Question

In: Finance

Step by step with provided answers. What is the formula step by step? Thank you so...

Step by step with provided answers. What is the formula step by step? Thank you so much.

10. Given annual returns of 14%, 8%, -10% and 4%, what is the geometric average?

            = 3.61%

           

11. What is the arithmetic average of the returns in question 10?

            = 4.00%

           

12. What is the standard deviation of the returns in question 10?

            = 10.20%

           

16. Moi International wants to issue 20-year, zero coupon bonds that yield 5 percent.   What price should they charge for these bonds if they have a par value of $1,000? Assume annual compounding.

= $376.89

       

17. A stock has an expected return of 15%. The risk-free rate is 3%, and the market risk premium is 8%. What is the beta for this stock?

        =     1.50

       

18. The beta of the overall market is _____ and the beta of a risk-free security of is _____.

        =     1; 0.

       

19. The stock of RWC has a beta of 1.28. The expected return on the market is 8 percent and the risk-free rate is 1.5 percent. What is the expected return on this stock?

        =9.82 percent

  1. Wentworth Inc. has bonds on the market with 22 years to maturity, face value of $1,000, YTM of 4.2%, and an annual coupon rate of 6%. The bonds make semiannual coupon payments. What is the current price of the bond?

=Bond price $1,256.82

  1. Wentworth Inc. also has common stock that trades actively. The stockholders just received a dividend of $1.00 a share. The dividend is expected to increase by 40% for the next 2 years and then the firm expects to maintain a constant dividend growth rate of 5 percent per year.   The required return is 9 percent.

a. What are the expected dividends in years 1 and 2?

=D1 = $1.40, D2 = 1.9

b. What would you be willing to pay for this stock today?

=P0 = $46.24

Solutions

Expert Solution

10.

Given, R1 = 0.14, R2 = 0.08, R3 = -0.10, R4 = 0.04

Geometric Return = [(1+R1)(1+R2).....(1+Rn)]1/n - 1

= [(1+0.14)(1+0.08)(1-0.10)(1+0.04)]1/4 - 1 = 0.0361 or 3.61%

11.

Arithmetic Average = [R1+R2+....Rn]/n

= [0.14 + 0.08 - 0.10 + 0.04]/4 = 0.04 or 4%

12.

Average Geometric Return = G = 0.0361

Standard Deviation = √ [(R1- G)2 + (R2-G)2 + .....+ (Rn-G)2]/n-1

= √ [(0.14 - 0.0361)2 + (0.08 - 0.0361)2 + (-0.10 - 0.0361)2 + (0.04 - 0.0361)2 ]/3

= √0.0313/3 = 0.1020 or 10.20%

16.

Par Value of Bond = FV = $1000

Interest Rate = r = 5% or 0.05

Number of Years = n = 20

PV = FV/(1+r)n = 1000/(1+0.05)20 = $376.89

17.

Using CAPM model

ERi = Rf + β(ERm - Rf)

where,

ERi = Expected return of stock = 15%
Rf = Risk-free rate = 3%
β = Beta of the stock
ERm - Rf = Market Risk Premium = 8%

=> 15 = 3 + β*8

=> β = 1.5

18.

Beta describes how much a stock's price moves with respect to market

The beta of the overall market is 1 and the beta of a risk-free security of is 0

19.

Using CAPM model

ERi = Rf + β(ERm - Rf)

where,

ERi = Expected return of stock
Rf = Risk-free rate = 1.5
β = Beta of the stock = 1.28
ERm = Expected Return on Market = 8%

=> ERi =1.5 + 1.28(8 - 1.5) = 9.82%

-------------------------------------

Number of periods = n = 22*2 = 44 semiannual periods

Yield I/Y= r = 4.2%/2 = 2.1%

SemiAnnual Payment P = 6%*1000/2 = $30

Face Value FV = $1000

Hence, PV = P/(1+r) + P/(1+r)2 + .... + P/(1+r)n + FV/(1+r)n

= P[1 - (1+r)-n]/r + FV/(1+r)n = 30(1 - 1.021-44)/0.021 + 1000/1.02144 = $1256.82

------------------------------------

Given, D0 = Dividend Now = $1

(a) Growth rate for next 2 years = 40%

=> D1 = 1*(1+0.40) = $1.40

D2 = 1.40*(1+0.40) = $1.96

(b) D3 = D2*(1+0.05) = 1.96(1+0.05) = $2.06

Required Return = r = 9%

Using Gordons Growth model,

P2 = D3/(r - g) = 2.06/(0.09 - 0.05) = 51.5

Present Value = P0 = D1/(1+r) + D2/(1+r)2 + P2/(1+r)2 = 1.40/(1+0.09) + 1.96/(1+0.09)2 + 51.50/(1+0.09)2 = $46.28


