In: Finance

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?

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 |

(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 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...

A stock has a required return of 8%, the risk-free rate is 3%,
and the market risk premium is 3%.
What is the stock's beta? Round your answer to two decimal
places.
If the market risk premium increased to 8%, what would happen
to the stock's required rate of return? Assume that the risk-free
rate and the beta remain unchanged. Do not round intermediate
calculations. Round your answer to two decimal places.
If the stock's beta is less than 1.0,...

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 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)

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 %.

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.

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...

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)

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]

ADVERTISEMENT

ADVERTISEMENT

Latest Questions

- Towing Company has budgeted sales for the next six months as follows: Sales for Cash Sales...
- Write the half reaction for the anode and cathode for the following electrochemical cells. which metal...
- A company has a single zero coupon bond outstanding that matures in five years with a...
- Do the experimental results consistent with the expected results for dc motor? Discuss any discrepancies and...
- 7. Explain how a company could: (a) avoid a backlog of orders when sales exceed expectations;...
- Write a class "LinkedBag" which implements this interface. The LinkedBag class has two instance variables firstNode...
- Decision Making and relevant factors: You have an opportunity to choose a flight for your upcoming...

ADVERTISEMENT