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Question 34 (1 point) A stock is expected to pay a dividend of $0.75 at the end of the next year. The required rate of return is 12.5%, and the expected constant growth rate is g -8.5% forever. What is the stock's intrinsic value? A) $19.22 OB) $18.28 C) $19.70 OD) $18.75 $17.82 Question 35.(1 point) Which one of the following bonds is the least sensitive to changes in market interest rates, that is, which one has the lowest amount of interest rate risk? OA) 8 percent annual coupon, 4 year B) Zero-coupon, 4 year 3 4 5 co 7 8

Answer 1

Pb 34:

Intrinsic Value = D1 / [ Ke - g ]

D1 =Expected div after 1 Year

Ke = Required Ret

g = Growth Rate

Intrinsic Value = D1 / [ Ke - g ]

= 0.75 / [ 12.5% - 8.5% ]

= 0.75 / 4%

= $ 18.75

intrinsic Value is $ 18.75

OPtion D is correct

Pb 37:

SD:
It spcifies the risk of Stock.
SD = SQRT [ SUm [ Prob * (X-AVgX)^2 ] ]

Expected Ret:

Scenario	Prob	Ret	Prob* Ret
Boom	0.0600	22.00%	1.32%
Normal	0.9200	13.00%	11.96%
Recision	0.0200	-15.00%	-0.30%
Expected Ret	12.98%

SD:

State	Prob	Ret (X)	(X-AvgX)	(X-AvgX)^2	Prob * (X-Avg X)^2
Boom	0.0600	22.00%	9.02%	0.008136	0.00049
Normal	0.9200	13.00%	0.02%	0.000000	0.00000
Recision	0.0200	-15.00%	-27.98%	0.078288	0.00157
Sum[ Prob * ( X-AvgX)^2 ) ]	0.00205
SD = SQRT [ [ Sum[ Prob * ( X-AvgX)^2 ) ] ] ]	0.04532
I.e SD is 4.53 %

OPtion B is correct

Pb 46:

Gain = Loss / Net Investment after Loss

= 35 / [ 100 - 35 ]

= 35 / 65

= 0.5385 i.e 53.85%

option C is correct.

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