er i-'er o&er o&erit B i-'er o&er i-'er o&er

Juetion 1 t'ru = are (ae* on t'e follo&in- infor3ation. Pol Bo(a*Ga$o Co. i a ver% lar-e $o3an% &it' $o33on to$4 lite* on t'e P'iliine Sto$4 E@$'anan* (on* tra*e* over t'e $ounter. A of t'e $urrent (alan$e 'eet< it 'a t'ree (on* iuouttan*in-5


7/23/2019 P04 - Risks (Sol)



P1=# 3illion of 1#6 erie )#1 P=# 3illion of ?6 erie )##? P?= 3illion of =6 erie )##+

T'e vi$e,rei*ent of finan$e i lannin- to ell P?= 3illion of (on* ne@t %ear to rela$e t'e *e(t*ue to e@ire in )##+. Preent 3ar4et %iel* on i3ilar Baa,rate* (on* are 1).16. Ga$o alo'a P:# 3illion of ?.=6 non$alla(le referre* to$4 outtan*in-< an* it 'a no intention of ellin-an% referre* to$4 at an% ti3e in t'e future. T'e referre* to$4 i $urrentl% ri$e* at P2# er'are< an* it *ivi*en* er 'are i P?.2#.T'e $o3an% 'a 'a* var% volatile earnin-< (ut it *ivi*en* er 'are 'ave 'a* a ver% ta(le-ro&t' rate of 26 an* t'i &ill $ontinue. T'e e@e$te* *ivi*en* i P1.:# er 'are< an* t'e$o33on to$4 i ellin- for P+# er 'are. T'e $o3an% invet3ent (an4er 'a ;uote* t'efollo&in- flotation $ot to Ga$o5 P).=# er 'are for referre* to$4 an* P).)# er 'are for$o33on to$4.On t'e a*vi$e of it invet3ent (an4er< Ga$o 'a 4et it *e(t at =#6 of aet an* it e;uit% at

=#6. Ga$o ee no nee* to ell et'er $o33on or referre* to$4 in t'e foreeea(le future a it-enerate* enou-' internal fun* for it invet3ent nee* &'en t'ee fun* are $o3(ine* &it'*e(t finan$in-. Ga$o $ororate ta@ rate i +#6.Co3ute t'e $ot of $aital for t'e follo&in-5

1. Bon* /*e(t0A. ?.)"6 C.B. D.

). Preferre* to$4A. C.B. D. 1#.#"6

. Co33on e;uit% in t'e for3 of retaine* earnin-A. C.B. 1).?=6 D.

+. Ne& $o33on to$4A. C. 1.#6B. D.

=. 7ei-'te*,avera-e $ot of $aitalA. C.B. D. 1#6

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e : of

7/23/2019 P04 - Risks (Sol)



PROBABILITIE$ ( $TATI$TI+$1+. A .S. $o3an% $urrentl% 'a *o3eti$ oeration onl%. It i $oni*erin- an e;ual,ie

invet3ent in eit'er Cana*a or Britain. T'e *ata on e@e$te* rate of return an* t'e ri4ao$iate* &it' ea$' of t'ee rooe* invet3ent are -iven (elo&.

Prooe* Invet3ent Mean Return Stan*ar* DeviationBriti' Invet3ent ))6 1#6Cana*ian Invet3ent )26 1=6

T'e 3ean return on t'e $o3an% $urrent /*o3eti$ onl%0 (uine i )#6< &it' a tan*ar**eviation of 1=6. in- t'e a(ove *ata an* t'e $orrelation $oeffi$ient< t'e $o3an%$al$ulate* t'e follo&in- ortfolio ri4 an* return /(ae* on a ratio of =#6 .S. *o3eti$oeration an* =#6 international oeration0.

Invet3ent Mean Return Stan*ar* Deviation.S. an* Britain )16 6.S. an* Cana*a )+6 1=6

T'e $o3an% lan to ele$t t'e oti3al $o3(ination of $ountrie (ae* on ri4 an* return fort'e *o3eti$ an* international invet3ent ta4en to-et'er. Bae* on t'e a(ove *ata< &'i$'one of t'e follo&in- alternative rovi*e t'e (et ri4 a*ute* return to t'e fir3>A. n*erta4e t'e Briti' invet3ent. C. Do not un*erta4e eit'er invet3ent.B. n*erta4e t'e Cana*ian invet3ent. D. na(le to *eter3ine (ae* on *ata -iven.

CMA Sa3 J1,

Juetion :" t'rou-' :2 are (ae* on t'e follo&in- infor3ation. Glei3Te$'a$e 'a (een a u$$eful to$4 over t'e at fe& %ear *eite it ri4ine. T'e tate oft'e e$ono3% 'a a tre3en*ou effe$t on t'e e@e$te* return for Te$'a$e a 'o&n (elo&5

Pro(a(ilit% State of t'e E$ono3% Te$'a$e Return.#= Dereion ,+=6.1= Re$eion ,1#6.)# Mini3al Slo&*o&n =6.+# Sta(le 1#6.1= E@anion #6.#= Si-nifi$ant E@anion =6

1++. 7'at i t'e e@e$te* rate of return on Te$'a$e to$4>A. ?.=6 C. =6B. 1=6 D. )=6

1+=. T'e varian$e of Te$'a$e return iA. .1?= C. .#?=B. .##1 D. .)?2

1+". T'e tan*ar* *eviation of Te$'a$e return iA. ?.=6 C. .#16B. 1?.=6 D. None of t'e an&er are $orre$t.

IN$1RAN+E1+?. art o&ne* a (uil*in- &it' a fair 3ar4et value of !+##<###. T'e (uil*in- &a $overe* (%

!##<### fire inuran$e oli$% $ontainin- an 2#6 $oinuran$e $laue. 7'at a3ount &ouart re$over if a fire totall% *etro%e* t'e (uil*in->.A. !# C. !##<###B. !)+#<### D. !+##<### CPA 11:) ,

1+2. On Aril )< 1:::< Rit Cor. ur$'ae* a &are'oue t'at it inure* for !=##<###. T'e ol$ontaine* a ?=6 $oinuran$e $laue. On Aril )=< )###< a fire $aue* !:##<### *a3a-e t'e &are'oue. T'e fair 3ar4et value of t'e &are'oue &a !2##<### on Aril )< 1::: an* !3illion on Aril )=< )###. Rit i entitle* to re$eive inuran$e ro$ee* of< at 3ot<A. !?=<### C. !"##<###B. !=##<### D. !?=#<### CPA #=22 ,

Juet ion 12= an* 12" are (ae* on t'e fo ll o& in- infor3ation. CPA #=: ,=: Po* (ou-'t a (uil*inin 1::" for !))#<###. At t'at ti3e< Po* ur$'ae* a !1=#<### fire inuran$oli$% &it' O&ner Inuran$e Co. an* a !=#<### fire inuran$e oli$% &it' Grou Inuran$e CoEa$' oli$% $ontaine* a tan*ar* 2#6 $oinuran$e $laue. In )###< &'en t'e (uil*in- 'a* a fa3ar4et value of !)=#<###< it &a *a3a-e* in a fire.

1+:. o& 3u$' &oul* Po* re$over fro3 O&ner if t'e fire $aue* !12#<### in *a3a-e>A. !:#<### C. !1=<###

B. !1)#<### D. !1=#<###

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e +# of

7/23/2019 P04 - Risks (Sol)



1=#. o& 3u$' &oul* Po* re$over fro3 O&ner an* Grou if t'e fire totall% *etro%e* t'e (uil*in->A. !1"#<### C. !))#<###B. !)##<### D. !)=#<###

1=1. Maon Co. 3aintaine* t&o tan*ar* fire inuran$e oli$ie on one of it &are'oue. Bot'oli$ie in$lu*e* an 2#6 $oinuran$e $laue an* a t%i$al [ot'er inuran$e[ $laue. Oneoli$% &a &it' A$e ire Inuran$e< In$.< for !)+<###< an* t'e ot'er &a &it' T'rift% Caualt%Inuran$e Co.< for !1"<###. At a ti3e &'en t'e &are'oue &a &ort' !1##<###< a fire in t'e&are'oue $aue* a !+#<### lo. 7'at a3ount $an Maon re$over fro3 A$e an* T'rift%<ree$tivel%>A. !# an* !#. C. !1)<### an* !2<###.B. !1#<### an* !1#<###. D. !)+<### an* !1"<###. AICPA 11:1 ,"#

1=). A (uil*in- t'at ori-inall% $ot !"#<### i no& &ort' !)##<###. T'e o&ner 'ol* a !1)#<### fire

inuran$e oli$% &it' an 2#6 $o,inuran$e $laue. If a fire $aue !1=#<### of *a3a-e to t'etru$ture< 'o& 3u$' &ill t'e o&ner (e a(le to $olle$t fro3 t'e inuran$e $o3an%>A. !11)<=## C. !1=#<###B. !1)#<### D. !1"#<### Glei3

1=. On Aril )< 1:::< Rit Cor. ur$'ae* a &are'oue t'at it inure* for !=##<###. T'e oli$%$ontaine* a ?=6 $oinuran$e $laue. On Aril )=< )###< a fire $aue* !:##<### *a3a-e tot'e &are'oue. T'e fair 3ar4et value of t'e &are'oue &a !2##<### on Aril )< 1::: an* !13illion on Aril )=< )###. Rit i entitle* to re$eive inuran$e ro$ee* of< at 3ot<A. !?=<### C. !"##<###B. !=##<### D. !?=#<### AICPA #=22 ,=:

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e +1 of

7/23/2019 P04 - Risks (Sol)



AN$5ER E7PLANATION$

RPCPA< AICPA< CMA CIA E8AMINATION JESTIONS Pa-e +) of

7/23/2019 P04 - Risks (Sol)


1 . #."/1.)0 L #.+/#.:#0 F 1.#2.

2 . An&er /C0 i $orre$t. Beta i t'e (et 3eaure of t'e ri4 of an in*ivi*ual e$urit% 'el* in a *iverifie* ortfolio(e$aue it *eter3ine 'o& t'e e$urit% affe$t t'e ri4 of t'e ortfolio. T'e (eta of a ortfolio i t'e &ei-'te* avera-e oft'e (eta of t'e in*ivi*ual e$uritie. or e@a3le< a**in- 'i-',(eta e$uritie to a ortfolio ten* to in$reae it ri4.en$e< t'e (eta of t'e ortfolio i .: /.2 @ .)0 L /." @ .+0 L /1.# @ .0 L /).# @ .10.An&er /A0 i in$orre$t (e$aue ).# i t'e 'i-'et (eta. An&er /B0 i in$orre$t (e$aue 1.1 i a i3le avera-e of t'e

(eta. An&er /D0 i in$orre$t (e$aue .2 i t'e lo&et (eta.

3 . An&er /A0 i $orre$t. If five to$4 'ave an avera-e (eta of 1.+< t'at 3ean t'e total of t'e in*ivi*ual (eta i ?.# /=@ 1.+0. Su(tra$tin- t'e 1.= of Sto$4 A fro3 ?.# leave =.= for t'e re3ainin- four to$4. If an avera-e (eta of 1.)= i*eire*< t'at &oul* i3l% a total of ".)= for five to$4. Su(tra$tin- =.= /(eta of four to$40 fro3 ".)= /(eta of fiveto$40 leave .?= for t'e fift' /ne&0 to$4.An&er /B0 i in$orre$t (e$aue it *oe not ro*u$e a total of ".)= for t'e in*ivi*ual (eta. An&er /C0 i in$orre$t(e$aue it *oe not ro*u$e a total of ".)= for t'e in*ivi*ual (eta. An&er /D0 i in$orre$t (e$aue it *oe not ro*u$ea total of ".)= for t'e in*ivi*ual (eta.

4 . An&er /D0 i $orre$t. T'e value of *e(t i t'e 3ar4et ri$e er (on* 3ultilie* (% t'e nu3(er of (on*< &'i$' i!:#)." /!1<### @ .=11"0 L /!2# @ +.2"2+0 @ "<###< &'i$' e;ual !=.+) 3illion. T'e value of t'e e;uit% i !)+ 3illion<

o t'e total 3ar4et value of t'e fir3 i e;ual to t'e u3 of t'e value of it *e(t an* e;uit%. T'u t'e fir3 i &ort' !=.+)3illion L !)+ 3illion F !):.+) 3illion. T'e (eta of t'e aet $an t'en (e foun* a follo&5 aet F *e(t /*e(tV0 Le;uit%/e;uit%V0 F /#.10/#.120 L /1.+0/#.2)0 F 1.1".An&er /A0 i in$orre$t (e$aue #.2) i t'e value of t'e e;uit% *ivi*e* (% t'e value of t'e fir3 a a &'ole< &'i$' i nott'e a3e t'in- a (eta of t'e aet. An&er /B0 i in$orre$t (e$aue #.?= i an avera-e of t'e (eta of t'e $o3an%to$4 an* t'e (eta of t'e *e(enture of t'e fir3< not t'e (eta of t'e aet. An&er /C0 i in$orre$t (e$aue (eta of t'eaet i /#.10/#.120 L /1.+0/#.2)0< not #.1 L #.12 L 1.+ L #.2) F ).=.

5 . An&er /B0 i $orre$t. T'e finan$ial levera-e i a ratio of *e(t to aet< &'i$' in t'i $ae i #.?= # \ /# L =#0.Beta of Co3uSolution i 1< (ae* on t'e loe of t'e line t'at &a lotte*< &'i$' in*i$ate fro3 it += loe t'at t'ereturn of t'e to$4 in ;uetion 3ove in *ire$t $orrelation &it' t'e return on t'e 3ar4et. T'e (eta of aet $an t'en (e$al$ulate* uin- t'e follo&in- relation'i5 aet F e;uit% @ /e;uit%V0 F 1/1 , #.?=0 F #.")=. /Note t'at t'i au3e

t'e (eta of *e(t to (e e;ual to ero.0An&er /A0 i in$orre$t (e$aue (eta of Co3uSolution i one< not t&o /an* t'u (eta of aet i 'alf of 1.)=0. An&er/C0 i in$orre$t (e$aue t'e (eta of t'e aet e;ual 1/1 , #.?=0< not 1/1 L #.?=0. An&er /D0 i in$orre$t (e$aue!=# 3illion \ !# 3illion i not t'e (eta of Co3uSolution aet.

. (Ol*< fir3 F 1.)=.4Ol*< fir3 F #.#? L /1+ , ?01.)= F 1=.?=6.(Ne&< fir3 F #.:/1.)=0 L #.1/1.10 F 1.)=.4Ne&< fir3 F #.#? L 1.)=/#.#?0 F 1=."+=6.4Ne&< aet F #.#? L 1.1/#.#?0 F 1+.?6.

?

8 Ol* aet F 1.#. Ne& aet F #.=. Total aet F 1.=.

Ol* re;uire* rate5 Ne& re;uire* rate5126 F ?6 L /=60( 1"6 F ?6 L /=60((eta F ).). (eta F 1.2.Ne& ( 3ut not (e -reater t'an 1.2< t'erefore

1.5

1/).)0 L

1.5

0.5/(0 F 1.2

#./(0 F #. ( F 1.#.

T'erefore< (eta of t'e ne& *iviion $annot e@$ee* 1.#.

7/23/2019 P04 - Risks (Sol)


2

. An&er /D0 i $orre$t. T'e avera-e (eta of t'e 'are of t'e ot'er &i*-et 3anufa$turer i 1.+. De(t to e;uit% ratio of#. 3ean *e(taet F #.1. F #.). E;uit%aet F 1 , #.) F #.??. Au3in- (eta for *e(t i ero< aet F (eta @/e;uit%aet0 F 1.+ @ #.?? F 1.#2. T'e re;uire* rate of return for t'e roe$t i 1=.?)6 " L /1.#2 @ :0.An&er /A0 i in$orre$t (e$aue :.?) *oe not in$lu*e t'e ri4,free rate. An&er /B0 i in$orre$t (e$aue ?.#26 *oenot 3ultil% 1.#26 (% : (efore a**in- it to "6. An&er /C0 i in$orre$t (e$aue 1".#26 i t'e u3 of t'e ri4,free rate<(eta of t'e aet< an* t'e e@e$te* ri4 re3iu3 /t'e e@e$te* ri4 re3iu3 'oul* (e 3ultilie* (% (eta of t'e

aet0.

> . An&er /B0 i $orre$t. T'e e@e$te* return on a ortfolio i t'e &ei-'te* avera-e of t'e e@e$te* return of t'ein*ivi*ual aet in t'e ortfolio. T'eir tan*ar* *eviation are irrelevant. T'u< t'e e@e$te* return on Mr. 7ilonretire3ent ortfolio i 1.==6 /#.=0/1#60 L /#.=0/160 L /#.10/1"60 L /#.10/1?60 L /#.10/))60.An&er /A0 i in$orre$t (e$aue 2.?6 reult fro3 uin- t'e tan*ar* *eviation to &ei-'t t'e return. An&er /C0 iin$orre$t (e$aue 1+.2#6 reult fro3 a*utin- t'e return for tan*ar* *eviation. An&er /D0 i in$orre$t (e$aue1=."#6 rereent an un&ei-'te* avera-e return.

10 8 k,% 9 :0; < =; 9 :=;8o&ever< for a lo&,ri4 roe$t< Dan*% Pro*u$t u(tra$t ) er$enta-e oint. T'erefore< t'e re;uire* rate of return i 1#er$ent.

4YD<o& ri4 roe$t F 1#6 L )6 , )6 F 1#6.11

. An&er /A0 i $orre$t. 8 i t'e roortion invete* in A< 1,8 i t'e roortion invete* in B< SA i t'e tan*ar* *eviationof t'e return on A< SB i t'e tan*ar* *eviation of t'e return on B< an* rAB i t'e $orrelation $oeffi$ient. T'e tan*ar**eviation of a t&o,to$4 ortfolio 3a% (e e@ree* a t'e ;uare root of t'e follo&in- e@reion5 t'e varian$e of t'ereturn on A &ei-'te* (% t'e ;uare of it roortion L t'e varian$e of t'e return on B &ei-'te* (% t'e ;uare of itroortion L t&i$e t'e ro*u$t of t'e roortion an* t'e $ovarian$e /ro*u$t of t'e tan*ar* *eviation of t'e return on

A an* B an* t'e $orrelation $oeffi$ient0. T'e for3ula i99

2

22

9

2 &&r '2#1&'#1& ++

) ) ) )/." 0/.11 0 L /1 , ."0 /.1+ 0 L )/."0/1 , ."0/.?0/.110/.1+0

12=.==4 F 11.)=An&er /B0 i in$orre$t (e$aue 1).)#6 i t'e &ei-'te* avera-e of t'e tan*ar* *eviation of t'e return on A an* B.An&er /C0 i in$orre$t (e$aue 1).=#6 i t'e i3le avera-e of t'e tan*ar* *eviation of t'e return on A an* B.An&er /D0 i in$orre$t (e$aue 1)".""6 i t'e ;uare of t'e tan*ar* *eviation of t'i t&o,to$4 ortfolio.

12 . An&er /C0 i $orre$t. T'e $oeffi$ient of variation i ueful &'en t'e rate of return an* tan*ar* *eviation of t&oinvet3ent *iffer. It 3eaure t'e ri4 er unit of return (% *ivi*in- t'e tan*ar* *eviation (% t'e e@e$te* return. T'u<for Proe$t 1< *ivi*in- !)##<### (% !1)#<### ro*u$e a $oeffi$ient of 1."?. or Proe$t )< t'e $al$ulation i to *ivi*e!1=#<### (% !1##<###< or 1.=#. If t'e t&o roe$t 'a* erfe$t $orrelation /F1.#0< t'en %ou $oul* $o3(ine t'e$al$ulation /!=#<### \ !))#<### F 1.=:0. o&ever< &it' a $orrelation of le t'an one< t'e ri4 &ill (e o3et'in- let'an 1.=:.An&er /A0 i in$orre$t (e$aue 1."? i for Proe$t 1 onl%. An&er /B0 i in$orre$t (e$aue 1.=: au3e a $orrelationof 1.#. An&er /D0 i in$orre$t (e$aue #." i t'e invere of t'e una*ute* ortfolio $oeffi$ient.

13 . An&er /C0 i $orre$t. T'e :6 rereent t'e after,ta@ $ot< or ""6 /1##6 , +60 of t'e %iel*. T'u< *ivi*e :6 (%""6 to fin* t'e (efore,ta@ interet5 :6 \ ""6 F 1."+6An&er /A0 i in$orre$t (e$aue =.:+6 au3e t'at :6 i t'e (efore,ta@ $ot. An&er /B0 i in$orre$t (e$aue :6i-nore t'e i3a$t of t'e ta@ 'iel*. An&er /D0 i in$orre$t (e$aue )".+?6 ue t'e $o3le3ent of t'e ta@ 'iel*rat'er t'an t'e ta@ 'iel*.

14 . 7'en a (on* ell at ar value< t'e $ouon rate i e;ual to t'e %iel* to 3aturit%.

15 . V F 1###< PMT F 1##< n F =< PV F ,:)2< i F 11.::?6

7/23/2019 P04 - Risks (Sol)


1 . YTM F 1+.6.

1?

. V F =##< PMT F 1##< n F 1#< PV F ,:?=< i F "."26 1? . An&er /A0 i $orre$t. Interet i 1)6< an* t'e annual interet a%3ent on one (on* i !1)#. T'u< t'e effe$tive

rate i 1).126 /!1)# \ !:2=0. Re*u$in- t'i rate (% t'e +#6 ta@ avin- lo&er t'e $ot to ?.16.An&er /B0 i in$orre$t (e$aue +.2?6 i $al$ulate* (% 3ultil%in- t'e reta@ effe$tive rate 1).126 /!1)# \ !:2=0 (%t'e ta@ rate of .+# intea* of (% /1 , .+#0. An&er /C0 i in$orre$t (e$aue 1)6 i t'e no3inal interet rate. An&er /D0i in$orre$t (e$aue t'e after,ta@ $ot of t'e (on* e;ual t'e effe$tive rate 1).126 /!1)# \ !:2=0 ti3e t'e ta@ effe$t/1 , .+#0< or ?.16.

1> . An&er /C0 i $orre$t. T'e reent value of !1#<### to (e re$eive* in )# %ear i !1<?2+.# (ae* on a :6 reentvalue ta(le.An&er /A0 i in$orre$t (e$aue t'e ri$e &ill (e le t'an !1#<### in$e no interet i ai* until after )# %ear. An&er/B0 i in$orre$t (e$aue !:<1?+ i &'at %ou &oul* a% for a (on* 3aturin- in one %ear. An&er /D0 i in$orre$t (e$aue!:## i a nonene an&er.

20 . An&er /D0 i $orre$t. Be$aue t'ere i no ta@ 'iel* ao$iate* &it' referre* to$4< t'e after,ta@ $ot i t'e a3ea t'e (efore,ta@ $ot. T'u< !.?= \ !=.## F 1=6. Preferre* *ivi*en* are not *e*u$ti(le for ta@ uroe.An&er /A0 i in$orre$t (e$aue =.)=6 ue t'e $o3le3ent of t'e ta@ rate to re*u$e t'e effe$tive $ot. An&er /B0 iin$orre$t (e$aue :.?=6 re*u$e t'e $ot (% t'e ta@ rate< &'i$' i not aroriate in$e referre* *ivi*en* are not*e*u$ti(le for ta@ uroe. An&er /C0 i in$orre$t (e$aue 1#.=#6 au3e a #6 ta@ rate an* *e*u$ti(ilit% of*ivi*en*.

21 . An&er /C0 i $orre$t. Be$aue t'e *ivi*en* on referre* to$4 are not *e*u$ti(le for ta@ uroe< t'e effe$t ofin$o3e ta@e i i-nore*. T'u< t'e relevant $al$ulation i to *ivi*e t'e !1# annual *ivi*en* (% t'e ;uantit% of fun*re$eive* at t'e ti3e t'e to$4 i iue*. In t'i $ae< t'e fun* re$eive* e;ual !:" /!1#1 ellin- ri$e , != un*er&ritin-fee0. T'u< t'e $ot of $aital i 1#.+6 /!1# \ !:"0.An&er /A0 i in$orre$t (e$aue ".)6 au3e t'at t'e *ivi*en* are *e*u$ti(le. An&er /B0 i in$orre$t (e$aue 1#6

(ae t'e $al$ulation on ar value intea* of fun* re$eive*. An&er /D0 i in$orre$t (e$aue =.)6 au3e t'at t'eun*er&riter fee i t'e *ivi*en*.

22 . An&er /D0 i $orre$t. T'e $ot of referre* to$4 i t'e referre* *ivi*en* *ivi*e* (% t'e ri$e. No ta@ a*ut3ent ine$ear% (e$aue *ivi*en* are not *e*u$ti(le. If t'e 3ar4et ri$e i !1)# &'en t'e *ivi*en* i !1=< t'e $ot ofreferre* $aital i 1).=6 /!1= \ !1)#0.An&er /A0 i in$orre$t (e$aue t'e referre* to$4 *ivi*en* i not *e*u$ti(le for ta@ uroe. An&er /B0 i in$orre$t(e$aue t'e referre* to$4 *ivi*en* i not *e*u$ti(le for ta@ uroe. An&er /C0 i in$orre$t (e$aue t'e*eno3inator i t'e 3ar4et ri$e< not t'e ar value.

23 . An&er /D0 i $orre$t. Divi*en* on referre* to$4 are not *e*u$ti(le for ta@ uroeH t'erefore< t'ere i noa*ut3ent for ta@ avin-. T'e annual *ivi*en* on referre* to$4 i !1## &'en t'e ri$e of t'e to$4 i !:"#. T'i

reult in a $ot of a(out 1#.+6 /!1## \ !:"#0.An&er /A0 i in$orre$t (e$aue t'ere i no ta@ *e*u$ti(ilit% of referre* *ivi*en*. An&er /B0 i in$orre$t (e$auet'ere i no ta@ *e*u$ti(ilit% of referre* *ivi*en*. An&er /C0 i in$orre$t (e$aue t'e *eno3inator i t'e $urrent3ar4et ri$e< not t'e ar value.

24 . An&er /C0 i $orre$t. T'e relevant $al$ulation i to *ivi*e t'e annual *ivi*en* (% t'e ;uantit% of fun* re$eive* att'e ti3e t'e to$4 i iue*. T'e fun* re$eive* fro3 un*er&riter e;ual !:+ /!:? ellin- ri$e , ! un*er&ritin- fee0.T'u< t'e $ot of fun* i ?.+6 /!? \ !:+0.An&er /A0 i in$orre$t (e$aue un*er&riter 1 ro*u$e a $ot of fun* of 1#.+6. An&er /B0 i in$orre$t (e$aueun*er&riter ) ro*u$e a $ot of fun* of 11."6. An&er /D0 i in$orre$t (e$aue un*er&riter + ro*u$e a $ot of fun*

7/23/2019 P04 - Risks (Sol)


of 2.+6.

25 . An&er /D0 i $orre$t. T'e $o3an% &ill re$eive t'e ue of onl% !"+ er 'are. T'e annual *ivi*en*An&er /A0 i in$orre$t (e$aue =.+)6 i $al$ulate* (% *ivi*in- t'e annual *ivi*en* of !.:# /"6 @ !"=0 (% !?) /!"2iue ri$e L !+ iuan$e $ot0. An&er /B0 i in$orre$t (e$aue =.?+6 i $al$ulate* (% *ivi*in- t'e annual *ivi*en* of!.:# /"6 @ !"=0 (% t'e !"2 iue ri$e. An&er /C0 i in$orre$t (e$aue ".##6 i $al$ulate* (% *ivi*in- t'e annual*ivi*en* of !.:# /"6 @ !"=0 (% t'e !"= ar value. re;uire3ent i "6 of !"=< or !.:# er 'are. Divi*in- t'e !.:# (%

t'e !"+ re$eive* reult in a finan$in- $ot of ".#:6.

2 . An&er /D0 i $orre$t. T'e roortion of e;uit% in t'e finan$ial tru$ture of t'e fir3 i t'e value of outtan*in- e;uit%*ivi*e* (% t'e total value of all finan$in- our$e5

e"it6o! va"edeto! va"e

e"it6o! va"e

+F

1<500<000$1<000<000

000<000<1$

+F .+#

Given t'at t'e fir3 &ill 3aintain t'e a3e &ei-'t for ea$' finan$in- our$e< ea$' *ollar invete* 'oul* (e +#6 e;uit%an* "#6 *e(t. T'e firt !"#<### of e;uit% ue* in finan$in- ne& roe$t i rovi*e* (% retaine* earnin-. T'i our$e ofe;uit% i e@'aute* &'en t'e fir3 rea$'e an invet3ent level of !1=#<### /!"#<### \ .+0.An&er /A0 i in$orre$t (e$aue t'e $o3an% 'a !"#<### retaine* earnin- to ue a one our$e of roe$t finan$in-.An&er /B0 i in$orre$t (e$aue !)+<### i +#6 of retaine* earnin-. An&er /C0 i in$orre$t (e$aue !:#<### i t'ea3ount of a**itional *e(t in$urre* if no ne& e;uit% i iue*.

27 . A**ition to retaine* earnin- &ill (e5 !.# 3illion × #.+ F !1.) 3illion. T'e retaine* earnin- (rea4oint i !1.)3illion#.) F !" 3illion.

2? . An&er /B0 i $orre$t. T'e $urrent to$4 ri$e i e;ual to t'e u3 of all future *ivi*en* t'at 'ave (een *i$ounte*(% t'e re;uire* rate of return. T'u< t'e *i$ountin- of t'e firt *ivi*en* a%out i 1 L t'e re;uire* rate of return< !) \1.1". T'e *i$ountin- of t'e e$on* *ivi*en* a%out i 1 L t'e re;uire* rate of return ;uare*< ! \ 1.+=". T'e*i$ountin- of t'e t'ir* *ivi*en* a%out i e;ual to 1 L t'e re;uire* rate of return $u(e*< != \ 1.="#:. T'e *i$ountin-for t'e future *ivi*en* t'at in$reae (% 26 i != ti3e 1 L t'e in$reae in *ivi*en*< /!= @ 1.#20< *ivi*e* (% t'e*ifferen$e (et&een t'e re;uire* rate of return an* t'e in$reae in *ivi*en*< /.1" , .#20. T'i a3ount< !"?.= /=.+ \ .#20<i t'en *ivi*e* (% 1 L t'e re;uire* rate of interet $u(e*< !"?.= \ 1.="#:. T'erefore< t'e u3 of t'ee nu3(er an* t'e$urrent to$4 ri$e i e;ual to !=#.+# /!1.?) L !).) L !.)# L !+.)=0.An&er /A0 i in$orre$t (e$aue !++.++ reult fro3 *i$ountin- t'e future *ivi*en* t'at in$reae (% 26 (% 1 L t'ere;uire* rate of return to t'e fourt' o&er< 1.21. An&er /C0 i in$orre$t (e$aue !"".21 reult fro3 *i$ountin-*ivi*en* (% 1 L t'e re;uire* rate of return< 1.1". An&er /D0 i in$orre$t (e$aue !??.=# reult fro3 a failure to*i$ount t'e *ivi*en* at all.

2> . An&er /D0 i $orre$t. T'i i a t&o,te ro(le3. T'e reent value of a eretual annuit% of !1) er %ear e;ualt'e a%3ent *ivi*e* (% t'e interet rate< or !2# /!1) \ .1=0. T'i a3ount i t'e reent value at a *ate # %ear in t'efuture of t'e annuit% to (e ai* in eretuit% (e-innin- in %ear 1. T'e reent value of !2# *i$ounte* at 1=6 for #%ear i t'e reultin- ri$e of t'e to$4< or aro@i3atel% !1.)1 /!2# @ .#1=1 reent value of !1 fa$tor0.An&er /A0 i in$orre$t (e$aue t'e future value of t'e annuit% 3ut (e *i$ounte* until t'e firt a%3ent /i.e.< for 1%ear0. An&er /B0 i in$orre$t (e$aue t'e future value of t'e annuit% 3ut (e *i$ounte* until t'e firt a%3ent /i.e.< for1 %ear0. An&er /C0 i in$orre$t (e$aue t'e *i$ountin- i for 1 %ear.

30 . An&er /B0 i $orre$t. T'e total ro$ee* at t'e en* of t'e %ear &ill (e !11) /!11# L !)0. Divi*in- t'e !11) (% 11)6/ori-inal invet3ent lu 1)6 return0 reult in !1## a t'e *eire* to$4 ri$e.An&er /A0 i in$orre$t (e$aue !:2.)1 i-nore t'e !) *ivi*en*. An&er /C0 i in$orre$t (e$aue !11# *oe not$oni*er t'e *eire for a 1)6 return. An&er /D0 i in$orre$t (e$aue !11) &oul* reult in a ero return.

31. Data -iven5 EPS F !).##H PE F +#]H P# F !2#H D1 F !1.##H 4 F 1#6H EPS1 F !).+#.Ste 15 Cal$ulate t'e ri$e of t'e to$4 one %ear fro3 to*a%5

4F D1P# L /P1 , P#0P#

7/23/2019 P04 - Risks (Sol)


#.1#F !1!2# L /P1 , !2#0!2#2F !1 L P1 , !2#!2?F P1.

Ste )5 Cal$ulate t'e PE ratio one %ear fro3 to*a%5PE F !2?!).+# F ".)=].

32 . Use the dividend growth model to calculate k s:

4 F0

0

Pg)(1D +

L - F$28

)$2.20(1.06 L #.#"

F #.#2 L #.#" F #.1+ F 1+.6.

33 . An&er /B0 i $orre$t. 7it'out an% *ivi*en* -ro&t'< t'e re;uire* rate of return i e;ual to t'e *ivi*en* %iel*. Divi*in-!).=# (% !)# reult in a 1).=6 %iel*.An&er /A0 i in$orre$t (e$aue t'e *ivi*en* %iel* i 1).=6. An&er /C0 i in$orre$t (e$aue t'e *ivi*en* %iel* i1).=6. An&er /D0 i in$orre$t (e$aue t'e *ivi*en* %iel* i 1).=6.

34 . An&er /C0 i $orre$t. T'i ;uetion involve eti3atin- t'e $urrent ri$e of a $o3an% to$4 uin- t'e *ivi*en*-ro&t' 3o*el. T'e *ivi*en* -ro&t' 3o*el tate t'at t'e *ivi*en* %iel* lu t'e -ro&t' rate /=60 e;ual t'e re;uire*

rate of return /1)60. T'u< t'e *ivi*en* %iel* 3ut (e ?6 /1)6 , =60. T'erefore< *ivi*in- t'e !.): *ivi*en* (% t'e ri$ee;ual .#?. Solvin- t'e e;uation reult in a ri$e of !+?.An&er /A0 i in$orre$t (e$aue !"=.2# au3e a =6 *ivi*en* %iel* intea* of ?6. An&er /B0 i in$orre$t (e$aue!").=1 reult fro3 u(tra$tin- t'e *ivi*en* fro3 &'at t'e ri$e &oul* (e at a =6 %iel*. An&er /D0 i in$orre$t (e$aue!)?.+1 ue a 1)6 %iel*.

35 . An&er /B0 i $orre$t. T'e *ivi*en* -ro&t' 3o*el eti3ate t'e $ot of retaine* earnin- uin- t'e *ivi*en*< to$4ri$e< an* -ro&t' rate. T'e $al$ulation involve a**in- t'e =6 -ro&t' rate to t'e *ivi*en* %iel* (ae* on t'e ne@te@e$te* *ivi*en*. If t'e $urrent *ivi*en* i !< t'en t'e =6 -ro&t' rate 3ean t'e ne@t *ivi*en* &ill (e !.1=. T'u<t'e *ivi*en* %iel* (ae* on a !.1= *ivi*en* i ?6 /!.1= \ !+=0. A**in- ne@t %ear ?6 %iel* to t'e =6 -ro&t' fa$torreult in a 1)6 re;uire* rate of return.An&er /A0 i in$orre$t (e$aue 1)."?6 i not (ae* on t'e ne@t %ear *ivi*en*. An&er /C0 i in$orre$t (e$aue

"."?6 i-nore t'e i3a$t of t'e -ro&t' fa$tor. An&er /D0 i in$orre$t (e$aue =.##6 i-nore t'e *ivi*en* %iel* an*ue t'e =6 -ro&t' fa$tor.

" . An&er /D0 i $orre$t. T'e $ot of ne& e;uit% i $al$ulate* (% a**in- t'e e@e$te* *ivi*en* %iel*< (ae* on t'e netro$ee* of t'e ne& iue< to t'e e@e$te* *ivi*en* -ro&t' rate. T'e e@e$te* *ivi*en* at t'e en* of t'e erio* e;ualt'e *ivi*en* at ti3e ero ti3e one lu t'e e@e$te* *ivi*en* -ro&t' rate. Net ro$ee* re$eive* (% t'e fir3 &'eniuin- one $o33on 'are e;ual t'e 3ar4et ri$e of a 'are ti3e one 3inu t'e flotation $ot er$enta-e. lotation$ot in$lu*e ite3 u$' a un*er&ritin- fee< rintin-< an* a*vertiin-. T'e $al$ulation of t'e $ot of ne& e;uit% i afollo&5

shareoneiss"ing proceedsnet

periodo! endatdividendepectedL *ivi*en* -ro&t' rate

F .05'$25#1

.10$1#1+

L 1#6F1+."6An&er /A0 i in$orre$t (e$aue t'e en* of erio* e@e$te* *ivi*en* an* t'e net ro$ee* of t'e iue 'oul*(e in$lu*e* in $al$ulatin- t'e *ivi*en* %iel*. An&er /B0 i in$orre$t (e$aue t'e en* of erio* e@e$te* *ivi*en* 'oul*(e in$lu*e* in $al$ulatin- t'e *ivi*en* %iel*. An&er /C0 i in$orre$t (e$aue t'e net ro$ee*< not 3ar4et ri$e< 'oul*(e in$lu*e* in $al$ulatin- t'e *ivi*en* %iel*.

?

8 %0 9 >=? %: 9 >=3:80@4 9 >=8:84e F D1P#/1 , 0 L - F !).1+/!+) , !10 L ?6 F 1).))6.

7/23/2019 P04 - Risks (Sol)


3? . An&er /D0 i $orre$t. T'e $ot of e;uit% uin- t'e Gor*on -ro&t' 3o*el e;ual t'e ;uotient of t'e ne@t *ivi*en**ivi*e* (% t'e to$4 ri$e< lu t'e -ro&t' rate in earnin- er 'are. To a$$ount for flotation $ot< t'e to$4 ri$e i3ultilie* (% one 3inu t'e flotation $ot. Given t'at t'e ne@t *ivi*en* i !).) /1.#" @ !).)#0< t'e $ot of ne& $o33onto$4 i 1).1+6 ^!).) \ /!+# @ /1 , .#=00 L .#"_.An&er /A0 i in$orre$t (e$aue t'e e@e$te* future *ivi*en* of !).) /1.#" @ !).)#0 'oul* (e *ivi*e* (% t'e a*ute*to$4 ri$e /$urrent 3ar4et value , t'e $ot of iuin- t'e ne& $o33on to$40. An&er /B0 i in$orre$t (e$aue t'e

e@e$te* future *ivi*en* of !).) /!).)# @ 1.#"0 'oul* (e ue* in $al$ulatin- t'e $ot of t'e ne& $o33on to$4 iue.An&er /C0 i in$orre$t (e$aue t'e $urrent to$4 ri$e 3ut (e a*ute* for t'e $ot of iuin- t'e ne& $o33on to$4.

3> . 4e F0.15)-$50(1

)$2.00(1.05 L =6 F :.:+6.

40 . An&er /D0 i $orre$t. T'e *ivi*en* -ro&t' 3o*el eti3ate t'e $ot of retaine* earnin- uin- t'e *ivi*en* for t'e$o3in- %ear< to$4 ri$e< an* -ro&t' rate. T'e =6 -ro&t' rate i a**e* to t'e *ivi*en* %iel*. T'u< a**in- t'e +6*ivi*en* %iel* /!+ \ !1##0 to t'e =6 -ro&t' rate ro*u$e a :6 rate of return.An&er /A0 i in$orre$t (e$aue +6 i t'e *ivi*en* %iel*. An&er /B0 i in$orre$t (e$aue =6 i t'e -ro&t' rate. An&er/C0 i in$orre$t (e$aue ?6 i an avera-e (et&een t'e -ro&t' rate an* t'e total return.

41 . An&er /D0 i $orre$t. T'e *ivi*en* -ro&t' 3o*el eti3ate t'e $ot of retaine* earnin- uin- t'e *ivi*en* er'are< t'e e@e$te* -ro&t' rate< an* t'e 3ar4et ri$e. T'e $urrent *ivi*en* %iel* i =6 /!+ \ !2#0. A**in- t'e -ro&t'rate of =6 to t'e %iel* of =6 reult in a re;uire* return of 1#6.An&er /A0 i in$orre$t (e$aue =6 rereent onl% 'alf of t'e return ele3ent /eit'er %iel* or -ro&t'0. An&er /B0 iin$orre$t (e$aue t'e -ro&t' rate i (ae* on 3ar4et value< not %iel*. An&er /C0 i in$orre$t (e$aue t'e %iel* an*-ro&t' rate are =6 ea$',,a total of 1#6.

42 . An&er /D0 i $orre$t. T'e *ivi*en* -ro&t' 3o*el *eter3ine t'e $ot of e;uit% (% a**in- t'e e@e$te* -ro&t' rateto t'e ;uotient of t'e ne@t *ivi*en* an* t'e $urrent 3ar4et ri$e. T'u< t'e $ot of e;uit% $aital i )#6 1#6 L /! \!#0. T'i 3o*el au3e t'at t'e a%out ratio< t'e retention rate< an* t'e earnin- er 'are -ro&t' rate are all$ontant.

An&er /A0 i in$orre$t (e$aue t'e -ro&t' rate /1#60 i a**e* to t'e *ivi*en* %iel* /1#60. An&er /B0 i in$orre$t(e$aue 11.#6 e;ual t'e -ro&t' rate /1#60 lu 1#6 of t'e $urrent *ivi*en* %iel* /1#60. An&er /C0 i in$orre$t(e$aue 1#.#6 i t'e -ro&t' rate.

43 . An&er /B0 i $orre$t. Divi*in- t'e !=.=# *ivi*en* (% t'e !=# 'are ri$e ro*u$e an 116 *ivi*en* %iel*. A**in-t'e 116 %iel* to t'e +.=6 -ro&t' rate ro*u$e a total return of 1=.=6.An&er /A0 i in$orre$t (e$aue 1=.#=6 a*ute* t'e -ro&t' rate (% t'e (eta< &'i$' i not re;uire*. An&er /C0 iin$orre$t (e$aue 1=.:=6 a*ute* t'e -ro&t' rate u&ar* (% t'e (eta. An&er /D0 i in$orre$t (e$aue 1".?)6 a*utt'e 'are ri$e (% t'e (eta.

44 . T'e fir3 3ut iue ne& e;uit% to fun* it $aital roe$t< o &e nee* to fin* t'e $ot of ne& e;uit% $aital< 4e54e F D1/P# , 0 L -

F !).=#/!=# , !0 L +6F !).=#!+? L +6F =.)6 L +6F :.)6.

45 . An&er /B0 i $orre$t. T'e for3ula to *eter3ine t'e $ot of retaine* earnin-< &it' t'e a**itional flotation $otentere* into t'e $al$ulation< i

@cost$,otation1#

A B

o

1& +

−=

7/23/2019 P04 - Risks (Sol)


If5 KS F Cot of retaine* earnin-H PO F Current ri$e of t'e to$4H D F Ne@t *ivi*en*H G F Divi*en* -ro&t' rate.T'i %iel* a $ot of ne& $o33on to$4 of 1=.="6.

15.5=%10%>0%$50.00

$2.50 B s =+=

An&er /A0 i in$orre$t (e$aue t'e $ot of ne& $o33on to$4 i 1=.="6. T'e for3ula to $al$ulate t'i er$enta-e i5ne@t *ivi*en* *ivi*e* (% /$urrent ri$e of t'e to$4 ti3e one 3inu t'e er$enta-e flotation $ot0< lu t'e *ivi*en*-ro&t' rate. An&er /C0 i in$orre$t (e$aue t'e $ot of ne& $o33on to$4 i 1=.="6. T'e for3ula to $al$ulate t'i

er$enta-e i5 ne@t *ivi*en* *ivi*e* (% /$urrent ri$e of t'e to$4 ti3e one 3inu t'e er$enta-e flotation $ot0< lut'e *ivi*en* -ro&t' rate. An&er /D0 i in$orre$t (e$aue t'e $ot of ne& $o33on to$4 i 1=.="6. T'e for3ula to$al$ulate t'i er$enta-e i5 ne@t *ivi*en* *ivi*e* (% /$urrent ri$e of t'e to$4 ti3e one 3inu t'e er$enta-e flotation$ot0< lu t'e *ivi*en* -ro&t' rate.

4 . An&er /B0 i $orre$t. T'e *ivi*en* -ro&t' 3o*el *eter3ine t'e $ot of e;uit% (% a**in- t'e e@e$te* -ro&t' rateto t'e ;uotient of t'e ne@t *ivi*en* an* t'e $urrent 3ar4et ri$e. In t'i $ae< t'e $ot of e;uit% $aital for e&i Cor. i)#6 1#6 L /! \ !#0. T'i 3o*el au3e t'at t'e a%out ratio< t'e retention rate< an* t'e earnin- er 'are-ro&t' rate are all $ontant.An&er /A0 i in$orre$t (e$aue C.S. In$. 'a a $ot of e;uit% $aital of )26. An&er /C0 i in$orre$t (e$aueS$re&tae In$. 'a a $ot of e;uit% $aital of )"6. An&er /D0 i in$orre$t (e$aue 7or3&oo* Cor. 'a a $ot ofe;uit% $aital of )6.

47 . 1#6 , =6 L1.1/26 , =60 F 1.?6.

4? . An&er /A0 i $orre$t. Beta 3eaure t'e volatilit% of t'e return of a e$urit% relative to t'e return on t'e 3ar4etortfolio. In ea$' $ae< t'e to$4 ri$e in$reae or *e$reae &a a -reater er$enta-e t'an t'e 3ar4et $'an-e. T'u<t'e (eta /to$4 $'an-e over 3ar4et $'an-e0 i -reater t'an 1.#.An&er /B0 i in$orre$t (e$aue t'e (eta i -reater t'an one &'en t'e to$4 ri$e $'an-e at a -reater rate t'an t'e3ar4et $'an-e. An&er /C0 i in$orre$t (e$aue t'e to$4 $'an-e i not t'e a3e a t'e 3ar4et $'an-e. An&er /D0 iin$orre$t (e$aue t'ere i a $onitent attern of t'e to$4 $'an-e (ein- -reater t'an t'e 3ar4et $'an-e.

4> . An&er /A0 i $orre$t. in- t'e CAPM relation'i< t'e re;uire* rate of return on Ar&i$ Co3an% to$4 i i3l%#.#= L #.2/#.#?0< or 1#."6.

An&er /B0 i in$orre$t (e$aue 11.#6 fail to a*ut t'e ri4 re3iu3 for (eta. An&er /C0 i in$orre$t (e$aue 1).#6i-nore (eta alto-et'er. An&er /D0 i in$orre$t (e$aue 1).26 a**< not 3ultilie< t'e (eta an* t'e ri4 re3iu3.

50 . An&er /D0 i $orre$t. T'e $aital aet ri$in- 3o*el a** t'e ri4,free rate to t'e ro*u$t of t'e (eta $oeffi$ient /a3eaure of ri40 an* t'e *ifferen$e (et&een t'e 3ar4et return an* t'e ri4,free rate. T'u< R F "6 L 1.) /+60 F 1#.26.An&er /A0 i in$orre$t (e$aue +.2#6 i t'e e@$e over t'e ri4,free rate< not t'e total re;uire* rate. An&er /B0 iin$orre$t (e$aue "6 i t'e ri4,free rate. An&er /C0 i in$orre$t (e$aue 1#6 i-nore t'e i3a$t of t'e (eta$oeffi$ient.

51 . T'e $ot of retaine* earnin- a $al$ulate* fro3 t'e CAPM i4 F 4R L /4M , 4R0(

F =6 L /"601.)

F 1).)6.52 . An&er /C0 i $orre$t. T'e $aital aet ri$in- 3o*el $al$ulate t'e e@e$te* %iel* a follo&5

R F +.#6 L 1.=/:60R F 1?.=6

An&er /A0 i in$orre$t (e$aue :.#6 i t'e 3ar4et ri4 re3iu3 an* fail to a** t'e ri4,free rate. An&er /B0 iin$orre$t (e$aue 1=6 i t'e reult of 3ultil%in- t'e (eta ti3e t'e ri4,free rate intea* of t'e ri4 re3iu3. An&er/D0 i in$orre$t (e$aue 1:.=6 i t'e reult of 3ultil%in- t'e (eta ti3e (ot' rate< rat'er t'an ut t'e ri4 re3iu3.

7/23/2019 P04 - Risks (Sol)


53 . An&er /D0 i $orre$t. T'e CAPM a** t'e ri4,free rate to t'e ro*u$t of t'e (eta $oeffi$ient an* t'e *ifferen$e(et&een t'e 3ar4et return an* t'e ri4,free rate. T'e 3ar4et,ri4 re3iu3 i t'e a3ount a(ove t'e ri4,free rate for&'i$' invetor 3ut (e $o3enate* to in*u$e t'e3 to invet in t'e $o3an%. T'e (eta $oeffi$ient of an in*ivi*ualto$4 i t'e $orrelation (et&een volatilit% /ri$e variation0 of t'e to$4 3ar4et an* t'e volatilit% of t'e ri$e of t'ein*ivi*ual to$4. T'u< t'e re;uire* rate i 1"6 "6 L 1.)= /1+6 , "60.An&er /A0 i in$orre$t (e$aue "6 i t'e ri4,free rate (ae* on inure* -overn3ent e$uritie an* (ear no relation tot'e return of t'e to$4 3ar4et. An&er /B0 i in$orre$t (e$aue ?.=6 i $al$ulate* (% 3ultil%in- t'e (eta ti3e t'e ri4,

free rateH t'e (eta 'oul* (e 3ultilie* ti3e t'e ri4 re3iu3 t'at i re;uire* (% invetor. An&er /C0 i in$orre$t(e$aue 1?.=6 i $al$ulate* (% 3ultil%in- t'e 3ar4et rate ti3e (eta. T'i i-nore t'e ri4 re3iu3. T'e (eta 'oul*(e 3ultilie* ti3e t'e ri4 re3iu3 t'at i *eire* (% invetor.

54 . E/R0 F "6 L 1.)/1) , "0 F 1.)6.

55 . An&er /B0 i $orre$t. T'e re;uire* rate of return on e;uit% $aital in t'e $aital aet ri$in- 3o*el i t'e ri4,freerate /*eter3ine* (% -overn3ent e$uritie0 lu t'e ro*u$t of t'e 3ar4et ri4 re3iu3 ti3e t'e (eta $oeffi$ient /(eta3eaure t'e fir3 ri40. T'e 3ar4et ri4 re3iu3 i t'e a3ount a(ove t'e ri4,free rate t'at &ill in*u$e invet3ent int'e 3ar4et. T'e (eta $oeffi$ient of an in*ivi*ual to$4 i t'e $orrelation (et&een t'e volatilit% /ri$e variation0 of t'eto$4 3ar4et an* t'at of t'e ri$e of t'e in*ivi*ual to$4. or e@a3le< if an in*ivi*ual to$4 ri$e in$reae (% 1=6 an*t'e 3ar4et onl% 1#6< (eta i 1.=. A$$or*in-l%< t'e re;uire* rate of return i 1+.6 26 L :#6 /1=6 , 260.

