Emily De Jong, CFA, works for Charles & Williams Associates, a medium-sized investment firm operating in the northeastern United States. Emily is responsible for producing financial reports to use as tools to attract new clients. It is now early in 2009, and Emily is reviewing information for O'Connor Textiles and finalizing a report that will be used for an important presentation to a potential investor at the end of the week.
Following an acquisition of a major competitor in 1992, O'Connor went public in 1993 and paid its first dividend in 1999. Dividends are paid at the end of the year. After 2008, dividends are expected to grow for three years at 11%: $2.13 in 2009, $2.36 in 2010, and $2.63 in 2011. The average of the arithmetic and compound growth rates are given in Exhibit 1. Dividends are then expected to settle down to a long-term growth rate of 4%. O'Connor's current share price of $70 is expected to rise to $72.92 by the end of the year according to the consensus of analysts' forecasts.

Viper Motor Company, a publicly traded automobile manufacturer located in Detroit, Michigan, periodically invests its excess cash in low-risk fixed income securities. At the end of 2009, Viper's investment portfolio consisted of two separate bond investments: Pinto Corporation and Vega Incorporated.
On January 2, 2009, Viper purchased $10 million of Pinto's 4% annual coupon bonds at 92% of par. The bonds were priced to yield 5%. Viper intends to hold the bonds to maturity. At the end of 2009, the bonds had a fair value of $9.6 million.
On July I, 2009, Viper purchased $7 million of Vega's 5% semi-annual coupon mortgage bonds at par. The bonds mature in 20 years. At the end of 2009, the market rate of interest for similar bonds was 4%. Viper intends to sell the securities in the near term in order to profit from expected interest rate declines.
Neither of the bond investments was sold by Viper in 2009.
On January 1,2010, Viper purchased a 60% controlling interest in Gremlin Corporation for $900 million. Viper paid for the acquisition with shares of its common stock.

Theresa Ponder and Rod Owens are analysts for a multinational investment bank, Datko Bank, based in Canada. Datko's clients have been advised to diversify globally, due to a decrease in expected long-term growth for North American economies.
As part of her analysis of global stocks, Ponder uses the domestic CAPM and the international CAPM to value stocks. She makes the following statements regarding the extension of the domestic capital asset pricing model (CAPM);
Statement 1: To extend the domestic CAPM to international asset pricing using the extended CAPM, one must make two additional assumptions. First, that global investors have identical consumption baskets and second, that interest rate parity holds throughout the world.
Statement 2: The extended CAPM assumes that exchange rate changes are predictable so that there is no real exchange rate risk.
As the primary analyst for European securities, Owens analyzes the stocks in the countries of Catonia and Arbutia. Catonia and Arbutia arc not currently members of the European Union, but have a timetable for joining by the end of the decade.
To evaluate Caionian stocks, he uses the international CAPM. Owens mentions that a foreign currency risk premium must be added in this model, and that the risk premium depends on various parity conditions. He finds that the foreign exchange expectation relation and interest rate parity hold between Canada and Catonia. The interest rate in Canada is 2%, and the interest rate in Catonia is 5%.
One of the companies Owens follows in Arbutia is Diversified Metal Finishers. Diversified produces customized sheet metal applications for manufacturers throughout the world. The firm enjoys a competitive advantage because Arbutia is a commodity-rich country which allows Diversified to source its inputs locally. Owens has found that when the Arbutian currency changes by 10%, the value of the Diversified stock generally changes by 6%.
Ponder is also analyzing stocks in the nations of Bisharov and Dineva. She is estimating the expected return using the international CAPM (ICAPM) for Ivanova Metals, located in Dineva. The data for Canada, Dineva, and lvanova are shown in the following. The foreign currency is denoted as the local currency (LC).
Canadian risk-free rate 2.00%
Dineva risk-free rate 8.00%
World market risk premium 6.00%
Dineva index beta to world market index 1.40
Dineva local market risk premium 7.50%
Ivanova beta to local index 1.30
Foreign currency risk premium 3.00%
Dineva sensitivity of LC stock returns to LC 0.70
Owens examines Ponder's analysis and makes the following statements:
Statement 1: To protect the growing economy and prevent capital flight, the Bisharov government taxes foreign investors at higher rates and has placed limits on currency convertibility. In Dineva, the government has taken a more hands-off approach and does not regulate .foreign investment. If the world were to consist entirely of countries like Bisharov, then the ICAPM cannot be applied.
Statement 2; Furthermore, inflation is often a concern in emerging market countries. To measure an exchange rate between Canada and an emerging market currency that is adjusted for inflation, a real exchange rate should be calculated. Assuming no change in the real exchange rate, the change in an emerging market's asset values in domestic currency will just reflect the emerging market's asset returns in local currency and the difference between inflation rates in the domestic and foreign countries.
Regarding the statements made by Owens on the ICAPM and inflation, are both statements correct?

Kevin Rathbun, CFA, is a financial analyst at a major brokerage firm. His supervisor, Elizabeth Mao, CFA, asks him to analyze the financial position of Wayland, Inc. (Wayland), a manufacturer of components for high quality optic transmission systems. Mao also inquires about the impact of any unconsolidated investments.

Christopher Robinson, chairman of the board of directors for a private endowment fund, believes that the endowment fund for which he is responsible has diverged too far from its stated objectives. Over several years the board has increased the size of the fund's equity position beyond the stated limits of the investment policy statement. In an effort to realign the fund's investments, Robinson has elected to choose a mortgage-backed security (MBS) for inclusion in the endowment's portfolio. After surveying the MBS market, Robinson has selected four MBS securities to present as potential investments at the next investment committee meeting. Details on the selected MBS securities are presented below: