In: Finance

# 2. Suppose the annual return in the stock market is 8%. Suppose company Z has no...

2. Suppose the annual return in the stock market is 8%. Suppose company Z has no debt, the risk-free rate is 2% and the beta for Z is 1.15. Managers have proposed a new project whose projected cash are $5 million each year for the next five years. There is no projected residual value. What is the most the firm should invest in this project? ## Solutions ##### Expert Solution  We have to compute the required rate first using CAPM required rate = Risk free rate+ (market rate- risk free rate)*Beta 2%+(8%-2%)*1.15 8.90% the most the firm should invest in this project is the present value of future cash flow computation of present value i ii iii=i*ii year Cash flow PVIF @ 8.9% present value 0 0 1.0000 - 1 5000000 0.9183 4,591,368 2 5000000 0.8432 4,216,132 3 5000000 0.7743 3,871,563 4 5000000 0.7110 3,555,155 5 5000000 0.6529 3,264,605 19,498,823 Therefore maximum investment value = 19,498,823 ## Related Solutions ##### (2) Stock Y has a beta of 1.30 and an expected return of 15.3%. Stock Z... (2) Stock Y has a beta of 1.30 and an expected return of 15.3%. Stock Z has a beta of 0.70 and an expected return of 9.3%. If the risk-free rate is 5.5% and the market risk premium is 6.8%, are these stocks correctly priced? ( 3) You have one million USD and want to create a portfolio equally as risky as the market. Given this information, fill in the rest of the following table: Asset Investment Beta Stock A... ##### Stock A has an annual expected return of 8%, a beta of .9, and a firm-specific... Stock A has an annual expected return of 8%, a beta of .9, and a firm-specific volatility of 50% Stock B has an annual expected return of 9%, a beta of 1.3, and a firm-specific volatility of 40% The market has a standard deviation of 20%, and the risk-free rate is is 2%. What is the volatility of stock A? (in %, round to 1 decimal place) Suppose we construct a portfolio built out of 50% stock A, 30% stock... ##### The average arithmetic return of the US stock market has been10%. The average annual corporate... The average arithmetic return of the US stock market has been 10%. The average annual corporate bond return in the US has been 5%. The average 30-yr US Treasury bond return in the US has been 5%. Finally, the average annual US 1-month Treasury bill return in the US has been 3.5%. From this information, please calculate the equity risk premium within the US. ##### DW Co. stock has an annual return mean and standard deviation of 8 percent and 31... DW Co. stock has an annual return mean and standard deviation of 8 percent and 31 percent, respectively. What is the smallest expected loss in the coming year with a probability of 16 percent? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round the z-score value to 3 decimal places when calculating your answer. Enter your answer as a percent rounded to 2 decimal places) ##### Navare Ltd required return on its common stock is 8%. The market return is 7%, the... Navare Ltd required return on its common stock is 8%. The market return is 7%, the T-bill is returning 296, the company's Beta is 1.2 and its marginal tax rate is 25%. Navare's is financed with 40% Debt and 60 % Equity. Use the Hamada equation to find the company's required return if management changes it's financing to 30% debt and 70% equity. ##### Company Z stock currently sells for$ 32.2. The required return on the stock is 21...
Company Z stock currently sells for $32.2. The required return on the stock is 21 %. Company Z maintains a constant 3 % growth rate in dividends.Company Z stock currently sells for$ 32.2. The required return on the stock is 21 %. Company Z maintains a constant 3 % growth rate in dividends.Calculate Company Z dividend yield? Express your answer as %.
##### Suppose a fund has a portfolio with two risky assets; stock and bond. Annual expected return...
Suppose a fund has a portfolio with two risky assets; stock and bond. Annual expected return of stock is 0.15 and standard deviation of 0.10 and expected return of bond is 0.08 and standard deviation of 0.07. The correlation-coefficient between stock and bond is 0.2. while t-bill has annual return of 0.03 Draw the opportunity set with 25% increment in bond fund. Also indicate the variance minimizing weight for bond and stock Draw the optimal CAL line and calculate the...
##### The risk free rate is 5% and the market rate of return is 8%. Stock A...
The risk free rate is 5% and the market rate of return is 8%. Stock A has a beta value =0.5. Required: (A). Draw the Security Market Line (SML) clearly indicating the risk free asset, market and stock A.[12marks].(B) Stock A beginning price is K50 and during the year paid a dividend of k3 with a maturity value of k55. Show using an empirical evidence weather stock A is undervalued, overvalued of fairly valued.[8marks]
##### The Rate of Return for firms on the stock market is about 8% on average(the mean)...
The Rate of Return for firms on the stock market is about 8% on average(the mean) with a standard deviation of 6%. (A) What proportion of firms will earn a return between 5% and 10%? (B) To the nearest percent, find the probability of a firm earning 0% or less per year (i.e. not making money or losing money)? If there are 1,000 firms listed on the stock market, then how many firms will not make any money or lose...
##### A stock has the following probabilities and expected returns probability return .35 8% .45 2% .2...
A stock has the following probabilities and expected returns probability return .35 8% .45 2% .2 -9% What is the expected return? (round to the nearest 2 decimals. What is the standard deviation? (set calculator to four or six decimal points)