An&er /A0< /C0< /D0 are in$orre$t (e$aue t'e re;uire* rate of return i 1+.6.

5 . An&er /B0 i $orre$t. T'e CAPM *eter3ine t'e $ot of $aital (% a**in- t'e ri4,free rate to t'e ro*u$t of t'e3ar4et ri4 re3iu3 an* t'e (eta $oeffi$ient /t'e (eta $oeffi$ient i a 3eaure of t'e fir3 ri40. T'e 3ar4et ri4re3iu3 i t'e a3ount in e@$e of t'e ri4,free rate t'at invetor 3ut (e ai* to in*u$e t'e3 to enter t'e 3ar4et.T'e ?6 flotation $ot *o not enter into t'e $al$ulation (e$aue t'e $o3an% *oe not lan to iue $o33on to$4.en$e< t'e $ot of retaine* earnin- for Colt i 1).::6 2.=6 L 1.1= /1).+6 , 2.=60.An&er /A0 i in$orre$t (e$aue 1.)16 reult fro3 uin- ?6 intea* of 2.=6. An&er /C0 i in$orre$t (e$aue t'eeti3ate* 3ar4et return i 1).+6. An&er /D0 i in$orre$t (e$aue 1+.)"6 e;ual 1.1= ti3e 1).+6.

57 . An&er /A0 i $orre$t. T'e $aital aet ri$in- 3o*el /CAPM0 $al$ulate an in*ivi*ual to$4 return a follo&5R F R L B/RM , R0< or

1)6 F "6 L B/1)6 , "60Solvin- for (eta reult in a (eta of 1.#.An&er /B0 i in$orre$t (e$aue it *oe not fulfill t'e re;uire3ent of t'e CAPM. An&er /C0 i in$orre$t (e$aue it *oenot fulfill t'e re;uire3ent of t'e CAPM. An&er /D0 i in$orre$t (e$aue it *oe not fulfill t'e re;uire3ent of t'e CAPM.

=2

. An&er /A0 i $orre$t. T'i ro(le3 re;uire t'e ue of i3ultaneou e;uation. Set u a CAPM for3ula for ea$' to$45 1=." F R L 1.) /M , R0 1).+ F R L .2 /M , R0

Re3ovin- t'e arent'ee an* $o3(inin- ter3< %ou -et 1=." F 1.)M , .)R 1).+ F .2M L .)R

T'en olve for M. A** t'e t&o e;uation a(ove< M F 1+. Su(titute 1+ for M in t'e e$on* e;uation5 1).+ F R L .2/1+ , R0 1).+ F .) R L 11.)1.) F .) R< or R F "

An&er /B0 i in$orre$t (e$aue (ot' rate are &ron-. An&er /C0 i in$orre$t (e$aue t'e ri4,free rate are too lo&.An&er /D0 i in$orre$t (e$aue t'e ri4,free rate are too lo&.

5> . An&er /B0 i $orre$t. To eti3ate t'e re;uire* rate of return on e;uit%< t'e $aital aet ri$in- 3o*el /CAPM0 a**t'e ri4,free rate /*eter3ine* (% -overn3ent e$uritie0 to t'e ro*u$t of t'e (eta $oeffi$ient /a 3eaure of t'e fir3ri40 an* t'e *ifferen$e (et&een t'e 3ar4et return an* t'e ri4,free rate. Belo& i t'e (ai$ e;uili(riu3 e;uation for t'e

7/23/2019 P04 - Risks (Sol)


CAPM.R F R L U /RM , R 0

T'u< -iven a (eta of 1.)< R i 116 =6 L 1.) /1#6 , =60. At a (eta of 1.=< R i 1).=6 =6 L 1.= /1#6 , =60.An&er /A0 i in$orre$t (e$aue 6 e;ual t'e 3ar4et return ti3e t'e in$reae in t'e (eta. An&er /C0 i in$orre$t(e$aue t'e $o3an% re;uire* rate of return i affe$te* (% a $'an-e in t'e $o3an% (eta $oeffi$ient. An&er /D0 iin$orre$t (e$aue t'e $'an-e reult in an in$reae of t'e $o3an% re;uire* rate of return< not a *e$reae.

0 . An&er /C0 i $orre$t. To *eter3ine t'e re;uire* rate< t'e ri4 re3iu3 i 3ultilie* (% t'e (eta. T'u< an in$reaeof er$enta-e oint in t'e ri4 re3iu3 'oul* (e 3ultilie* (% t'e (eta of 1.)=< to arrive at an in$reae of .?=6.A**in- .?=6 to t'e ori-inal 1=6 reult in a ne& re;uire* rate of 12.?=6.An&er /A0 i in$orre$t (e$aue 1=6 i t'e reult of i-norin- t'e $'an-e in t'e ri4 re3iu3. An&er /B0 i in$orre$t(e$aue 126 i t'e reult of failin- to 3ultil% t'e $'an-e in ri4 re3iu3 (% t'e (eta. An&er /D0 i in$orre$t (e$aue)).=#6 i t'e reult of a**in- t'e ri4,free rate to t'e reviou re;uire* rate.

1 . An&er /C0 i $orre$t. Initiall%< t'e $al$ulation un*er t'e CAPM i5 R F =6 L 1.#/260 F 16 ollo&in- t'e $'an-e<t'e ne& $al$ulation i5 R F +6 L ).#/260 F )#6An&er /A0 i in$orre$t (e$aue (ot' rate are too lo&. An&er /B0 i in$orre$t (e$aue t'e ne& rate i )#6H t'i an&eri-nore t'e ri4,free ortion of t'e ne& re;uire* rate. An&er /D0 i in$orre$t (e$aue t'e $'an-e in (eta 3a4e ai-nifi$ant $'an-e in t'e re;uire* return.

2 . An&er /D0 i $orre$t. T'e $orre$t an&er i ,!)<#1)< (ae* on a 1+6 $ot of $aital.4Proe$t F =6 L /1#6 , =60/1.20 F 1+6NPV F ,!1##<### L !1)<###/PVIA1+6< 1#0 L !)#<### /PVI1+6< 1#0 F ,!1##<### L !1)<###/=.)1"10 L !)#<###/#.)":?0 F ,!)<#1).2# F aro@. ,!)<#1) /roun*e*0

An&er /A0 i in$orre$t (e$aue t'e% are not (ae* on a 1+6 $ot of $aital. An&er /B0 i in$orre$t (e$aue t'e% arenot (ae* on a 1+6 $ot of $aital. An&er /C0 i in$orre$t (e$aue it reult fro3 a failure to $oni*er alva-e value.

3 . An&er /A0 i $orre$t. R i t'e re;uire* return on e;uit% $aital< R i t'e ri4,free rate of return< ( i t'e (eta$oeffi$ient /a 3eaure of t'e fir3 ri40< an* RM i t'e 3ar4et return. T'e (ai$ e;uation for t'e CAPM i

R F R L U /RM , R 0

T'u< t'e re;uire* rate of return for A< B< an* C are 16 "6 L /1.+ @ =60< 1#6 "6 L /.2 @ =60< an* 1.=6 "6 L/1.= @ =60< ree$tivel%. A 'oul* (e ree$te* /R i -reater t'an t'e 1)6 e@e$te* return0. B 'oul* (e a$$ete* /R ile t'an t'e 116 e@e$te* return0. C 'oul* (e ree$te* /R i -reater t'an t'e 16 e@e$te* return0.An&er /B0 i in$orre$t (e$aue t'e re;uire* rate of return for A an* C e@$ee* t'eir e@e$te* return. An&er /C0 iin$orre$t (e$aue R for C e@$ee* it e@e$te* return. An&er /D0 i in$orre$t (e$aue t'e re;uire* rate of return for Aan* C e@$ee* t'eir e@e$te* return.

4 . An&er /A0 i $orre$t. T'e $aital aet ri$in- 3o*el $al$ulate t'e re;uire* return on a to$4 a t'e u3 of t'eri4,free rate an* t'e ro*u$t of t'e (eta $oeffi$ient an* t'e 3ar4et ri4 re3iu3. A$$or*in- to t'e CAPM< t'e e@e$te*return /R0 of ea$' of t'e four to$4 i $al$ulate* a 'o&n (elo&. T'u< M an* N are un*ervalue* (e$aue t'eire@e$te* return e@$ee* t'eir re;uire* return< an* O an* J are overvalue* (e$aue t'eir e@e$te* return are let'an t'eir re;uire* return. In e;uili(riu3< t'e e@e$te* an* re;uire* return are e;ual. A$$or*in-l%< invetor &ill

ur$'ae 'are of M an* N< *rivin- u t'eir ri$e an* lo&erin- t'eir e@e$te* return until e;uili(riu3 i rea$'e*.Invetor &ill ell 'are of O an* J< re*u$in- t'eir ri$e an* in$reain- t'eir e@e$te* return until e;uili(riu3 irea$'e*.

RM F .1) L /.12 , .1)0.: F .1?+ F 1?.+6RN F .1) L /.12 , .1)01.) F .1:) F 1:.)6RO F .1) L /.12 , .1)01.= F .)1# F )1.#6RJ F .1) L /.12 , .1)01.? F .))) F )).)6

An&er /B0 i in$orre$t (e$aue N i un*ervalue*. An&er /C0 i in$orre$t (e$aue M an* N are un*ervalue*. An&er/D0 i in$orre$t (e$aue O an* J are overvalue*.

7/23/2019 P04 - Risks (Sol)


58 4 F 1#6 L /+601.= F 1"6.

P# F0.10-0.16

)$3.00(1.10 F !==.##.

""

8 Cot of ne& $o33on e;uit%5

4e F5)$55.00(0.9

$3.30 L #.1# F 1".)6.

7 . An&er /A0 i $orre$t. Ar(itra-e ri$in- t'eor% /APT0 i (ae* on t'e au3tion t'at an aet return i (ae* on3ultile %te3ati$ ri4 fa$tor. In $ontrat< t'e CAPM i a 3o*el t'at ue ut one %te3ati$ ri4 fa$tor to e@lain t'eaet return. T'at fa$tor i t'e e@e$te* return on t'e 3ar4et ortfolio< i.e.< t'e 3ar4et,value* &ei-'te* avera-e of alle$uritie availa(le in t'e 3ar4et. A$$or*in-l%< APT rovi*e for a earate (eta an* a earate ri4 re3iu3 for ea$'%te3ati$ ri4 fa$tor i*entifie* in t'e 3o*el. E@a3le of t'e 3an% otential %te3ati$ ri4 fa$tor are t'e -ro*o3eti$ ro*u$t /GDP0< inflation< an* real interet rate. T'e APT for a t'ree,fa$tor 3o*el 3a% (e for3ulate* afollo&5

R F R L U1 41 L U) 4) L U 4If5 R F e@e$te* rate of return RF ri4,free rate U1< )< F in*ivi*ual fa$tor (eta $oeffi$ient

41< )< F in*ivi*ual fa$tor ri4 re3iu3T'u< t'e e@e$te* return un*er t'e APT i 1."6 .#= L /.= @ .#0 L /. @ .#+0 L /. @ .#?0 L /.+ @ .#=0 L /." L .#0.An&er /B0 i in$orre$t (e$aue 1#.6 i (ae* on t'e t'ree fa$tor &it' t'e 'i-'et (eta. An&er /C0 i in$orre$t(e$aue 2.6 i (ae* on t'e t&o fa$tor &it' t'e 'i-'et (eta. An&er /D0 i in$orre$t (e$aue =.#6 i t'e ri4,freerate.

? . An&er /C0 i $orre$t. T'e 3ar-inal $ot of ne& e;uit% finan$in- i -iven a 1"6. T'e after,ta@ $ot of ne& *e(tfinan$in- i +.=6 :6 @ /1 , .=0.An&er /A0 i in$orre$t (e$aue 1=6 i t'e $ot of e@itin- e;uit% finan$in-. An&er /B0 i in$orre$t (e$aue 1=6 i t'e$ot of e@itin- e;uit% finan$in-< an* =.#6 i t'e after,ta@ $ot of e@itin- *e(t finan$in-. An&er /D0 i in$orre$t(e$aue =.#6 i t'e after,ta@ $ot of e@itin- *e(t finan$in-.

69

. Proe$tRate of ReturnRi4,A*ute* Cot of CaitalA 1"616B1+11C1):D111E1#111#:G?:Proe$t A< B< an* C are rofita(le (e$aue t'eir return ura t'eir ri4,a*ute* $ot of $aital. D i not rofita(le(e$aue it return /1160 i le t'an it ri4,a*ute* $ot of $aital /160. E i not a$$eta(le for t'e a3e reaon5 Itreturn /1#60 i le t'an it ri4,a*ute* $ot of $aital /1160. i a$$ete* in$e it i lo& ri4 an* it return /1#60urae t'e ri4,a*ute* $ot of $aital of :6. G i ree$te* (e$aue it return /?60 W ri4,a*ute* $ot of $aital/:60.

70 . An&er /A0 i $orre$t. Au3e t'e 'are of to$4 &a &ort' !1##. T'e 126 no3inal rate of return (rin- %our total&ealt' to !112. o&ever< t'e 1+6 real return 3ean %our real &ealt' i onl% !11+. T'e ro(le3 i to *eter3ine &'atrate of inflation &ill e;uate t'e !112 to t'e !11+ of real &ealt'. Au3in- t'at t'e ri$e level in*e@ &a 1##6 initiall%< t'eolution aroa$' i a follo&5

$11? F !11+< or @ F 1.#=1

T'u< t'e inflation rate i .=16.An&er /B0 i in$orre$t (e$aue +6 i t'e *ifferen$e in er$enta-e oint< not t'e rate of inflation. An&er /C0 iin$orre$t (e$aue it &ill not e;uate no3inal &ealt' to real &ealt'. An&er /D0 i in$orre$t (e$aue it &ill not e;uateno3inal &ealt' to real &ealt'.

71 . An&er /D0 i $orre$t. T'e after,ta@ &ei-'te*,avera-e $ot of $aital i 1)6< reultin- in a total $aital $'ar-e of!"#<### on ! 3illion of total $aital. o&ever< t'e 7ACC i an after,ta@ rate< o t'e $ot of *e(t i +.26 26 @ /1.# ,+#6 ta@ rate0. A$$or*in-l%< t'e *e(t $o3onent of t'e $aital $'ar-e i !:"<### /+.26 @ !)<###<###0. T'e $ot of e;uit%

7/23/2019 P04 - Risks (Sol)


3ut t'erefore (e )".+6 /!"#<### , !:"<###0 \ !1<###<###.An&er /A0 i in$orre$t (e$aue 26 i t'e re,ta@ $ot of *e(t $aital. An&er /B0 i in$orre$t (e$aue 1)6 i t'e after,ta@ &ei-'te*,avera-e $ot of (ot' *e(t an* e;uit%. An&er /C0 i in$orre$t (e$aue 1=6 i t'e 'ur*le rate.

72

Sour$eProortion of

Tta" Funds9!ter'ta )ost7ei-'te*,

Avera-e CotCo33on Sto$4."#.1=.#:#Bon*.+#.#2.#).1))73 . An&er /C0 i $orre$t. T'e 1)6 *e(t $ouon rate i re*u$e* (% t'e =6 ta@ 'iel*< reultin- in a $ot of *e(t of

?.26 1)6 @ /1 , .=0. T'e avera-e of t'e 1=6 e;uit% $aital an* ?.26 *e(t i 11.+6. An&er /D0 i in$orre$t (e$aue1.=#6 overloo4e* t'e ta@ 'iel* on t'e *e(t $aital.An&er /A0 i in$orre$t (e$aue 2.??=6 au3e* t'at *ivi*en* on e;uit% $aital are ta@ *e*u$ti(le. An&er /B0 iin$orre$t (e$aue :."#6 ue* t'e $o3le3ent of t'e ta@ rate intea* of t'e ta@ rate.

74 . An&er /D0 i $orre$t. All t'ree rate are ;uote* a after,ta@ rate in$e t'ere i no ta@ 'iel* ao$iate* &it'$o33on e;uit% $aital. T'u< i3l% &ei-'t t'e t'ree rate to *eter3ine t'e &ei-'te* avera-e $ot. De(t 26 @ .+ F .) Preferre* 16 @ .) F )." Co33on 1?6 @ .+ F ".21)."6An&er /A0 i in$orre$t (e$aue

1#.))6 au3e* t'at *ivi*en* on $o33on e;uit% are ta@ *e*u$ti(le< &'i$' i in$orre$t. An&er /B0 i in$orre$t(e$aue 1#.=)6 ue t'e $o3le3ent of t'e ta@ rate< an* au3e* t'e *e(t rate &a (efore ta@ rat'er t'an after [email protected]&er /C0 i in$orre$t (e$aue 11.+26 au3e* t'e rate -iven for *e(t &a (efore ta@ rat'er t'an after ta@.

