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
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.
Internal rate of return and modified internal rate of return. Quark Industries has three potential projects,...
Internal rate of return and modified internal rate of
return.
Quark Industries has three potential projects, all with an
initial cost of $1,600,000.
Given the discount rate and the future cash flow of each project
in the following table,
Cash Flow Project M Project N Project O
Year 1 $400,000 $500,000 $900,000
Year 2 $400,000 $500,000
$700,000
Year 3 $400,000 $500,000 $500,000
Year 4 $400,000 $500,000 $300,000
Year 5 $400,000 $500,000 $100,000
Discount rate 9% 14% 17%
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Question 4 Brown Manufacturing has four categories of overhead. The four categories and expected overhead costs...
- 1. What is the major difference between reliability and validity? Is it possible to have a...
- Your business has estimated its total cost to be TC = 3800 + 0.25Q + 0.0018Q2;...
- 1.The Celestar 8 telescope available in the Physics Lab is described on Blackboard. The primary mirror...
- Assume that you are considering developing a nationwide chain of women's clothing stores. You have contacted...
- A protein you are studying is believed to have a beta barrel secondary structure that consists...
- QUESTION 2 (20) Below is the title and abstract of an article which was published in...
ADVERTISEMENT