Question

In: Finance

1. Risk is a. The probability that return will be less than expected. b. The standard...

1. Risk is

a. The probability that return will be less than expected.

b. The standard deviation of the probability distribution of returns.

c. Variability in return

d. All of the above.

2. A stock with a beta of 1.0 will :

a. always generate a return equal to the market average

b. always generate a return that is close to the market average.

c. always generate a return that is at least as the market average.

d. all of the above are correct.

e. none of the above are correct.

3. Syncor borrowed $ 800,000 payable over 5 years, with an interest rate of 9 percent per annum on the unpaid balance. If the loan is to be repaid in 5 equal, end of year payments, what is the total amount of interest paid on this loan?

a. 205656

b. 228278

c. 201753

d. 255131

4. Calculate the required rate of return for Mercury, Inc.. assuming that (1) investors except a 4.0% rate of inflation in the future, (2) the real risk free rate is 3.0% (3) the market risk premium is 5.0%, (4) Mercury has a beta of 1.00 and (5) its realized rate of return has averaged 15.0% over the last 5 years.

a 10.29%

b. 10.83%

c. 11.40%

d. 12%

e. 12.6o%

Expert Solution

1

All of the above, basically risk is the possibility of not getting the expected return

2

3

	Annual rate(M)=	yearly rate/1=	9.00%	Annual payment=	205673.97
Year	Beginning balance (A)	Annual payment	Interest = M*A	Principal paid	Ending balance
1	800000.00	205673.97	72000.00	133673.97	666326.03
2	666326.03	205673.97	59969.34	145704.62	520621.41
3	520621.41	205673.97	46855.93	158818.04	361803.37
4	361803.37	205673.97	32562.30	173111.66	188691.71
5	188691.71	205673.97	16982.25	188691.71	0.00

Where

Interest paid = Beginning balance * Annual interest rate

Principal = Annual payment – interest paid

Ending balance = beginning balance – principal paid

Beginning balance = previous Year ending balance

total payment=Annual payment*number of Year

=205673.9656*5

=1028369.828

Total interest paid= total payment-period 1 beginning balance

=1028369.828-800000

=228369.828

4

Nominal return =real return + inflation = 3+4= 7

As per CAPM

expected return = risk-free rate + beta * (Market risk premium)

Expected return% = 7 + 1 * (5)

Expected return% = 12

jeff jeffy answered 1 year ago

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