75 . An&er /C0 i $orre$t. T'e $ot for e;uit% $aital i -iven a 1=6< an* referre* to$4 i 1#6. T'e (efore,ta@ ratefor *e(t i -iven a "6< &'i$' tranlate to an after,ta@ $ot of .:6 "6 @ /1 , .=0. T'e rate are &ei-'te* a follo&5 1=6 @ ."= F :.?=# 1#6 @ .1# F 1.### .:6 @ .)= F.:?= 11.?)=6An&er /A0 i in$orre$t (e$aue 1#.6 i anun&ei-'te* avera-e of t'e t'ree $ot< an* alo i-nore t'e ta@ 'iel*. An&er /B0 i in$orre$t (e$aue 11.)=6 ue*t'e $o3le3ent of t'e ta@ rate intea* of t'e ta@ rate to $al$ulate t'e ta@ 'iel*. An&er /D0 i in$orre$t (e$aue1).)=#6 i-nore t'e ta@ avin- on *e(t $aital.

7 . An&er /B0 i $orre$t. T'e ro(le3 $an (e olve* (% uin- t'e t'ree,te ro$e of unleverin- an* releverin- t'e

7ACC. irt< unlever t'e 7ACC to $al$ulate t'e oortunit% $ot of $aital< r5 r F rD/DV0 L rE/EV0 F #.#2/#.+0 L#.1/#."0 F #.11 F 116. Ne@t< t'e $ot of e;uit% at a )#6 *e(t ratio $an (e $al$ulate*5 r E F r L /rA , rD0DE F #.11 L /#.11, #.#?20/#.)#.20 F #.112 F 11.26. inall%< t'e ne& 7ACC $an (e $al$ulate*5 7ACC F #.#?2/1 , #.=0/#.)0 L #.112/#.20F 1#.+=6.An&er /A0 i in$orre$t (e$aue :.116 i t'e 7ACC if t'e )#6 i rela$e* (% t'e ori-inal +#6< an* t'e 2#6 i t'u*e$reae* to "#6 in t'e final 7ACC $al$ulation. An&er /C0 i in$orre$t (e$aue 116 i t'e oortunit% $ot of $aital.An&er /D0 i in$orre$t (e$aue 11.26 i t'e $ot of e;uit% at a )#6 *e(t ratio.

77 . An&er /C0 i $orre$t. T'e i3ortant $oni*eration i &'et'er t'e overall $ot of $aital &ill (e lo&er for a -ivenrooal. A$$or*in- to t'e Caital Aet Pri$in- Mo*el< t'e $'an-e &ill reult in a lo&er avera-e $ot of $aital. or t'ee@itin- tru$ture< t'e $ot of e;uit% $aital i 1=.=6 "6 L .:= /1"6 , "60. Be$aue t'e $o3an% 'a no *e(t< t'eavera-e $ot of $aital i alo 1=.=6. n*er t'e rooal< t'e $ot of e;uit% $aital i 1".=6 "6 L 1.#= /1"6 , "60<an* t'e &ei-'te* avera-e $ot of $aital i 1.26 ./.#?=0 L .?/.1"=0. en$e< t'e rooal of 1.26 'oul* (ea$$ete*.An&er /A0 i in$orre$t (e$aue t'e avera-e $ot of $aital nee* to (e $oni*ere*. An&er /B0 i in$orre$t (e$auet'e avera-e $ot of $aital nee* to (e $oni*ere*. An&er /D0 i in$orre$t (e$aue t'e &ei-'te* avera-e $ot of$aital &ill *e$reae.

7?8 Solve for 45 7ACC F 11.=6 F &*4*/1 , T0 L &$4

11.=6 F #.+=/#.#:0/#.?#0 L #.==4 4 F 1=.?=6.

7/23/2019 P04 - Risks (Sol)


Solve for -5 1=.?=6 F D1P# L -1=.?=6 F !=!+= L -

- F +."+6.

7>. Caital tru$ture5 +#6 D< 1#6 P< =#6 E.7ACC F 1).#6 /-iven0.4* F 116 /-iven0.

7ACC F #.+/4*0/1 , T0 L #.1/40 L #.=/4e0.

Be$aue t'e fir3 'a inuffi$ient retaine* earnin- to fun* t'e e;uit% ortion of t'e fir3 $aital (u*-et< ue 4 e int'e 7ACC $al$ulation.

a. Calculate k e:

4e F$30(0.85)

$2(1.08) L 26 F 2.+?6 L 26 F 1".+?6.

(. Calculate k p:

4 F

P

D

N

p

F

$20(0.9)

$2 F 11.116.

$. Find T by substituting values for k d , k p, and k e in the WCC e!uation:#.1)# F #.+/#.110/1 , T0 L #.1/#.11110 L #.=/#.1"+?0#.1)# F #.#++/1 , T0 L #.#111 L #.#2)+#.#):= F #.#++/1 , T0#."?1 F 1 , T#.)2? F T.

?0 .).1#

R F L 26 F 16+)

Retention ratio F /P+.2# P).1#0 ÷P+.2# F =".)=6

Gro&t' rate F ROE @ Retention ratio F 26 @ =".)=6 F+.=6

Mar4et Pri$eP).1#

P F F P)+.?1o16 , +.=6

?1 . in* t'e *ivi*en*< D# F /#.=0!+#<###Z of S'are F !)#<###1#<### F !).##.Sin$e t'e fir3 &ill not 'ave enou-' retaine* earnin- to fun* t'e e;uit% ortion of it $aital (u*-et< t'e fir3 &ill 'ave toiue ne& $o33on to$4.in* t'e $ot of ne& $o33on to$45 4e F D1P#/1 , 0 L - F !).##!)=/1 , #.1=0 L #6 F #.#:+1 F :.+16.inall%< $al$ulate 7ACC< uin- 4e F #.#:+1< an* 4* F #.#2< o7ACC F /DA0/1 , Ta@ rate04* L /EA04e

F #.+/#.#20/1 , #.+0 L #."/#.#:+10 F #.#?=?≈

?."6.2)

. 7ACC F #. × #.#2+ × /1 , #.+0 L #.? × /!).=/!+= × /1 , #.100 L #.#?0 F 1#.?6.

?3 . AT $ot of *e(t F #.#2/1 , #.+#0 F #.#+2 F +.2#6.Cot of retaine* earnin- F !).1)!) L #.#" F #.1)" F 1)."6.7ACC F #.?=/#.1)"0 L #.)=/#.#+20 F 1#."?6.

2+

. 7ACC F &*4*/1 , T0 L &$4e. 4* i -iven F :6. in* 4e54e F D1P#/1 , 0 L -

7/23/2019 P04 - Risks (Sol)


F !#.2!)=/1 , #.10 L #.#:F #.1)===".

No& %ou $an $al$ulate 7ACC57ACC F /#.0/#.#:0/#."0 L /#.?0/#.1)==="0 F 1#.+16.

?5Juetion 1 t'ru + are (ae* on t'e follo&in- infor3ation. Bri-'a3

. Ro an* Son In$. 'a a tar-et $aital tru$ture t'at $all for +# er$ent *e(t< 1# er$ent referre* to$4< an* =# er$ent$o33on e;uit%. T'e fir3 $urrent after,ta@ $ot of *e(t i " er$ent< an* it $an ell a 3u$' *e(t a it &i'e at t'i rate.T'e fir3 referre* to$4 $urrentl% ell for !:# a 'are an* a% a *ivi*en* of !1# er 'areH 'o&ever< t'e fir3 &ill net onl%!2# er 'are fro3 t'e ale of ne& referre* to$4. Ro $o33on to$4 $urrentl% ell for !+# er 'are< (ut t'e fir3 &illnet onl% !+ er 'are fro3 t'e ale of ne& $o33on to$4. T'e fir3 re$entl% ai* a *ivi*en* of !) er 'are on it $o33onto$4< an* invetor e@e$t t'e *ivi*en* to -ro& in*efinitel% at a $ontant rate of 1# er$ent er %ear. Au3e t'e fir3 'auffi$ient retaine* earnin- to fun* t'e e;uit% ortion of it $aital (u*-et.

. 7'at i t'e fir3 $ot of retaine* earnin-> /E0a. 1#.#6 *. 1".=6(. 1).=6 e. 12.#6$. 1=.=6

. 7'at i t'e fir3 $ot of ne&l% iue* $o33on to$4> /E0a. 1#.#6 *. 1".=6(. 1).=6 e. 12.#6$. 1=.=6

. 7'at i t'e fir3 $ot of ne&l% iue* referre* to$4> /E0a. 1#.#6 *. 1".=6(. 1).=6 e. 12.#6$. 1=.=6

. 7'at i t'e fir3 &ei-'te* avera-e $ot of $aital> /E0

a. :.=6 *. 11.+6(. 1#.6 e. 11.:6$. 1#.26

8 4e F0.2)-$21.88(1

)$2.00(1.05 L #.#= F 1?6.

?8 7ACC F #.+/#.1+0/1 , #.+0 L #."/#.1?0 F #.1=" F 1.="6 ≈ 1."6.

?7 . An&er /D0 i $orre$t. e t'e follo&in- $al$ulation5

R F,otation$'#1

A

0

1L G F

$30.00#.>5

$3.1?L .#" F 1?.1"6

An&er /A0 i in$orre$t (e$aue 1"6 i-nore t'e in$reae in *ivi*en* an* flotation $ot. An&er /B0 i in$orre$t(e$aue 1".=6 i-nore t'e ne@t *ivi*en* in$reain- to !.12. An&er /C0 i in$orre$t (e$aue 1"."6 i-nore t'eflotation $ot.

?? . An&er /C0 i $orre$t. In t'e $al$ulation (elo&< t'e $ot of referre* to$4 e;ual t'e referre* *ivi*en* *ivi*e* (%t'e net iuan$e ri$e. T'e referre* to$4 &ill %iel* !+<2##<### after u(tra$tin- t'e +6 flotation $ot< o it 3ut ell for!=<###<### /!+<2##<### \ .:"0. T'e annual *ivi*en* on t'e referre* to$4 i !##<### /"6 @ !=<###<###0.Cone;uentl%< t'e $ot of $aital raie* (% iuin- referre* to$4 i ".)=6 /!##<### *ivi*en* \ !+<2##<### netiuan$e ri$e0.

7/23/2019 P04 - Risks (Sol)


7ei-'tBon* +#6@ :6 @ /1,.+0 F ).1" 6Preferre* to$4 1#6@ ".)=6 F .")=Co33on to$4 =#6@ 1=6F ?.=#1#.)2=6lotation $ot are i-nore* for t'e (on* (e$aue !)# 3illion 3ut (e reai* at 3aturit% *ate< &'i$' i not t'e

$ae for referre* to$4.An&er /A0 i in$orre$t (e$aue t'e% *o not aear to (e t'e reult of a $o33on error. An&er /B0 i in$orre$t (e$auet'e% *o not aear to (e t'e reult of a $o33on error. An&er /D0 i in$orre$t (e$aue t'e% *o not aear to (e t'ereult of a $o33on error.

?> . An&er /D0 i $orre$t. Multil% /1 , effe$tive ta@ rate0 ti3e t'e effe$tive interet rate of 116< &'i$' i "."#6 116 @/1 , .+0.An&er /A0 i in$orre$t (e$aue =.16 i =.+#6 re*u$e* (% t'e =6 to$4 flotation $ot. An&er /B0 i in$orre$t(e$aue =.+#6 i "#6 of :6. An&er /C0 i in$orre$t (e$aue ".)=6 i "."#6 re*u$e* (% t'e =6 to$4 flotation $ot.

>0 . An&er /C0 i $orre$t. A a lar-er roortion of an entit% $aital i rovi*e* (% *e(t< t'e *e(t (e$o3e ri4ier an*3ore e@enive. en$e< it re;uire a 'i-'er interet rate.An&er /A0 i in$orre$t (e$aue t'e *iverit% *e$reae< not in$reae< ri4. An&er /B0 i in$orre$t (e$aue!=#<###<### i 3inu$ule in t'e *e(t 3ar4et. An&er /D0 i in$orre$t (e$aue t'e $o3(ination alternative 3aintaint'e a3e *e(t,e;uit% 3i@ture< &'i$' &oul* not &arrant a rate in$reae in t'e $ot of *e(t or e;uit%.

>1 . irt< $al$ulate t'e after,ta@ $o3onent $ot of *e(t a ?6/1 , #.0 F +.:6. Ne@t< $al$ulate t'e retaine* earnin-

(rea4oint a !=##<####.= F !1<###<###. T'u< to finan$e it oti3al $aital (u*-et< on-treet 3ut iue o3e ne&e;uit% an* flotation $ot of 1#6 &ill (e in$urre*. T'e $ot of ne& e;uit% i t'en !=/1.1#60!?=/1 , #.10 L 1#6 F 2.1=6L 1#6 F 12.1=6. inall%< t'e 7ACC F +.:6/#.0 L :6/#.)0 L 12.1=6/#.=0 F 1).+6.

>2 . REJIRED5 T'e &ei-'te*,avera-e $ot of $aital.DISCSSION5 /C0T'e firt te i to *eter3ine t'e after,ta@ $ot of t'e lon-,ter3 *e(t. Multil%in- t'e $urrent %iel* of:6 ti3e one 3inu t'e ta@ rate /1 #.+ #."0 reult in an after,ta@ $ot of *e(t of =.+6 /:6 @ #."0. T'e $ot of t'ereferre* to$4 i "6 /t'e annual *ivi*en* rate0. T'e Gor*on -ro&t' 3o*el for 3eaurin- t'e $ot of e;uit% $aital$o3(ine t'e *ivi*en* %iel* &it' t'e -ro&t' rate. Divi*in- t'e !1.)# *ivi*en* (% t'e !+# 3ar4et ri$e ro*u$e a*ivi*en* %iel* of 6. A**in- t'e 6 *ivi*en* %iel* an* t'e 1#6 -ro&t' rate -ive a 16 *ivi*en* %iel* an* t'e 1#6-ro&t' rate -ive a 16 $ot of $o33on e;uit% $aital.On$e t'e $ot of t'e of t'e t'ree t%e of $aital 'ave (een $o3ute*< t'e ne@t te i to &ei-'t t'e3 a$$or*in- to t'e

3ar4et value of t'e ele3ent of t'e $urrent $aital tru$ture. T'e !1<###<### of referre* to$4 i ellin- at ar. T'e3ar4et value of t'e lon-,ter3 *e(t i 2#6 of (oo4 value< or !=<"##<### /2#6 @ !?<###<###0. T'e $o33on to$4 'a a$urrent 3ar4et ri$e of !2<###<### /!+# @ )##<### 'are0. T'u< t'e &ei-'te*,avera-e $ot of $aital i :."6/!1<+#)<### \ !1+<"##<###0 a 'o&n (elo&.De(t#.=+ @ !=<"##<###F! #)<+##Preferre*#.#" @ !1<###<###F"#<###Co33on #.1 @!2<###<###F1<#+#<###Total!1+<"##<###F!1<+#)<+##An&er /A0 i in$orre$t (e$aue 16 i t'e $ot of e;uit%. An&er/B0 i in$orre$t (e$aue 2.6 i t'e i3le avera-e. An&er /D0 i in$orre$t (e$aue :6 i (ae* on (oo4 value.

>3. 7ACC An&er5 ( Diff5 M RAT $ot of *e(t F #.#?/1 , #.+#0 F #.#+) F +.)6.Cot of referre* to$4 F !+!+) F #.#:=) F :.=)6.Cot of retaine* earnin- F !)!)2 L #.#? F #.1+1+ F 1+.1+6.

7ACC F #.+#/#.#+)0 L #.1#/#.#:=)0 L #.=#/#.1+1+0 F #.#:?# F :.?#6.>4 . An&er /B0 i $orre$t. A$$or*in- to t'e *ivi*en* -ro&t' 3o*el< t'e t'ree ele3ent re;uire* to $al$ulate t'e $ot ofe;uit% $aital are /10 t'e *ivi*en* er 'are< /)0 t'e e@e$te* -ro&t' rate< an* /0 t'e 3ar4et ri$e of t'e to$4. Ifflotation $ot are in$urre* &'en iuin- ne& to$4< t'e% are *e*u$te* fro3 t'e 3ar4et ri$e to arrive at t'e a3ount of$aital t'e $ororation &ill a$tuall% re$eive. A$$or*in-l%< t'e !1## ellin- ri$e i re*u$e* (% t'e ! *i$ount an* t'e !=flotation $ot to arrive at t'e !:) to (e re$eive* for t'e to$4. Be$aue t'e *ivi*en* i not e@e$te* to in$reae in future%ear< no -ro&t' fa$tor i in$lu*e* in t'e $al$ulation. T'u< t'e $ot of t'e $o33on to$4 i ?."6 /!? *ivi*en* \ !:)0.An&er /A0 i in$orre$t (e$aue t'e ?.#6 fi-ure &oul* onl% (e $orre$t if !1## &ere re$eive* fro3 t'e ale of t'e to$4.An&er /C0 i in$orre$t (e$aue ?.+6 &oul* (e $orre$t onl% if t'e to$4 $oul* (e ol* &it'out -ivin- a ! *i$ount.An&er /D0 i in$orre$t (e$aue 2.16 &oul* (e $orre$t onl% if t'e a3ount re$eive* &ere a(out !2" or if o3e -ro&t'

7/23/2019 P04 - Risks (Sol)


fa$tor &ere au3e*.

>5 . An&er /A0 i $orre$t. T'e t'ree ele3ent re;uire* to $al$ulate t'e $ot of e;uit% $aital are /10 t'e *ivi*en* er'are< /)0 t'e e@e$te* -ro&t' rate< an* /0 t'e 3ar4et ri$e of t'e to$4. Be$aue -ro&t' i not e@e$te*< t'e$al$ulation i i3l% to *ivi*e t'e *ivi*en* of !? (% t'e !1## 3ar4et ri$e of t'e to$4 to arrive at a $ot of e;uit% $aitalof ?6.An&er /B0 i in$orre$t (e$aue ?."6 &oul* (e t'e $ot of ne& e;uit% $aital fro3 ellin- to$4 if t'e to$4 reulte* in

ro$ee* of !:) er 'are. An&er /C0 i in$orre$t (e$aue ?.+6 &oul* (e $orre$t onl% if ne& to$4 &ere ol* an*reulte* in ro$ee* of !:= er 'are. An&er /D0 i in$orre$t (e$aue *ivi*in- t'e !? *ivi*en* (% t'e !1## 3ar4etri$e of t'e to$4 ro*u$e a ratio of ?6< not 2.16.

> . An&er /C0 i $orre$t. 7illia3 referre* $aital tru$ture i =#6 $o33on to$4. o&ever< !1##<### of retaine*earnin- /=#6 of t'e re;uire* !)##<### of $aital0 &ill (e ue* (efore an% $o33on to$4 i iue*. T'u< t'e &ei-'te*,avera-e $ot of $aital &ill (e *eter3ine* (ae* on t'e ree$tive $ot of t'e (on*< referre* to$4< an* retaine*earnin-. T'e $ot of t'e (on* i -iven a +.26< t'e $ot of t'e referre* to$4 i 26< an* t'e $ot of t'e retaine*earnin- i ?6 /!? *ivi*en* \ !1## 3ar4et ri$e of t'e $o33on to$40. T'ee t'ree $ot are t'en &ei-'te* (% t'ereferre* $aital tru$ture ratio5#6 @ +.26 F 1.++6)#6 @ 2.#6 F 1."#6=#6 @ ?.#6 F .=#6Total ".=+6Roun*in- to t'e nearet tent' ro*u$et'e $orre$t an&er of ".=6.

An&er /A0 i in$orre$t (e$aue 1:.26 rereent t'e un&ei-'te* u3 of ea$' of t'e t'ree ele3ent of $ot. An&er/B0 i in$orre$t (e$aue +.26 i t'e $ot of t'e lon-,ter3 *e(t. All fun*in- &ill not (e o(taine* fro3 *e(t (e$aue t'efir3 &ant to 3aintain a $aital tru$ture in &'i$' *e(t rereent onl% #6 of t'e total $aital. An&er /D0 i in$orre$t(e$aue t'e ".26 fi-ure $an onl% (e o(taine* if ne& to$4 i ol*. Ne& to$4 &ill not (e ol* (e$aue t'e retaine*earnin- $an (e ue* at a lo&er $ot< an* t'ere i no nee* to ell to$4 &'en t'e total $aital re;uire* i onl% !)##<###.

>7 . An&er /A0 i $orre$t. T'e $ot of t'e (on* i -iven a +.26. T'e $ot of t'e referre* to$4 i 26 /!2 *ivi*en* \!1##0< t'e $ot of ne& $o33on to$4 i ?."6 /!? *ivi*en* \ !:) ro$ee*0< an* t'e $ot of t'e retaine* earnin- i ?6/!? *ivi*en* \ !1## 3ar4et ri$e0. T'ee four $ot are t'en &ei-'te* (% t'e referre* $aital tru$ture ratio< aro$e t'at re;uire u(*ivi*in- t'e $o33on to$4 ortion into retaine* earnin- of !1##<### /1#6 of $aital0 an* ne&$o33on to$4 of !+##<### /+#6 of $aital05#6 @ +.26 F 1.++6)#6 @ 2.#6 F 1."#6+#6 @ ?."6 F .#+61#6 @ ?.#6 F .?#6Total".?26Roun*in- to t'e

nearet tent' reult in t'e $orre$t an&er of ".26.An&er /B0 i in$orre$t (e$aue +.26 i t'e $ot of t'e lon-,ter3 *e(t. An&er /C0 i in$orre$t (e$aue ".=6 &oul* (e$orre$t onl% if t'e e;uit% $aital &ere o(taine* totall% fro3 retaine* earnin-. Be$aue onl% !1##<### of retaine*earnin- i availa(le< t'e re3ain*er of e;uit% $aital 3ut $o3e fro3 ale of ne& to$4. An&er /D0 i in$orre$t(e$aue )?.+6 rereent t'e un&ei-'te* total of ea$' of t'e four ele3ent of $ot.

:2

. T'e fir3 &ill not (e iuin- ne& e;uit% (e$aue t'ere are a*e;uate retaine* earnin- availa(le to fun* availa(leroe$t. T'erefore< 7ACC 'oul* (e $al$ulate* uin- 4 rat'er t'an 4e.

4 F D1P# L -F !.##!"#.## L #.#?

F #.1) F 1)6.

7ACC F &*4*/1 , T0 L &$4

F /#."0/#.#20/1 , #.+0 L /#.+0/#.1)0F #.#?"2 F ?."26.

>>8EBIT !1<###<###Interet +##<###EBT ! "##<###

7/23/2019 P04 - Risks (Sol)


Ta@e /+#60 )+#<###Net in$o3e ! "#<###

EPS1 F !"#<###1##<### F !."#.D1 F !."#/#.=0 F !1.2#.4 F /!1.2#!+#.##0 L #.1)= F 1?.#6.

1##

8 Cot of ne& $o33on e;uit%5

4e F)($40)(0.90

$1.80 L #.1)= F 1?.=6.

1018 4 F$8.59

)$0.90(1.05 L #.#= F #.1"## F 1".##6.

1028 4e F0.10)-$8.59(1

)$0.90(1.05 L #.#= F #.1?)) F 1?.))6.

1038 Sin$e t'e fir3 $an fun* t'e e;uit% ortion of it $aital (u*-et &it' retaine* earnin-< ue 4 in 7ACC.7ACC F &*4*/1 , T0 L &$4

F #./#.1)0/1 , #.+0 L #.?/#.1"0F #.#)1" L #.11)F #.1" F 1."6.

104 . An&er /B0 i $orre$t. Be$aue t'e (on* are iue* at t'eir fa$e value< t'e reta@ effe$tive rate i 1#6. o&ever<interet i *e*u$ti(le for ta@ uroe< o t'e -overn3ent a(or( +#6 of t'e $ot< leavin- a "6 after,ta@ $ot.An&er /A0 i in$orre$t (e$aue +6 au3e a "#6 ta@ rate. An&er /C0 i in$orre$t (e$aue 1#6 i t'e (efore,ta@rate. An&er /D0 i in$orre$t (e$aue t'e after,ta@ $ot &ill (e le t'an t'e effe$tive (efore,ta@ rate.

105 . An&er /D0 i $orre$t. T'e $ot of internal e;uit% $aital e;ual t'e *ivi*en* %iel* /*ivi*en* er 'are \ 3ar4etri$e0 lu t'e *ivi*en* -ro&t' rate. Divi*in- t'e ! *ivi*en* (% t'e !"# 3ar4et ri$e reult in a %iel* of =6. A**in- t'e1#6 *ivi*en* -ro&t' rate ro*u$e a $ot of 1=6 for retaine* earnin-. No a*ut3ent i 3a*e for ta@e (e$aue*ivi*en* are not ta@ *e*u$ti(le.

An&er /A0 i in$orre$t (e$aue =6 i t'e *ivi*en* %iel*H t'e -ro&t' rate i i-nore*. An&er /B0 i in$orre$t (e$aue:6 &oul* (e t'e after,ta@ $ot if *ivi*en* &ere *e*u$ti(le. An&er /C0 i in$orre$t (e$aue 1#6 i t'e *ivi*en* -ro&t'rateH it i-nore t'e *ivi*en* %iel*.

10 . An&er /C0 i $orre$t. T'e $o3an% &ill re$eive onl% 2#6 of t'e !"# 3ar4et ri$e< or !+2. Cone;uentl%< t'e*ivi*en* %iel* i ".)=6 /! \ !+20. A**in- t'e 1#6 -ro&t' rate ro*u$e a $ot of ne& e;uit% $aital of 1".)=6.An&er /A0 i in$orre$t (e$aue ".)=6 i-nore t'e *ivi*en* -ro&t' rate. An&er /B0 i in$orre$t (e$aue 1=6 i-noret'e flotation $ot. An&er /D0 i in$orre$t (e$aue 1#6 i t'e *ivi*en* -ro&t' rate.

107 . An&er /C0 i $orre$t. T'e $urrent oti3al $aital tru$ture i +#6 *e(t an* "#6 e;uit%. T'e ! 3illion to (eretaine* fro3 earnin- in t'e $o3in- %ear rereent t'e e;uit% ortion of t'e 3a@i3u3 ne& $aital outla%. To retain t'eoti3al $aital tru$ture< !) 3illion of *e(t 3ut (e a**e* to t'e ! 3illion of retaine* earnin-. en$e< t'e 3a@i3u3

$aital e@anion i != 3illion.An&er /A0 i in$orre$t (e$aue !) 3illion i t'e a3ount of *e(t t'at 3ut (e a**e* to 3aintain t'e oti3al tru$ture.An&er /B0 i in$orre$t (e$aue ! 3illion i t'e a3ount of earnin- retaine*. An&er /D0 i in$orre$t (e$aue t'ea3ount of != 3illion $an (e $al$ulate*.

10? . REJIRED5 T'e after,ta@ &ei-'te* avera-e $ot of $aital -iven t'e a3ount of t'e (u*-et.DISCSSION5 /B0 To 3aintain a $aital tru$ture of +#6 *e(t an* "#6 e;uit%< t'e !? 3illion total 3ut $onit of !).23illion of *e(t an* !+.) 3illion of e;uit%. T'e e;uit% &ill $onit of ! 3illion of retaine* earnin- an* !1.) 3illion of ne&to$4. T'e &ei-'te*,avera-e $ot of t'e t'ree our$e of ne& $aital i *eter3ine* a follo&5

!<###<### ÷ !?<###<### @ 1+6 F ".##6

7/23/2019 P04 - Risks (Sol)


!1<)##<### ÷ !?<###<### @ 1"6 F ).?+6!)<2##<### ÷ !?<###<### @ 1#6 F +.##6 1).?+6

An&er /A0 i in$orre$t (e$aue 111+6 au3e a ta@ a*ut3ent for t'e $ot of *e(t< (ut t'e 1#6 rate i an after,ta@a3ount. An&er /C0 i in$orre$t (e$aue 1."6 au3e t'e e;uit% $onit olel% of ne& $o33on to$4. An&er /D0i in$orre$t (e$aue 1"6 i t'e $ot of ne& $o33on to$4.

10> . REJIRED5 T'e 3ar-inal $ot of $aital after roe$t e@$ee* t'e $aital (u*-et.

DISCSSION5 /C0 or t'i $al$ulation< t'e &ei-'te*,avera-e $ot of $aital i (ae* on t'e 1"6 $ot of ne& $o33onto$4 an* t'e 1#6 $ot of *e(t. Retaine* earnin- &ill not (e $oni*ere* (e$aue t'e a3ount availa(le 'a (eene@'aute*. T'u< t'e &ei-'te*,avera-e of an% a**itional $aital re;uire* &ill (e 1."6 /"#6 @ 1"6 $ot of ne& e;uit%0L /+#6 @ 1#6 $ot of ne& *e(t0.An&er /A0 i in$orre$t (e$aue 1#6 i t'e $ot of *e(t $aital. An&er /B0 i in$orre$t (e$aue 1).?+6 i t'e&ei-'te*,avera-e $ot of $aital $al$ulate* for a !? 3illion (u*-et. An&er /D0 i in$orre$t (e$aue 1"6 i t'e $ot ofne& $o33on to$4.

11#

. Cot of retaine* earnin- An&er5 $ Diff5 E

4 F $40.00

)$2.00(1.10

L #.1# F 1=.=6.111. Cot of e@ternal e;uit% An&er5 * D iff5 E

Cot of ne& $o33on e;uit%5

4e F$34.00

$2.20 L #.1# F #.1"+? 1".=6.

11)

. Cot of referre* to$4 An&er5 ( Diff5 E

4 F$80

$10 F 1).=6.

11

. Sin$e t'e fir3 'a uffi$ient retaine* earnin- to fun* t'e e;uit% ortion of it $aital (u*-et< ue 4 in 7ACC e;uation.

7ACC F &*4*/1 , T0 L &4 L &$4F #.+/"60 L #.1/1).=60 L #.=/1=.=60F 11.+6.

114 8 7e nee* to fin* 4 at t'e oint &'ere all + roe$t are a$$ete*. In ot'er &or*< t'e $aital (u*-et F !)<### L!<### L !=<### L !<### F !1<###. T'e 7ACC at t'at oint i e;ual to IRRD F :.=6.

Ste 15 Find the retained earnings break point to determine whether k s or k e is used in the WCC calculation:

BPRE F0.4

$1,000 F !)<=##.

Sin$e t'e $aital (u*-et X t'e retaine* earnin- (rea4 oint< 4e i ue* in t'e 7ACC $al$ulation.

Ste )5 Calculate k e:

4e F)$42.75(0.9

$3.00 L =6 F 1).2#6.

Ste 5 Find k p: :.=6 F #.+/1#60/#."=0 L #.)/40 L #.+/1).2#60 :.=6 F )."#6 L #.)/40 L =.1)61.?26 F #.)4

2.:#6 F 4.

7/23/2019 P04 - Risks (Sol)


115 . Data -iven5 &* F #.H &$ F #.?H 4* F 26H T F #.+H 4R F =.=6< 4M , 4R F =6.

Ste 15 Deter3ine t'e fir3 $ot of e;uit% uin- t'e 7ACC e;uation57ACC F &* × 4*× /1 , T0 L &$ × 4

1#6 F #. × 26 × /1 , #.+0 L #.? × 4

2.="6 F #.? × 4

4 F 1).))2"6.

Ste )5 Cal$ulate t'e fir3 (eta uin- t'e CAPM e;uation54 F 4R L /4M , 4R0(

1).))2"6 F =.=6 L /=60(".?)2"6 F =6(

( F 1.+=? ≈ 1.=.

11" . 7ACC F &*4*/1 , T0 L &$4.4 F 4R L RPM/(04 F =.=6 L =6/1.+04 F =.=6 L ?6 F 1).=6.

7ACC F &*4*/1 , T0 L &$4

7ACC F #.+/:60/1 , #.+0 L /#."01).=67ACC F :.""6.

117 . Cot of *e(t F #.#:/1 , #.=0 F #.#=2= F =.2=6.

Cot of retaine* earnin- F 4R L /RPM0( F "6 L "6/1.=0 F 1=6.

7ACC F #."#/#.#=2=0 L #.+#/#.1=##0 F #.#:=1 F :.=16.

11? . An&er /C0 i $orre$t. T'e $urrent rate for Treaur% (on* i ?6. If t'e $o3an% $an iue *e(t at 1=# (ai oint/1.=60 over .S. Treaur% (on*< t'e 3ar4et rate of interet for Martin i 2.=6. Given a +#6 ta@ rate< t'e net $ot of*e(t i "#6 of t'e rate a$tuall% ai*< or =.16 /"#6 @ 2.=60.An&er /A0 i in$orre$t (e$aue =.=6 i t'e Treaur% rate 3inu 1=# (onu oint. An&er /B0 i in$orre$t (e$aue?.#6 i t'e Treaur% rate. An&er /D0 i in$orre$t (e$aue 2.=6 i-nore t'e in$o3e ta@ effe$t.

11> . An&er /D0 i $orre$t. T'e CAPM a** t'e ri4,free rate /*eter3ine* (% -overn3ent e$uritie0 to t'e ro*u$t of t'e(eta $oeffi$ient /a 3eaure of t'e fir3 ri40 an* t'e *ifferen$e (et&een t'e 3ar4et return an* t'e ri4,free rate. T'u<t'e $urrent $ot of e;uit% uin- t'e CAPM i 1?6 ?6 L 1.)= /1=6 , ?60.An&er /A0 i in$orre$t (e$aue 2.?=6 e;ual t'e ro*u$t of (eta an* t'e ri4,free rate. An&er /B0 i in$orre$t (e$aue1#.##6 fail to a** t'e ri4,free rate to t'e ri4 re3iu3. An&er /C0 i in$orre$t (e$aue 1=.##6 i t'e e@e$te*3ar4et return.

120 . An&er /A0 i $orre$t. Pro$ee* are !1+<2=#<### /1.#1 @ !1=<###<###0 , /.#) @ !1=<###<###0. T'e annual intereti !1<)##<### /.#2 $ouon rate @ !1=<###<###0. T'u< t'e $o3an% i a%in- !1<)##<### annuall% for t'e ue of!1+<2=#<###< a rate of 2.#26 /!1<)##<### \ !1+<2=#<###0.An&er /B0 i in$orre$t (e$aue 1#.##6 i t'e u3 of t'e $ouon rate an* t'e flotation rate. An&er /C0 i in$orre$t(e$aue ?.:)6 i-nore t'e )6 flotation $ot. An&er /D0 i in$orre$t (e$aue 2.##6 i t'e $ouon rate.

