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FNCE101 2024 Final Exam Examples

The document contains a practice final exam with multiple choice and short answer questions related to finance topics such as loans, risk, required returns, and stock valuation. It provides probability distributions and other stock data to calculate expected returns, variance, and determine the best stock choice based on risk levels for isolated or diversified holdings.

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samuel.sjh
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35 views2 pages

FNCE101 2024 Final Exam Examples

The document contains a practice final exam with multiple choice and short answer questions related to finance topics such as loans, risk, required returns, and stock valuation. It provides probability distributions and other stock data to calculate expected returns, variance, and determine the best stock choice based on risk levels for isolated or diversified holdings.

Uploaded by

samuel.sjh
Copyright
© © All Rights Reserved
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Download as DOCX, PDF, TXT or read online on Scribd
Download as docx, pdf, or txt
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SMU Classification: Restricted

Final Exam - Practice

PART I: Please circle the correct answer.

1. Bonnie has just purchased a Bentley and borrowed $88,477 toward the purchase. The amount is to
be repaid over a period of 11 years, in payments of $1,010 each month. What is the annual percentage
rate (APR) on the loan?
a. 9.6%
b. 8.0%
c. 5.6%
d. 8.8%

2. If an investor were to have only one asset, the measure of its specific risk would be
a. its mean.
b. its standard deviation.
c. its covariance with the market.
d. its correlation with the market.

3. The slope of the Security Market Line is


a. beta.
b. the market risk premium.
c. the market risk premium divided by the standard deviation of the market.
d. the market risk premium divided by beta.

4. Assume the expected return on a common stock exceeds its required return. You should conclude
that
a. the stock has a negative beta.
b. the company is not paying dividends.
c. the stock is overpriced.
d. the stock is underpriced.

5. Assume you must choose between two mutually exclusive projects. What decision criteria should
you use?
a. Use the NPV.
b. Use the IRR.
c. Both the NPV and IRR can be used.
d. Use the PI.

Jeremy Goh Page 1 1 April 2023


SMU Classification: Restricted

PART II: Short answer questions:

1. TransAmerican is a profitable company that is not paying a dividend on its common stock. Phil Parr
believes that TransAmerican will begin paying a $2.00 per share dividend in two years and that the
dividend will increase 8% annually thereafter. Rich Andrews is less optimistic. Rich thinks that
TransAmerican will begin paying a dividend in four years, that the dividend will be $2.00, and that it
will grow at 5% annually. Phil and Rich agree that the required return for TransAmerican is 15%.

I. What value would Phil estimate for this company?


II. What value would Rich assign to the TransAmerican stock?

2. Given the probability distribution for the returns for stock X and stock Y, compute
1. the expected return for each stock, X and Y
2. the variance of the return for each stock

Probability Stock X return (%) Stock Y return(%)


0.2 5 12
0.2 10 10
0.4 12 8
0.15 14 0
0.05 18 2

3. You have developed the following data on three stocks:

Stock Standard Deviation Beta


A 0.15 0.79
B 0.25 0.61
C 0.20 1.29

If you are a risk minimizer, which stock would you choose, if (1) it is to be held in
isolation and (2) if it is to be held as part of a well-diversified portfolio? Briefly explain why?

Jeremy Goh Page 2 1 April 2023

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