Question
In: Finance
Douglas Keel, a financial analyst for Orange Industries, wishes to estimate the rate of return for...
Douglas Keel, a financial analyst for Orange Industries, wishes to estimate the rate of return for two similar-risk investments, X and Y. Douglas's research indicates that the immediate past returns will serve as reasonable estimates of future returns. A year earlier, investment X had a market value of $27,000; and investment Y had a market value of \$64,000. During the year, investment X generated cash flow of $2,025 and investment Y generated cash flow of $ 7,327. The current market values of investments X and Y are $27,781 and $64,000, respectively. a. Calculate the expected rate of return on investments X and Y using the most recent year's data. b. Assuming that the two investments are equally risky, which one should Douglas recommend?
Solutions
Expert Solution
Rate of return = cash flow generated during the year +(Current price of investment - Previous years market value of investment) / Previous years market value of investment
Investment X:
= $2,025 + ($27,781 - $27,000) / $27,000
= $2,025 + $781 / $27,000
= $2,806 / $27,000
= 10.39%
Investment Y:
= $7,327 + ($64,000 - $64,000) / $64,000
= $7,327 + 0 / $64,000
= 11.44%
b. The expected rate of return on investment Y is higher than the investment X and the amount of risk on both the investment are equall.
jeff jeffy answered 2 years agoRelated Solutions
Rate of return Douglas Keel, a financial analyst for Orange Industries, wishes to estimate the rate...
Rate of return Douglas Keel, a financial
analyst for Orange Industries, wishes to estimate the rate of
return for two similar-risk investments, X and Y. Douglas's
research indicates that the immediate past returns will serve as
reasonable estimates of future returns. A year earlier, investment
X had a market value of $27,000; and investment Y had a market
value of $61,000. During the year, investment X generated cash
flow of $2,025and investment Y generated cash flow of $6,757. The...
Suppose that a financial analyst collected the following data: rate of return on T-bill is 2.5%...
Suppose that a financial analyst collected the following data:
rate of return on T-bill is 2.5%
Market risk premium is = 5%; company's beta is 0.7;
D1 = $2.00; current stock price is
$30.00; future growth of dividends is 6%.
What estimate should the analyst use?
Suppose that a financial analyst collected the following data: rate of return on T-bill is 2.5%...
Suppose that a financial analyst collected the following data:
rate of return on T-bill is 2.5%
Market risk premium is = 5%; company's beta is 0.7;
D1 = $2.00; current stock price is
$30.00; future growth of dividends is 6%.
a. What is this firm’s cost of equity using the DCF
approach?
A stock analyst wondered whether the mean rate of return of financial, energy, and utility stocks...
A stock analyst
wondered whether the mean rate of return of financial, energy, and
utility stocks differed over the past 5 years. He obtained a simple
random sample of eight companies from each of the three sectors and
obtained the 5-year rates of return shown in the accompanying
table (in percent).
Financial
Energy Utilities
10.76 12.89 11.88
15.05 13.91 5.76
17.21 6.43 13.67
5.03 11.23 9.90
19.50 18.79 3.95
8.21 20.73 3.44
10.38 9.60 7.11
6.52 17.40 15.70
(a) State...
A stock analyst wondered whether the mean rate of return of financial, energy, and utility stocks...
A stock analyst wondered whether the mean rate of return of
financial, energy, and utility stocks differed over the past 5
years. He obtained a simple random sample of eight companies from
each of the three sectors and obtained the 5-year rates of return
shown in the accompanying table (in percent). Complete parts (a)
through (d) below.
(c) Are the mean rates of return different at the α=0.05
level of significance?
Use technology to find the F-test statistic for this...
A stock analyst wondered whether the mean rate of return of financial, energy, and utility stocks...
A stock analyst wondered whether the mean rate of return of
financial, energy, and utility stocks differed over the past 5
years. He obtained a simple random sample of eight companies from
each of the three sectors and obtained the 5-year rates of return
shown in the accompanying table (in percent). Complete parts (a)
through (d) below.
Are the mean rates of return different at
α=0.05 level of significance?
Use technology to find the F-test statistic for this data
set....
USE THE INFORMATION BELOW FOR PROBLEMS 1-4 An analyst wishes to estimate the share price for...
USE THE INFORMATION BELOW FOR PROBLEMS 1-4
An analyst wishes to estimate the share price for Ashley
Corporation. The following information
is made available:
Estimated profit margin = 15%
Total asset turnover = 2
Financial leverage = 1.2
Estimated dividend payout ratio = 75%
Required rate of return = 14%
Estimated EPS = $2.50
1. Calculate the firm's ROE.
2. Calculate the firm's sustainable growth rate.
3. Calculate the firm’s P/E multiple.
4. Calculate the firm’s estimated share price.
USE...
Leonard Industries wishes to estimate how much financing they will need using a pro forma balance...
Leonard Industries wishes to estimate how much financing they
will need using a pro forma balance sheet for December 31, 2017.
The firm expects 2017 sales to total $3,000,000. The following
information has been provided:
A mimimum cash balance of $50,000 is desired.
Marketable securities, accruals, other current liabilities,
long-term debt, and common shares are expected to remain unchanged.
Accounts Receivable represent 10% of sales.
Inventories represent 12% of sales.
A new machine costing $90,000...
Suppose that a financial analyst collected the following data: rate of return on T-bill is 2.5% Market risk premium is = 5%
Suppose that a financial analyst collected the following data:
rate of return on T-bill is 2.5% Market risk premium is = 5%;
company's beta is 0.7; D1 = $2.00; current stock price is $30.00;
future growth of dividends is 6%.
Risk and Return Sarah is a financial analyst of a portfolio consisting of the stocks shown...
Risk and Return
Sarah is a financial analyst of a portfolio consisting of the
stocks shown below.
The risk free rate is 3% and the market risk premium is 8%.
Stock H, Investment $2mil, Beta 1.4
Stock I, Investment $3mil, Beta 1.0
Stock J, Investment $5mil, Beta -0.2
Compute beta and expected return of portfolio.
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- identify one intrapersonal relationship and evaluate its component.
- Using Python in vs code: The distribution of letters in a document has a distinctive and...
- Why is De Beers exploring the diamond reselling market? How does the creation of IIDV affect...
- programming in Python The body mass index (BMI) is calculated as a person’s weight (in lb)...
- 1. Show the steps in merging A and B into C where A= 8, 12, 19,...
- 1. Given the following information, determine the beta coefficient for Stock L that is consistent with...
- Generate the first ten rows of Pascal triangle using MATLAB. Post code in the response
ADVERTISEMENT