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Date Posted: 19:32:31 07/04/00 Tue
Author: Charles Hodges
Subject: Re: Another sample Mid-term from Hodges
In reply to: Karen Gilmore 's message, "Re: Another sample Mid-term from Hodges" on 12:45:36 07/04/00 Tue

I've corrected errors. My answers are in CAPS.

>
> > 8. An unusual firm had no profits and no
> depreciation
> > expense during a given time period. Their cash
> > balance was unchanged and their current ratio
> > increased from 2 to 3. Given this information, which
> > of the following is true?
> > a. On their statement of cash flows, cash flows from
> > operating activities were negative.
> > b. On their statement of cash flows, cash flows from
> > operating activities were unchanged.
> > c. On their statement of cash flows, cash flows from
> > operating activities were postive.
> > d. Both A and B are true.
> > e. Both B and C are true.
> > f. We do not have enough information to answer this
> > question.
> > C

I DID NOT GRADE THIS QUESTION, AS IT IS VERY POORLY WRITTEN. MY PREFERRED ANSWER WAS A. MY LOGIC WAS AS FOLLOWS, IF THE CURRENT RATIO INCREASES, THEN ASSETS INCREASED. AN INCREASE IS ASSETS IS A USE OF FUNDS, AND SINCE THERE WERE NO POSITIVE CASH FLOWS FROM DEPRECIATION OR NET INCOME, THEREFORE A.


> > 14. Place the below Income Statement and Balance
> > Sheet in the correct format (4 points). Fill in the
> > missing numbers (18 points).
I HAVE NOT WORKED THIS ONE OUT.
> > 18. A portfolio's standard deviation is always less
> > than, or equal to, the standard deviations of the
> > individual security with the highest stand-alone
> risk.
> > a. True b. False
> > B

THIS IS TRUE. STAND ALONE RISK IS MEASURED BY STANDARD DEVIATION. DUE TO DIVERSIFICATION EFFECTS, THE STANDARD DEVIATION OF LESS THAN PERFECTLY CORRELATED STOCKS IS LESS THAN THE HIGHEST INDIVIDUAL STANDARD DEVIATION. IT IS EQUAL IN THE SPECIAL CASE OF A PORTFOLIO CONSISTING OF ONE STOCK.

> > 21. You are given the following data:
> >
> > k* = real risk-free rate = 3%
> > Constant inflation premium = 6%
> > Maturity risk premium = 1%
> > Default risk premium for AAA bonds = 5%
> > Liquidity premium for long-term T-bonds = 2%
> >
> > Assume that a highly liquid market does not exist for
> > long-term T-bonds, and the expected rate of inflation
> > is a constant. Given these conditions, the nominal
> > risk-free rate for T-bills is _____, and the rate on
> > long-term Treasury bonds is _____.
> > 9% and 10%

SHOULD BE 12% ON THE LONG TERM SINCE THE PROBLEM SAYS IT HAS A LIQUIDITY PREMIUM OF 2%.

21b. (2 points) For this firm, what was the smallest
> > source of funds in 1997?
> >
> > Positive change in A/P of $165

THE BALANCE SHEET CAUSED PROBLEMS HERE. I ALSO ACCEPTED NET INCOME (+147) AND ACCOUNTS RECEIVABLE SINCE $0 IS NOT A NEGATIVE NUMBER.

>
> > 21c. (2 points) What was the firm's 1997 Net Cash
> > Flow?
> >
> > 147+730=877

NICE QUESTION HERE, SINCE CASH WENT FROM 315 TO 255, IT WAS A DECREASE OF 60.

>
> > 1b. (4 points) Now create a portfolio that is 70%
> > stock A and 30% stock B. What is the expected return
> > and standard deviation for the portfolio?
> >
> > Expected Return = 7.24%

TO SOLVE, FORM A PORTFOLIO WITH THE ABOVE WEIGHTING IN EACH STATE OF NATURE, THEN SOLVE JUST LIKE IS SHOWN IN THE MESSAGE ROOM MESSAGE ON THIS TOPIC.


> >
> > 2. Last year your company had; sales = $200, Net
> > Profit Margin = 12%, Assets = $400, and a
> > debt-to-equity ratio=2.5. Calculate the Return on
> > Assets (2 points) and Return on Equity (3 points).
> > ROA = 24/400=.06
>
> I'm lost on ROE.
> CL+Equity = 400
> TD = CL+LTD
> >
KEY HERE IS DEBT TO EQUITY OF 2.5:1.0, SINCE BALACE SHEET MUST BALANCE, 3.5 = 2.5 + 1. NOW USE EASY ALGEBRA TO GET ROE.

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