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Humber College Financial Controllership I ACCT251-ACCT308 TEST # 2 (worth 20% of final grade) Fall 2021 Q

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Humber College

Financial Controllership I

ACCT251-ACCT308 TEST # 2

(worth 20% of final grade)

Fall 2021

Q.1 Multiple Choice (9 Marks): 

 

Complete the Test #2 Multiple Choice question on CONNECT

 

 

 

 

 

 

 

 

 

                       

 

                       

Question # 2 (10 Marks)

 

Reliable Cellular Incorporated is experiencing a period of growth.  Earnings and dividends are expected to grow at a rate of 8% during the next two years, and at a constant rate of 5% thereafter.  The last dividend was $0.55, and the required rate of return on the shares is 7%

 

Required:

 

a) Calculate the price of a share today.   (Timeline required.)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

b) What is the price of the share (estimated) at the end of the first year.

 

 

 

 

 

 

 

 

 

 

b) Calculate the dividend yield, capital gains yield, and the total return for Year 1.

 

 

 

 

 

 

 

 

Question # 3 (8 marks)

 

A portfolio consists of two stocks:

 

Stock              Expected                Standard             Beta      Weight

                        Return                    Deviation

 

X                      8.85%                          5.9%                1.2x        30%

Y                      10.3%                          5.75%              1.8x         70%

 

The correlation between the two stock’s returns is 0.40.

 

Required:

1. (5 marks) Calculate the expected return, standard deviation, and Beta of the portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2. (3 marks) Given that the risk free rate is 2% and the expected market rate is 9%, would you invest in this portfolio?  Why?

 

 

 

 

 

 

 

 

 

 

 

 

 

Question # 4 (6 marks)

 

Suppose that today you buy a 5% annual coupon bond for $1,090.  The bond has 5

years to maturity.  Three years later, the YTM on your bond has increased by 1% and

you decide to sell. 

 

Required:

(***In your answers, carry all decimal places for rates, round $values to 2 decimal places.***)

 

1. What rate of return did you expect to earn on your investment when you bought the bond?

 

 

 

 

 

 

 

 

2. What price will your bond sell for after holding it for three years?

 

 

 

 

 

 

 

 

 

3. What is the holding period yield on your investment?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Question # 5 (12 marks)

 

(a) (4 marks) Assume that at the beginning of 2016 the expected inflation rate for 2016 is 8 percent, for 2017 it is 6 percent, for 2018 it is 5 percent, and for 2019 it is 5.5 percent.

 

What is the average interest rate, over the four year period, if the real rate of interest is 2.5%?

Do NOT use an arithmetic average. 

(***Carry all decimal places for interim calculations, round final answers to 4 places.***)

 

 

 

 

 

 

 

 

 

 

 

(b) (4 marks)  Ayden Inc. issued preferred stock that pays a $5.90 dividend annually each year.  This preferred share currently sells for $87 per share.

 

1)   What is the current expected return?

 

 

 

 

 

2)   Suppose the expected return drops by 2%.  What would Ayden Inc. preferred shares sell for now?

 

 

 

 

 

 

(c) (4 marks)

A major chemical manufacturer has experienced a market re-evaluation lately due to a number of lawsuits.  The firm has a bond issue outstanding with 15 years to maturity and a coupon rate of 8% (paid quarterly).

 

What is the current value of these bonds, assuming that the level of interest rates has now risen to an effective rate of 16.64 percent?

 

 

 

 

 

Question # 6 (8 Marks)

 

The following information is given about stock F and the market:

 

Risk free rate is 3%

Expected rate of return on an average stock is 8%

Beta coefficient for stock F is 0.8

Current Price of stock F is $38.85

Growth rate is 2%

Next expected dividend is $1.75

 

a) Is the stock price in equilibrium?  Explain.  (Show all calculations to support your answer).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

b) Considering your answer to part a),

 

What will investors do?

 

 

 

 

What will occur in the market?