121 . An&er /A0 i $orre$t. T'e ?6 *e(t $ot an* t'e 1)6 e;uit% $ot 'oul* (e &ei-'te* (% t'e roortion of t'e totalinvet3ent rereente* (% ea$' our$e of $aital. T'e total roe$t $ot !=# 3illion< of &'i$' *e(t i !1= 3illion< or#6 of t'e total. E;uit% $aital i t'e ot'er ?#6. Cone;uentl%< t'e &ei-'te*,avera-e $ot of $aital i 1#.=6 /?60

7/23/2019 P04 - Risks (Sol)


/#60 L /1)60/?#60.An&er /B0 i in$orre$t (e$aue 2.=#6 revere t'e &ei-'t. An&er /C0 i in$orre$t (e$aue :.=#6 au3e *e(t an*e;uit% are e;uall% &ei-'te*. An&er /D0 i in$orre$t (e$aue t'e &ei-'te*,avera-e $ot $annot (e le t'an an% of it$o3onent.

122 . An&er /A0 i $orre$t. T'e 3ar4et return /RM0< -iven a 1)6< 3inu t'e ri4,free rate /R0< -iven a =6< i t'e3ar4et ri4 re3iu3. It i t'e rate at &'i$' invetor 3ut (e $o3enate* to in*u$e t'e3 to invet in t'e 3ar4et. T'e

(eta $oeffi$ient /U0 of an in*ivi*ual to$4< -iven a "#6< i t'e $orrelation (et&een volatilit% /ri$e variation0 of t'e to$43ar4et an* t'e volatilit% of t'e ri$e of t'e in*ivi*ual to$4. Cone;uentl%< t'e e@e$te* rate of return i :.)#6 R LU/RM , R0 F .#= L ."/.1) , .#=0.An&er /B0 i in$orre$t (e$aue 1).)#6 e;ual t'e ri4,free rate lu "#6 of t'e 3ar4et rate. An&er /C0 i in$orre$t(e$aue ?.)#6 reult fro3 3ultil%in- (ot' t'e 3ar4et rate re3iu3 an* t'e ri4,free rate (% "#6. An&er /D0 iin$orre$t (e$aue 1).##6 i t'e 3ar4et rate.

123 . Cot of *e(t F #.#2+/1 , #.#0 F #.#=22 F =.226.Cot of referre* to$4 F #.#: F :6.Cot of retaine* earnin- F 4R L /RPM0( F ".=?6 L /=601. F 1.#?6.7ACC F #.+/#.#=220 L #.1#/#.#:0 L #.=#/#.1#?0 F :.?:6.

124 . An&er /D0 i $orre$t. A$$or*in- to SMA +A< t'e $ot of $aital i *efine* a t'e $o3oite $ot of variou our$eof fun* in$lu*e* in a fir3 $aital tru$ture. It i t'e 3ini3u3 rate of return t'at 3ut (e earne* on ne& invet3entt'at &ill not *ilute t'e interet of t'e 'are'ol*er. In t'i ro(le3< Co3an% 8 'a t'ree our$e of fun*5 *e(t<$o33on to$4< an* referre* to$4. T'e $ot of *e(t $aital i t'e after,ta@ $ot of *e(t to t'e fir3. Given t'at t'e fir3 ita@e* at +#6 an* interet i a ta@ *e*u$tion< t'e $ot to t'e fir3 i onl% #.#"" /1.# , #.+0 @ /.110. T'e $ot of referre*to$4 i t'e annual *ivi*en* re;uire3ent *ivi*e* (% t'e $urrent ri$e er 'are or t'e ro$ee* fro3 iuan$e er 'are.T'u< t'e $o3onent $ot of referre* to$4 for Co3an% 8 i #.#?= /!).)= \ #0. T'e $ot of $o33on to$4 i *iffi$ultto *eter3ine a$$uratel%< (ut one of t'e 3ot $o33on eti3ation involve uin- t'e $aital aet ri$in- 3o*el to*eter3ine t'e $ot. T'u< t'e $ot of $o33on to$4 e;ual t'e ri4,free rate lu t'e ro*u$t of (eta for Co3an% 8an* t'e 3ar4et ri4 re3iu3. T'e $o3onent $ot of $o33on to$4 for Co3an% 8 i #.#2) .#+ L /.? @ .#"0. To*eter3ine t'e &ei-'te*,avera-e $ot of $aital< ea$' $o3onent $ot i 3ultilie* (% it ree$tive &ei-'t in t'e$o3an% $aital tru$ture< an* t'ee value are u33e* to arrive at #.#? /.#"" @ .=0 L /.#2) @ .+0 L /.#?= @ .10.

An&er /A0 i in$orre$t (e$aue #.#?+ i t'e i3le avera-e. An&er /B0 i in$orre$t (e$aue #.#2)# i t'e $ot of$o33on to$4. An&er /C0 i in$orre$t (e$aue #.#""# i t'e $ot of *e(t.

125.Time line: 0 1 2 3 4 40 6-mont

• • • Pe!io"#

PT % 60 60 60 60 60&' % 1,000 & % 1,000

"*2 % +

Sin$e t'e (on* ell at ar of !1<###< it YTM an* $ouon rate /1) er$ent0 are e;ual. T'u< t'e before"ta# $ot of*e(t to Rollin i 1).# er$ent. T'e after"ta# $ot of *e(t e;ual54*<After,ta@ F 1).#6/1 , #.+#0 F ?.)6.

inan$ial $al$ulator olution5Inut5 N F +#H PV F ,1<###H PMT F "#H V F 1<###HOutut5 I F ".#6 F 4*).4* F ".#6 ) F 1)6.

4*/1 , T0 F 1).#6/#."0 F ?.)6.

12. Cot of referre* to$4 An&er5 * Diff5 ECot of referre* to$45 4 F !1)!1##/#.:=0 F 1)."6.

1)?

7/23/2019 P04 - Risks (Sol)


. Cot of e;uit%5 CAPM An&er5 $ Diff5 ECot of retaine* earnin- /CAPM aroa$'054 F 1#6 L /=601.) F 1".#6.

12?. Cot of e;uit%5 DC An&er5 $ Diff5 ECot of retaine* earnin- /DC aroa$'05

4 F $27

)$2.00(1.08

L 26 F 1".#6.1):

. Cot of e;uit%5 ri4 re3iu3 An&er5 $ Diff5 ECot of retaine* earnin- /(on* %iel*,lu,ri4,re3iu3 aroa$'054 F 1).#6 L +.#6 F 1".#6.

1#

. 7ACC An&er5 ( Diff5 E R

Cal$ulate 4e5 4e F0.1)$27(1

)$2.00(1.08

− L 26 F 1".2:6.

7ACC F &*4*/1 , T0 L &4 L &$4e

F #.)/1).#60/#."0 L #.)/1)."60 L #."/1".2:60 F 1+.#: 1+.16.

131 . An&er /C0 i $orre$t. If earnin- (efore interet an* ta@e in$reae* (% 1?6< an* net in$o3e &a u +)6< t'e fir3i uin- levera-e effe$tivel%. T'e *e-ree of finan$ial levera-e i t'e er$enta-e $'an-e in net in$o3e *ivi*e* (% t'eer$enta-e $'an-e in EBIT. A$$or*in-l%< Nelon *e-ree of finan$ial levera-e i ).+?.An&er /A0 i in$orre$t (e$aue t'e *e-ree of finan$ial levera-e i $al$ulate* (% *ivi*in- t'e er$enta-e $'an-e in netin$o3e (% t'e er$enta-e $'an-e in EBIT. An&er /B0 i in$orre$t (e$aue t'e *e-ree of finan$ial levera-e i$al$ulate* (% *ivi*in- t'e er$enta-e $'an-e in net in$o3e (% t'e er$enta-e $'an-e in EBIT. An&er /D0 i in$orre$t(e$aue t'e *e-ree of finan$ial levera-e i $al$ulate* (% *ivi*in- t'e er$enta-e $'an-e in net in$o3e (% t'eer$enta-e $'an-e in EBIT.

132 . An&er /B0 i $orre$t. inan$ial levera-e i t'e a3ount of t'e fi@e* $ot of $aital< rin$iall% *e(t< in a fir3 $aitaltru$ture relative to it oeratin- in$o3e. evera-e $reate finan$ial ri4 an* i *ire$tl% relate* to t'e $ot of $aital.Be$aue t'e $o3an% i retirin- (on*< t'e total *e(t i *e$reae*. Given t'at t'e a3ount of *e(t an* levera-e are*ire$tl% relate*< a *e$reae in t'e a3ount of *e(t reult in a *e$reae in finan$ial levera-e.An&er /A0 i in$orre$t (e$aue t'e (on* retire3ent *e$reae t'e *e(t e;uit% ratio. An&er /C0 i in$orre$t (e$auet'e total aet &ill *e$reae /aet &ill (e ue* to retire t'e *e(t< reultin- in an in$reae* aet turnover ratio /netale \ avera-e total aet0. An&er /D0 i in$orre$t (e$aue t'e interet e@ene avoi*e* &ill in$reae net in$o3ean* t'e return on 'are'ol*er e;uit%.

133 . An&er /B0 i $orre$t. T'e *e-ree of finan$ial levera-e for Co3an% B 3a% (e $al$ulate* a earnin- (eforeinteret an* ta@e< *ivi*e* (% EBIT 3inu interet. EBIT i !)## /!:= NI L !1# interet L !:= ta@ e@ene0. T'u< t'eD i 1.#= !)## \ /!)## , !1#0.An&er /A0 i in$orre$t (e$aue 1.# reult if *ere$iation e@ene i o3itte* fro3 t'e $al$ulation of EBIT. An&er /C0i in$orre$t (e$aue 1.1) reult if net in$o3e i ue* intea* of EBIT. An&er /D0 i in$orre$t (e$aue 1.)= i t'e*e-ree of finan$ial levera-e for Co3an% A.

134 . An&er /C0 i $orre$t. T'e (oo4 value er 'are for Co3an% A e;ual t'e u3 of $o33on to$4 an* retaine*earnin-< *ivi*e* (% t'e nu3(er of 'are< or +.1? /!1## L !1=#0 \ "#.An&er /A0 i in$orre$t (e$aue !1."? reult if retaine* earnin- i o3itte* fro3 t'e nu3erator. An&er /B0 i in$orre$t(e$aue !).=# reult if $o33on to$4 i o3itte* fro3 t'e nu3erator. An&er /D0 i in$orre$t (e$aue !=.## i t'e(oo4 value er 'are for Co3an% B.

1= . An&er /A0 i $orre$t. T'e *e-ree of total levera-e e;ual t'e *e-ree of finan$ial levera-e /D0 ti3e t'e *e-reeof oeratin- levera-e /DO0. T'e D 3a% (e tate* a earnin- (efore interet an* ta@e /EBIT0 *ivi*e* (% EBIT

7/23/2019 P04 - Risks (Sol)


3inu interet an* referre* *ivi*en* /(efore t'e ta@ effe$t0. If EBIT i !1##<### /!) @ ##<### unit0 ale , /!1.=# @##<### unit0 VC , !=#<### C< t'e D i 1.)= !1##<### \ /!1##<### , !)#<### , !#0. T'e DO 3a% (e tate* a$ontri(ution 3ar-in *ivi*e* (% t'e $ontri(ution 3ar-in 3inu fi@e* $ot. en$e< if t'e $ontri(ution 3ar-in i !1=#<###/!) unit ri$e , !1.=# unit VC0 @ ##<### unit< t'e DO i 1.= !1=#<### \ /!1=#<### , !=#<###0< an* t'e *e-ree oftotal levera-e i 1.2?= /1.)= @ 1.=#0.An&er /B0 i in$orre$t (e$aue 1.=# i t'e DO. An&er /C0 i in$orre$t (e$aue 1.)= i t'e D. An&er /D0 iin$orre$t (e$aue 1.)# e;ual t'e DO *ivi*e* (% t'e D.

13 . An&er /B0 i $orre$t. Oeratin- levera-e i t'e er$enta-e $'an-e in oeratin- in$o3e reultin- fro3 aer$enta-e $'an-e in ale. It 3eaure 'o& a $'an-e in volu3e affe$t rofit. Co3anie &it' lar-er invet3entan* -reater fi@e* $ot or*inaril% 'ave 'i-'er $ontri(ution 3ar-in an* 3ore oeratin- levera-e. T'e *e-ree ofoeratin- levera-e 3eaure t'e e@tent to &'i$' fi@e* aet are ue* in t'e ro*u$tion ro$e. A $o3an% &it' a 'i-'er$enta-e of fi@e* $ot i 3ore ri4% t'an a fir3 in t'e a3e in*utr% t'at relie 3ore on varia(le $ot to ro*u$e.Bae* on a $ontri(ution 3ar-in of !.1" er unit /!1 , !.2+ varia(le $ot0< t'e *e-ree of oeratin- levera-e i /+##<### @!.1"0 \ /+##<### @ !.1"0 , )2<### F 1.?2.An&er /A0 i in$orre$t (e$aue ).+ i o(taine* (% overtatin- t'e $ontri(ution 3ar-in or t'e fi@e* $ot. An&er /C0 iin$orre$t (e$aue ).1 in$lu*e a nonoeratin- e@ene /interet0 a a fi@e* $ot. An&er /D0 i in$orre$t (e$aue 1.)i o(taine* (% un*ertatin- t'e !"+<### $ontri(ution 3ar-in or un*ertatin- t'e !)2<### of fi@e* $ot.

137 . An&er /C0 i $orre$t. T'e *e-ree of finan$ial levera-e i t'e er$enta-e $'an-e in earnin- availa(le to $o33on'are'ol*er t'at i ao$iate* &it' a -iven er$enta-e $'an-e in net oeratin- in$o3e. Oeratin- in$o3e e;ualearnin- (efore interet an* ta@e. T'e 3ore finan$ial levera-e e3lo%e*< t'e -reater t'e *e-ree of finan$ial levera-ean* t'e ri4ier t'e fir3. Earnin- (efore interet an* ta@e e;ual !"<### !+##<### ale , /!.2+ @ +##<### unit0 VC ,!)2<### C. in- t'e for3ula< t'e $al$ulation i a follo&5

!"<###F!"<###

F 1.=!"<### , !"<### , /!)<### \ ."0!)"<""?An&er /A0 i in$orre$t (e$aue ).+ i o(taine* (% overtatin- t'e$ontri(ution 3ar-in or t'e fi@e* $ot. An&er /B0 i in$orre$t (e$aue 1.?2 i t'e *e-ree of oeratin- levera-e< notfinan$ial levera-e. An&er /D0 i in$orre$t (e$aue 1.) i o(taine* (% un*ertatin- t'e !"+<### of $ontri(ution 3ar-in orun*ertatin- t'e !)2<### of fi@e* $ot.

13? . An&er /A0 i $orre$t. T'e *e-ree of total levera-e i e;ual to t'e *e-ree of oeratin- levera-e ti3e t'e *e-ree offinan$ial levera-e. T'u< a *e$reae in eit'er of t'ee ratio reult in a *e$reae in total levera-e. If t'e $o3an% 'a*no referre* to$4< t'e D an* t'e DT &oul* (e lo&er (e$aue t'e reta@ in$o3e ne$ear% to a% t'e referre**ivi*en* P \ /1 , t0 i u(tra$te* fro3 t'e *eno3inator of t'e D.An&er /B0 i in$orre$t (e$aue t'e DT &oul* *e$reae< not in$reae. An&er /C0 i in$orre$t (e$aue t'e eli3inationof referre* to$4 &oul* $'an-e t'e e;uation. An&er /D0 i in$orre$t (e$aue t'e *e$reae &oul* (e roortional.

13> . An&er /B0 i $orre$t. T'e &ei-'te*,avera-e $ot of $aital i $al$ulate* a follo&5/7ei-'t of e;uit%0/Cot of e;uit%0 L /7ei-'t of *e(t0/Before,ta@ $ot of *e(t0/1 , Ta@ rate0 F /.?0/.1)0 L /.0/.#20/1 , .0 F 1#6

An&er /A0 i in$orre$t (e$aue 26 i t'e (efore,ta@ $ot of *e(t. An&er /C0 i in$orre$t (e$aue 116 i $al$ulate*

uin- t'e (efore,ta@ $ot of *e(t intea* of t'e after,ta@ $ot of *e(t. An&er /D0 i in$orre$t (e$aue 1)6 i t'e $ot ofe;uit%.