Related Solutions

Answers are provided but need step by step solutions without excel just basic step by step...
Answers are provided but need step by step solutions without excel just basic step by step with formulas 1. John invested $20,000 fifteen years ago with an insurance company that has paid him 8 percent (APR), compounded quarterly (every 3 months). How much interest did John earn over the 15 years?= $45,620.62 2. You are running short of cash and really need to pay your tuition. A friend suggests that you check out the local title pawn shop. At the...
Please state the step number next to the answers, thank you! The following table gives the...
Please state the step number next to the answers, thank you! The following table gives the average number of hours 7 junior high students were left unsupervised each day and their corresponding overall grade averages. Hours Unsupervised 0 0.5 1.5 2.5 3.5 4.5 5 Overall Grades 96 88 84 80 76 72 68 Step 1 of 3: Calculate the correlation coefficient, r. Round your answer to six decimal places. Step 2 of 3: Determine if r is statistically significant at...
Please explain to me the answers so that I can understand the concept. Thank you! You...
Please explain to me the answers so that I can understand the concept. Thank you! You must evaluate a proposal to buy a new milling machine. The purchase price of the milling machine, including shipping and installation costs, is $126,000, and the equipment will be fully depreciated at the time of purchase. The machine would be sold after 3 years for $85,000. The machine would require a $3,500 increase in net operating working capital (increased inventory less increased accounts payable)....
Please state the step number next to the answers given, thank you! An automobile manufacturer claims...
Please state the step number next to the answers given, thank you! An automobile manufacturer claims that their jeep has a 31.9 miles/gallon (MPG) rating. An independent testing firm has been contracted to test the MPG for this jeep. After testing 16 jeeps they found a mean MPG of 32.1 with a standard deviation of 1.6. Is there sufficient evidence at the 0.05 level that the jeeps outperform the manufacturer's MPG rating? Assume the population distribution is approximately normal. Step...
Please clearly state the step number next to the answers given, thank you! A political researcher...
Please clearly state the step number next to the answers given, thank you! A political researcher wishes to know if political affiliation and age are related. He has collected data on 283 persons in three age categories. Is there evidence that age and political affiliation are related? Age Democrat Republican Independent Total 18-31 37 38 19 94 32-51 43 38 23 104 52-68 32 35 18 85 Total 112 111 60 283 Step 1 of 8: State the null and...
Please clearly state the step number next to the answers given, thank you! A random sample...
Please clearly state the step number next to the answers given, thank you! A random sample of 12 supermarkets from Region 1 had mean sales of 72.4 with a standard deviation of 6.2. A random sample of 16 supermarkets from Region 2 had a mean sales of 78.3 with a standard deviation of 5.3. Does the test marketing reveal a difference in potential mean sales per market in Region 2? Let μ1 be the mean sales per market in Region...
show formula and detail step,please Thank you! 3. Suppose your company needs $20 million to build...
show formula and detail step,please Thank you! 3. Suppose your company needs $20 million to build a new assembly line. Your target debt–equity ratio is .75. The flotation cost for new equity is 7 percent, but the flotation cost for debt is only 3 percent. Your boss has decided to fund the project by borrowing money because the flotation costs are lower and the needed funds are relatively small. a. What do you think about the rationale behind borrowing the...
please do it step by step with the use of formulas , thank you.. The following...
please do it step by step with the use of formulas , thank you.. The following are monthly percentage price changes for four market indexes. Month DJ SP500 1 0.03 0.02 2 0.07 0.06 3 −0.02 −0.01 4 0.01 0.03 5 0.05 0.04 6 −0.06 −0.04 Russ500 Nicky 0.04 0.04 0.10 −0.02 −0.04 0.07 0.03 0.02 0.11 0.02 −0.08 0.06 (17 points) Compute the following. a. Average monthly rate of return for each index b. Standard deviation for each index...
Please show work step by step, NO EXCEL. Thank you! The investment is $1,000,000, which is...
Please show work step by step, NO EXCEL. Thank you! The investment is $1,000,000, which is depreciated straight line to a zero salvage value over a 10 year life. The asset will be worthless in 10 years. The project will generate, annually, revenues of $800,000, cash operating expenses of $500,000, and depreciation of $100,000. The tax rate is 30%, and the cost of capital is 10%. a. what are the annual cash flow and the NPV? b. what would be...
Could you please give me step-by-step on how to solve this. Thank you! I believe that...
Could you please give me step-by-step on how to solve this. Thank you! I believe that the population proportion for 50% of the people who live in my neighborhood drive a mini van. I surveyed 40 people/houses in my neighborhood and found that only 19 drive mini vans. Use the significance level .10 to test the hypothesis.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT