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Roll Number:
Final Examination
Instructions:
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1. What factors affect price volatility of bonds? Explain briefly.
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2. What are the limitations of Macaulay and Modified Duration?
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3. Under what conditions promised yield to call and realized yield of a bond would be the same? Give an
example to explain differentiating between American and European Call options.
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4. What are the effects of call and put options on the interest rate sensitivity of a bond?
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5. What are the limitations of dividend discount model?
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6. What are the costs and benefits of using trailing or forward Price to Earnings Ratios?
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7. What are the assumptions of Markowitz Portfolio Theory?
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8. What is meant by efficient portfolio? Please explain.
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9. Give an example to show that how Capital Asset Pricing Model be used to calculate the price of a stock?
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10. DDO Industries is considering expanding into a new product line. Earnings per share are expected to be $
15 in the coming year and are expected to grow annually at 5% without the new product line but growth
would increase to 7% if the new product line is introduced. To finance the expansion, DDO would need to
cut its dividend payout ratio from 80% to 70%. If DDO’s equity cost of capital is 11%, what would be the
impact on DDO’s stock price if they introduce the new product line? Assume the equity cost of capital will
remain unchanged.
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11. PPL has EBITDA of $2,766,000,000 and 410 million shares outstanding. PPL also has $1,963 million in
debt and $ 0.509 billion in cash. If PPL has an enterprise value to EBITDA multiple of 1.7, estimate the
value for a share of PPL stock.
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12. PTCL plans to pay $1.84 per share in dividends in the coming year. Its equity cost of capital is 8%.
Dividends are expected to grow by 0.4% per year in the future. Estimate the value of PTCL’s stock.
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13. Consider the following returns:
Stock X
Realized Stock Y
Year End Return Realized Return
2004 20.1% -14.6%
2005 72.7% 4.3%
2006 -25.7% -58.1%
2007 56.9% 71.1%
2008 6.7% 17.3%
2009 17.9% 0.9%
What is the covariance between Stock X's and Stock Y's returns?
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14. Consider the following covariances between securities:
Duke Wal-Mart
What is the variance of a portfolio that is made up of a $6000 investments in Duke Energy and a $4000
investment in Wal-Mart stock?
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