1+# . An&er /D0 i $orre$t. T'e $o3an% &ill 'ave 'i-'er e@e$te* ta@ e@ene un*er arran-e3ent Z1 (e$aue< &it'lo&er interet e@ene< ta@a(le in$o3e &ill (e 'i-'er. Z1 Z)Sale revenue !=##<### !=##<###Cot of ale /)##<###0 /)##<###0GA e@ene/1##<###0 /1##<###0Interete@ene /)+<###0 /?#<###0Ta@a(le in$o3e!1?"<### !1#<###Ta@ a%a(le /#60 /=)<2##0 /:<###0Net in$o3e!1)<)## ! :1<###An&er /A0 i in$orre$t (e$aue e@e$te* -ro 3ar-in i unaffe$te* (% t'e $'oi$e of finan$in-arran-e3ent. An&er /B0 i in$orre$t (e$aue t'e *e-ree of oeratin- levera-e 3eaure t'e effe$t of a $'an-e in aleon oeratin- in$o3e /earnin- (efore interet an* ta@e0. en$e< t'e t&o arran-e3ent 'ave t'e a3e *e-ree of

7/23/2019 P04 - Risks (Sol)


oeratin- levera-e (e$aue t'e finan$in- arran-e3ent *oe not affe$t ale an* $ot of ale. An&er /C0 i in$orre$t(e$aue interet e@ene &ill (e 'i-'er un*er arran-e3ent Z).

141 . An&er /D0 i $orre$t. T'e *e-ree of finan$ial levera-e 3a% (e e@ree* a earnin- (efore interet an* ta@e<*ivi*e* (% earnin- (efore interet an* ta@e 3inu interet. or finan$ial arran-e3ent Z)< t'e D i 1.=+ ^/!=##<###ale , !)##<### CGS , !1##<### GA0 \ /!=##<### ale , !)##<### CGS , !1##<### GA0 , /1#6 @ !?##<###*e(t0_.

An&er /A0 i in$orre$t (e$aue 1.#: ue t'e after,ta@ interet $ot for arran-e3ent Z1 in t'e *eno3inator. An&er /B0i in$orre$t (e$aue 1.1+ i t'e *e-ree of finan$ial levera-e for arran-e3ent Z1. An&er /C0 i in$orre$t (e$aue 1.)ue t'e after,ta@ interet $ot in t'e *eno3inator.

1+) . An&er /A0 i $orre$t. A $al$ulate* (elo&< net rofit a3ount for Z1 an* Z) are !1)<)## an* !:1<###<ree$tivel%. T'u< Z) 'a a #.6 return on e;uit% !:1<### \ /!1<###<### total aet , !?##<### *e(t0 $o3are*&it' a 1?."6 return on e;uit% for Z1 !1)<)## \ /!1<###<### total aet , !##<### *e(t0. Moreover< t'e *e(t ratio/*e(t finan$in- \ total aet0 i ?#6 /!?##<### \ !1<###<###0 for Z)< an* #6 /!##<### \ !1<###<###0 for Z1. Z1 Z)Sale revenue !=##<### !=##<###Cot of ale /)##<###0/)##<###0General a*3in. e@ene /1##<###0/1##<###0Interet e@ene /)+<###0 /?#<###0Ta@a(le rofit!1?"<### !1#<###Ta@ a%a(le /#60 /=)<2##0/:<###0Net rofit !1)<)## ! :1<###An&er /B0 i in$orre$t (e$aue t'e return on e;uit% an* t'e *e(t ratio are 'i-'erfor Z) t'an for Z1. An&er /C0 i in$orre$t (e$aue t'e return on e;uit% an* t'e *e(t ratio are 'i-'er for Z) t'an for Z1.

An&er /D0 i in$orre$t (e$aue t'e return on e;uit% an* t'e *e(t ratio are 'i-'er for Z) t'an for Z1.

143 . An&er /A0 i $orre$t. T'e $oeffi$ient of variation i ueful &'en t'e rate of return an* tan*ar* *eviation of t&oinvet3ent *iffer. It 3eaure t'e ri4 er unit of return (e$aue it *ivi*e t'e tan*ar* *eviation /σ 0 (% t'e e@e$te*

return /k C 0.

Coeffi$ient of variation Fk C

σ

T'e invet3ent in t'e .S. an* Britain 'a a $oeffi$ient of variation of .1+ /6 \ )160< &'erea t'e invet3ent in t'e.S. an* Cana*a 'a a $oeffi$ient of variation of .")= /1=6 \ )+60. A$$or*in-l%< t'e $o3an% 'oul* un*erta4e t'eBriti' invet3ent (e$aue it 'a u(tantiall% le ri4 er unit of return.An&er /B0 i in$orre$t (e$aue t'e Cana*ian invet3ent i i-nifi$antl% ri4ier er unit of return. An&er /C0 i in$orre$t

(e$aue t'e $o3an% 'oul* un*erta4e t'e Briti' invet3ent. A a reult< it return &ill in$reae an* it ri4 &ill*e$reae. An&er /D0 i in$orre$t (e$aue t'e $o3an% 'oul* un*erta4e t'e Briti' invet3ent. A a reult< it return&ill in$reae an* it ri4 &ill *e$reae.

144 . An&er /A0 i $orre$t. T'e e@e$te* rate of return on an invet3ent i *eter3ine* uin- an e@e$te* value$al$ulation. It i an avera-e of t'e out$o3e &ei-'te* a$$or*in- to t'eir ro(a(ilitie. or Te$'a$e< t'e avera-e ia$$o3li'e* (% 3ultil%in- ea$' ro(a(ilit% (% t'e $orreon*in- return for ea$' tate of t'e e$ono3% an* t'en$al$ulatin- t'e u3 of t'e ro*u$t. Nu3eri$all%< t'e $al$ulation i erfor3e* a follo&5 .#=/,.+=0 L .1=/,.1#0 L .)/.#=0L .+/.1#0 L .1=/.#0 L .#=/.=0 F .#?= F ?.=6.An&er /B0 i in$orre$t (e$aue 1=6 a** oitive ro*u$t intea* of ne-ative ro*u$t for t'e firt t&o tate. An&er/C0 i in$orre$t (e$aue =6 i t'e u3 of t'e return /au3in- all are oitive0 3inu 1. An&er /D0 i in$orre$t(e$aue )=6 i t'e u3 of t'e return.

145 . An&er /B0 i $orre$t. T'e varian$e 2σ i $al$ulate* uin- t'e e;uation

2σ F ( ) i

n

i

i pk k

2

1

C∑=

−

If5 ik i t'e return fro3 t'e it' out$o3e< k C i t'e e@e$te* return< an* i p i t'e ro(a(ilit% of t'e it' out$o3e.

∑=

=n

1i

ii pk k C or

.#=/,.+=0 L .1=/,.1#0 L .)/.#=0 L .+/.1#0 L .1=/.#0 L .#=/.=0 F .#?=

7/23/2019 P04 - Risks (Sol)


2σ F .#=/,.+=,.#?=0) L .1=/,.1,.#?=0 ) L .)/.#=,.#?=0 ) L .+/.1,.#?=0 ) L .1=/.#,.#?=0 ) L .#=/.=,.#?=0 )F .##1

An&er /A0 i in$orre$t (e$aue .1?= i t'e ;uare root of .##1< &'i$' i t'e tan*ar* *eviation of Te$'a$e return.An&er /C0 i in$orre$t (e$aue .#?= i t'e e@e$te* return. An&er /D0 i in$orre$t (e$aue .)?2 i t'e ;uare root oft'e e@e$te* return.

14 . An&er /B0 i $orre$t. T'e tan*ar* *eviation /`0 -ive an e@a$t value for t'e ti-'tne of t'e *itri(ution an* t'e

ri4ine of t'e invet3ent. It i $al$ulate* (% ta4in- t'e ;uare root of t'e varian$e. Given t'at t'e varian$e i .##1<t'e tan*ar* *eviation i .1?=< or 1?.=6.An&er /A0 i in$orre$t (e$aue ?.=6 i t'e e@e$te* return. An&er /C0 i in$orre$t (e$aue .#16 i t'e varian$e.An&er /D0 i in$orre$t (e$aue t'e tan*ar* *eviation i 1?.=6.

147 . An&er /C0 i $orre$t. A $oinuran$e $laue re;uire t'e inure* to 3aintain inuran$e e;ual to or -reater t'an ae$ifie* er$enta-e /uuall% 2#60 of t'e value of t'e inure* roert%. If t'e inure* 'a not $arrie* t'e e$ifie*er$enta-e an* a artial lo o$$ur< t'e inuran$e $o3an% i lia(le for onl% a roortionate art of t'e lo. T'i i to*eter eole fro3 a%infor inuran$e on onl% a 3all art of t'e roert% value. o&ever< t'e $oinuran$e $laue 'ano ali$ation &'en an inure* (uil*in- i totall% *etro%e*. T'u< art $an re$over t'e !##<### fa$e value of t'eoli$%.An&er /A0 i in$orre$t (e$aue artial re$over% i availa(le &'en a $oinuran$e re;uire3ent i not $o3lie* &it'.

An&er /B0 i in$orre$t (e$aue a $oinuran$e $laue *oe not li3it re$over% &'en t'e inure* roert% i a total lo.An&er /D0 i in$orre$t (e$aue an inure* $annot $olle$t 3ore fro3 an inuran$e $o3an% t'an t'e fa$e value of t'eoli$%.

14? . An&er /B0 i $orre$t. n*er a tan*ar* $oinuran$e $laue< t'e inure* a-ree to 3aintain inuran$e e;ual to ae$ifie* er$enta-e of t'e value of t'e roert%. If t'e inure* 'a not $arrie* t'e e$ifie* er$enta-e an* a loo$$ur< t'e inuran$e $o3an% a% onl% art of t'e lo. T'e $oinuran$e re;uire3ent i !?=#<### /?=6 @ !1<###<###MV at t'e ti3e of t'e lo0. n*er t'e for3ula (elo&< Rit 3i-'t re$over !"##<### of t'e !:##<### lo.

Decover6+osstre"iremene)oins"ranc

ins"ranceo! 9mo"nt=

$=00<000$>00<000

000<750$

$500<000=

But Rit 3a% re$over no 3ore t'an t'e fa$e a3ount of t'e oli$%.An&er /A0 i in$orre$t (e$aue t'e $oinuran$e er$enta-e i alie* to $o3ute t'e $oinuran$e re;uire3ent< &'i$'in turn i t'e *eno3inator of t'e fra$tion 3ultilie* (% t'e lo. An&er /C0 i in$orre$t (e$aue un*er no $ir$u3tan$e&oul* t'e inuran$e $o3an% a% 3ore t'an t'e fa$e value of t'e oli$%. An&er /D0 i in$orre$t (e$aue un*er no$ir$u3tan$e &oul* t'e inuran$e $o3an% a% 3ore t'an t'e fa$e value of t'e oli$%.

14> . An&er /C0 i $orre$t. A $oinuran$e $laue re;uire t'e inure* to 3aintain inuran$e e;ual to or -reater t'an ae$ifie* er$enta-e /uuall% 2#60 of t'e value of t'e inure* roert%. If t'e inure* 'a not $arrie* t'e e$ifie*er$enta-e an* a artial lo o$$ur< t'e inuran$e $o3an% i lia(le for onl% a roortionate art of t'e lo. A ro rata$laue -enerall% rovi*e t'at a eron &'o i inure* &it' 3ultile oli$ie $an $olle$t fro3 ea$' inuran$e $o3an%onl% a roortionate a3ount of t'e lo (ae* on t'e a3ount of inuran$e $arrie* &it' ea$' inurer. Po* &a in

$o3lian$e &it' t'e $oinuran$e $laue /2#6 @ !)=#<### F !)##<###0. Po* &oul* re$over in full. T'e ro rata ortionPo* &oul* re$over fro3 O&ner i !1=<### /!1=#<### \ !)##<###0 @ !12#<###.An&er /A0 i in$orre$t (e$aue< in$e Po* &a in $o3lian$e &it' t'e $oinuran$e re;uire3ent< O&ner &ill a% aroortionate a3ount of t'e lo (ae* on t'e a3ount of inuran$e $arrie* &it' ea$' inurer. An&er /B0 i in$orre$t(e$aue< in$e Po* &a in $o3lian$e &it' t'e $oinuran$e re;uire3ent< O&ner &ill a% a roortionate a3ount of t'elo (ae* on t'e a3ount of inuran$e $arrie* &it' ea$' inurer. An&er /D0 i in$orre$t (e$aue< in$e Po* &a in$o3lian$e &it' t'e $oinuran$e re;uire3ent< O&ner &ill a% a roortionate a3ount of t'e lo (ae* on t'e a3ountof inuran$e $arrie* &it' ea$' inurer.

7/23/2019 P04 - Risks (Sol)


150 . An&er /B0 i $orre$t. A $oinuran$e $laue *oe not al% &'en t'e roert% inure* i totall% *etro%e*. Po*&oul* re$over t'e fa$e a3ount of t'e oli$ie.An&er /A0 i in$orre$t (e$aue a $oinuran$e $laue *oe not al% &'en t'e roert% inure* i totall% *etro%e*.An&er /C0 i in$orre$t (e$aue re$over% i li3ite* to t'e fa$e a3ount of t'e oli$ie. An&er /D0 i in$orre$t (e$auere$over% i li3ite* to t'e fa$e a3ount of t'e oli$ie.

151 . An&er /C0 i $orre$t. n*er a $oinuran$e $laue< t'e inure* a-ree to 3aintain t'e inuran$e e;ual to a

e$ifie* er$enta-e of t'e value of 'i'er roert%. If a lo o$$ur< t'e inurer a% onl% a roortionate 'are if t'einure* 'a not $arrie* t'e e$ifie* er$enta-e. In t'i $ae< t'e inure* a-ree* to $arr% 2#6< (ut in fa$t $arrie* onl%+#6H t'u< it (e$a3e a =#6 inurer< an* t'e inuran$e $o3anie lia(ilit% &a re*u$e* to =#6 of an% lo. T'e total$o3(ine* lia(ilit% of t'e fire inuran$e $o3anie in t'e ro(le3 i !)#<###. n*er t'e tan*ar* ro rata $laue< aeron &'o i inure* &it' 3ultile oli$ie $an $olle$t fro3 ea$' inuran$e $o3an% onl% a roortionate a3ount oft'e lo. Even t'ou-' A$e iue* a oli$% for !)+<###< it i lia(le for onl% t'ree,fift' /)+<###+#<###0 of t'e re$overa(lelo after al%in- t'e $oinuran$e for3ula /= @ !)#<### F !1)<###0. i4e&ie< T'rift% i lia(le for )= of !)#<###.An&er /A0 i in$orre$t (e$aue art of t'e lo i re$overe* &'en a $oinuran$e $laue i not $o3lie* &it'. An&er/B0 i in$orre$t (e$aue ea$' a% t'e a3ount re$overa(le ti3e t'e er$enta-e of t'e total inuran$e it a-ree* torovi*e. An&er /D0 i in$orre$t (e$aue t'e inurer a% onl% a roortionate 'are if t'e inure* 'a not $arrie* t'ee$ifie* er$enta-e.

152 . An&er /A0 i $orre$t. ollo&in- a lo< t'e o&ner &ill (e a(le to $olle$t t'e leer of /10 t'e fa$e a3ount of t'eoli$%< /)0 t'e a3ount of t'e lo< or /0 t'e a3ount of t'e $o,inuran$e li3itation. T'e $o,inuran$e li3itation i$al$ulate* (% 3ultil%in- t'e lo ti3e t'e follo&in- $o,inuran$e for3ula5 a$e a3ount of oli$% /!1)#<###0 over Co,inuran$e re;uire3ent /2#6 @ !)##<### fair value0 F ?=6. T'u< ?=6 of an% lo &ill (e $overe*< u to t'e fa$ea3ount of t'e oli$%. T'e re$over% i !11)<=## /?=6 @ !1=#<### lo0.An&er /B0 i in$orre$t (e$aue t'e re$over% i li3ite* to t'e a3ount $al$ulate* in t'e $o,inuran$e for3ula. An&er/C0 i in$orre$t (e$aue t'e re$over% i li3ite* to t'e a3ount $al$ulate* in t'e $o,inuran$e for3ula. An&er /D0 iin$orre$t (e$aue t'e re$over% i li3ite* to t'e a3ount $al$ulate* in t'e $o,inuran$e for3ula.

153 . An&er /B0 i $orre$t. n*er a tan*ar* $oinuran$e $laue< t'e inure* a-ree to 3aintain inuran$e e;ual to ae$ifie* er$enta-e of t'e value of t'e roert%. If t'e inure* 'a not $arrie* t'e e$ifie* er$enta-e an* a loo$$ur< t'e inuran$e $o3an% a% onl% art of t'e lo. T'e $oinuran$e re;uire3ent i !?=#<### /?=6 @ !1<###<###

MV at t'e ti3e of t'e lo0. n*er t'e for3ula (elo&< Rit 3i-'t re$over !"##<### of t'e !:##<### lo.A3ount of inuran$e

@ o F Re$over%Coinuran$e re;uire3ent!=##<###@ !:##<### F !"##<###!?=#<###But Rit 3a% re$over no 3ore t'an t'e fa$e a3ount of t'e oli$%.An&er /A0 i in$orre$t (e$aue t'e $oinuran$e er$enta-e i alie* to $o3ute t'e $oinuran$e re;uire3ent< &'i$'in turn i t'e *eno3inator of t'e fra$tion 3ultilie* (% t'e lo. An&er /C0 i in$orre$t (e$aue un*er no $ir$u3tan$e&oul* t'e inuran$e $o3an% a% 3ore t'an t'e fa$e value of t'e oli$%. An&er /D0 i in$orre$t (e$aue un*er no$ir$u3tan$e &oul* t'e inuran$e $o3an% a% 3ore t'an t'e fa$e value of t'e oli$%.

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P04 - Risks (Sol)