Consider the following information regarding corporate bonds
Question 3Consider the following information regarding corporate bonds:RatingAAAAAABBBBBBCCCAverage Default Rate0.0%0.0%0.2%0.4%2.1%5.2%9.9%Recession Default Rate0.0%1.0%3.0%3.0%8.0%16.0%43.0%Average Beta0.050.050.051.00.170.260.31Wyatt Oil has a bond issue outstanding with seven years to maturity, a yield to maturity of 7.0%, and a BBB rating. The bondholders expected loss rate in the event of default is 70%. Assuming a normal economy the expected return on Wyatt Oil’s debt is closest to:3.5%4.9%6.7%3.0%1 points Question 4Consider the following information regarding corporate bonds:RatingAAAAAABBBBBBCCCAverage Default Rate0.0%0.0%0,2%0,4%2.1%5.2%9.9%Recession Default Rate0.0%1.0%3.0%3.0%8.0%16.0%43.0%Average Beta0.050.050.050.100.170.260.31CompanyMarket Capitalisation ($mm)Total Enterprise Value ($mm)Equity BetaDebt RatingTaggart Transcontinental$4,5008,0001.1BBBRearden Metal$3,8007,2001.3AAAWyatt Oil$2,4003,8000.9ANielson Motors$1,5004,4001.75BBYour estimate of the asset beta for Nielson Motors is closest to:0.710.590.660.421 points Question 5RON Ltd has the following capital structure components:Five million shares issued with a current market price of 6. Equity holders require a 11% return.$10 million face value of Corporate bonds outstanding. These bonds pay an annual coupon of 6% and currently trade at a yield to maturity of 6%.If the firm faces a corporate tax rate of 30%, compute RON Ltd’s Weighted Average Cost of Capital (WACC). Enter your answer in decimal form to FOUR decimal places. For example 10.34%, would be entered as 0.10341 points ________________________Question 6Firms should adjust for execution risk byassigning a higher cost of capital to new projects.ignoring execution risk since it is diversifiable.capturing this risk in the expected cash flows generated by the project.noticing missteps in the firm’s execution of new projects.1 points Question 7Which of the following statements is FALSE?The beta estimated we obtain from linear regression can be very sensitive to outliers, which are returns of unusually small magnitude.There may be reasons to exclude certain historical data as anomalous when estimating beta.If we use very old data to when estimating beta, they data may be unrepresentative of the current market risk of the security.Many practitioners use adjusted betas, which are calculated by averaging the estimated beta with 1.0.1 points Question 8John Galt is a mutual fund manager at Atlas Asset Management. He can generate an alpha of 2% a year up to $500 million of invested capital. After that amount his skills are spread too thin, so he cannot add value and his alpha is zero for all investments over $500 million. Atlas Asset Management charges a fee of 0.80% on the total amount of money under management. Assume that there are always investors looking for positive alpha investments and no investor would invest in a fund with a negative alpha. Assume that the fund is in equilibrium, meaning that no investor either takes out money or wishes to invest new money into the fund.The amount of fee income that Galt’s fund will generate is closest to:$8.00 million$3.75 million$10.00 million$25.00 million1 points Question 9Various trading strategies appear to offer non-zero alphas when we examine real world data. If indeed these alphas are positive, it could be explained by any of the following except:The positive alpha trading strategies contain risk that investors are unwilling to bear but the CAPM does not capture.The market portfolio is inefficient, but the market portfolio proxy used to calculate the alphas is efficient.Investors are systematically ignoring positive-NPV investment opportunities.A stock’s beta with the market portfolio does not adequately measure a stock’s systematic risk.1 points Question 10Assume that the economy has three types of people. 20% are fad followers, 70% are passive investors, and 10% are informed traders. The portfolio consisting of all informed traders has a beta of 1.2 and an alpha of 2.64%. The market has an expected return of 9% and the risk-free rate is 3%. What is the alpha for the fad followers? Enter your answer as a percentage to two decimal places (i.e. 0.12% rather than 0.0012; the percent sign is not necessary).
