Suppose you’re a financial analyst who has been asked to perform fundamental analysis on a company. The company you’ve been asked to analyze pays an annual dividend of $15. The dividend is expected to grow at a rate of 8 percent going forward and the discount rate is 12 percent.

 

A. What types of information would typically be used for this purpose?

B. What model would you select to find the price of the stock today given this information and why would you choose that model?

C. What would be the price of the stock today using the model you’ve selected? Remember to show work used to the obtain price.

 

2. Suppose you’re a financial advisor who has been asked by clients to explain how diversification works. The client wants to know the following information.

 

A. Does nondiversifiable risk exist?

B. If nondiversifiable risk exists what is it?

C. How do you determine total risk?

 

In your answer also explain how diversification relates to systematic and nonsystematic risk, and explain how the expected return on an asset is related to these concepts.

 

3. Suppose you’re a financial analyst who has been asked to provide some general information about duration as well as duration analysis of several bonds. You’ve determined the follow two pieces of information.

 

A. Bond A has Macaulay duration of 6.5 years and yield to maturity of 9.5.

B. Bond B has a Macaulay duration of 5.8 years and a yield to maturity of 10.1.

 

A. What does duration measure?

B. Which of the two has a higher modified duration? Explain how you arrived at your answer.

C. You’re also analyzing a U.S. Treasury STRIPS with a maturity of 6 years and a current value of $456.00. What’s the Macaulay duration (also known as effective duration) of the STRIPS? Explain how you arrived at your answer.

 

Part B- Answer each of the following questions in one or two sentences

 

1. Suppose that you’re a financial planner, and a client is seeking your advice on how much money she’ll need to retire in 25 years and accumulate $2,500,000 over that time period. She has already saved $85,000.00 and wants to know what her annual investment contribution should be. Assume the portfolio will earn 7 percent per year compounded annually. Report the result of your calculations and how you arrived at the answer.

 

2. Suppose as you’re reading the investment column in your local newspaper, you learn of a group of stocks that was recommended to speculate investor. Just out of curiosity, you look into the stocks mentioned in the column. Combining your research with the information in the article you compile the following table.

 

Stock Proportion of Portfolio Beta
Stock A 15% 1.42
Stock B 10% 1.29
Stock C 8% 0.67
Stock D 12% 1.11
Stock E 25% 1.74
Stock F 30% 1.97

 

 

What’s the beta of the stock portfolio? Show and clearly label your calculations. What changes to this portfolio could make it more speculative than it currently is?

 

3. As an investment analyst, you’ve been tasked with explaining why investors make mistakes in judgement using concepts such as Prospect theory. List and briefly explain three types of judgement errors investors are prone to make when investing.

 

4. Suppose that you’re a financial advisor who has been asked by a client which of two bond issues offers the higher yield when taxes are taken into account. The first bond is a corporate bond yielding 8.7 percent, and the second bond is a municipal bond yielding 6.1 percent. The client’s tax rate is 32 percent. Indicate which bond offers the higher after-tax yield and show how you arrived at this conclusion.

 

5. Suppose you’re a financial analyst who has been asked to value several dividend-paying stocks. Name two models you might use for this purpose. What are some shortcoming of these models?