FINAL EXAM FOR BUS 320 CORPORATE FINANCE. ALL ANSWERS CORRECT-GRADED A.

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BUS 320 : CORPORATE FINANCE FINAL Professor Chordia You have 2 hours to take this exam. There are 6 questions and 5 pages (including cover) to this test. I understand the requirements of the Hono... r System of Emory University and I pledge that the work contained herein is in compliance with these requirements. Name _____ __ Signature Consider the following joint distribution of returns for stocks A and B: (The following table shows for instance that the probability of stock A producing a 10% return at the same time that stock B produces a 20% return is 40%) A 10% 20% 20% 0.4 0.2 B 30% 0.1 0.3 What is the variance and the expected return of a portfolio that is invested equally in both assets. [15 points] E(Ra) = 0.5(0.1)+0.5(0.2)=15% E(Rb)=0.6(0.2)+0.4(0.3)=24% Vara = 0.5(0.1-0.15)^2 + 0.5(0.2-0.15)^2 = 0.0025 Varb = 0.6(0.2-0.24)^2 + 0.4(0.3-0.24)^2 = 0.0024 Covab = 0.4(0.1-0.15)(0.2-0.24) + 0.2(0.2-0.15)(0.2-0.24) +0.1(0.1-0.15)(0.3-0.24) + 0.3(0.2-0.15)(0.3-0.24) =0.001 E(Rp) = 0.5(0.15)+0.5(0.24) = 19.5% Var p = (0.5)^2 (0.0025) + (0.5)^2 (0.0024) + 2(0.5)(0.5)(0.001) = 0.00173 You have your choice of two investment accounts, Investment A is a seven year annuity that features end of month $100 payments and has an interest rate of 17 percent APR, compounded monthly. Investment B is a 12 percent continuously compounded lump sum investment, also good for seven years. How much money would you need to invest in B today so it is worth as much as A seven years from now? [15 points] A: FVA = $100 1 .17 12 1   84 .17 12           = $15,951.16. B: FV = $15,951.16= PV e0.127 ; PV = $15,951.16 e0.84 = $6,886.28. [Show More]

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