Investment Midterm Test

Chapter 1
Rate of return
( Ending value−Beginning value ) + Income
=
Beginning value
( P 1−P 0 )+ D 1
=
P0

Risk-free rate = (1+Real rate)(1+Expected rate of return) – 1

CAPM
Ke = RF + b(ERP)
= RF + b (Km – RF)

Chapter 3
Initial equity
Purchase: 100 shares at RM6.00 per share (100 x 6) RM600
Borrow: 600 x (1-0.4) - RM360
Beginning equity RM240

Ending Equity
Purchase: 100 shares at RM7.00 per share (100 x 7) RM700
Borrow: 600 x (1-0.4) - RM360
Ending equity RM340

Return on investment
Ending equity−opening equity
=
Opening equity
Tax obligation
Amount Rate Tax
First $8,500 10% $ 850
Next $26,000 15% $ 3,900
Next $24,500 25% $ 6,125
$59,000 $10,875

Average tax rate

Taxes paid
=
Taxable income

Chapter 5
Monetary Policy
Increase in money supply
Discount rate. The central bank can increase the money supply through reducing the
discount rate. When the central bank decreases the discount rate, the interest rate will
decrease. Thus, this will encourage banks to lend money from the central bank as the cost of
borrowing will decrease, therefore, the banks’ loanable amount will increase. The lower
borrowing cost also attracts people to borrow money from banks.
Reserve requirements. When the reserve ratio decreases, the amount of statutory deposits
needed by the central bank decreases too. Thus, the banks will have more money to lend out
to public.
Open market operation. To lead to an increase in money supply, the central bank will
purchase the government securities in the open market as the bondholder will sell their
government securities to the central bank and receive money.
Decrease in money supply
Reserve requirements. Increase in reserve requirements can result in a decrease in money
supply. It is because the bank must hold a higher percentage of reserves in the central bank
and therefore, the amount of money that is available for lending is lesser.
Discount rate. The central bank can decrease the money supply through increasing the
discount rate. When the central bank increases the discount rate, the interest rate will
increase. Thus, this will cause reduce to borrow money from the central bank because the
cost of borrowing increases. Therefore, the banks’ loanable amount will decrease. Also, the
higher cost of borrowings will reduce people’s desire to borrow loans from bank.
Open market operations. To lead the decrease in money supply, the central bank will sell
the government securities in the open market. People will purchase the securities and the
money in hand will be reduced.
Chapter 7
(a)
Year Dividend (16% growth)
1 D0 (1+g) = RM 2.00
2 RM 2.00(1+1.16) = RM 2.32
3 RM 2.32(1+1.16) = RM 2.69
4 RM 2.69(1+1.16) = RM 3.12
5 RM 3.12(1+1.16) = RM 3.62

(b)
0 CF0
2 CF1
2.32 CF2
2.69 CF3
3.12 CF4
3.62 CF5
12 I/YR
Shift NPV = RM 9.59
(c)
Dividend growth rate (6%)
Dividend in year 6 = RM3.62(1 + 0.06) = RM3.84
(d)
P4 = D5 / (Ke - g) = 7.26 / (0.13-0.05) = $90.75
using HP financial calculator:
90.75 FV
4N
13 I/YR
PV = -55.66
(e)
Total PV of stock
= RM9.59 + RM36.32
= RM45.91