Question

1. If the future value of an ordinary, 7-year annuity is $10,000 and interest rates are 4%, what is the future value of the same annuity due? A. $9,615.39 B. $10,010.00 C. $10,710.00 D. $10,400.00

2.The returns on the common stock of ACME closely follow the economy. In a booming economy, the stock is expected to return 23% in comparison to 14% in a normal economy and a -18% in a recession. The probability of a recession is 18% while the probability of a boom is 22%. What is the standard deviation of ACME stock's returns?

		A. 14.71%
		B. 12.01%
		C. 11.51%
		D. 15.81%
		E. 13.71%

3. Suppose the common stock of ACME has a beta of 1.28 and a required return of 15.47%. The rate of return on T-Bills 3.7% while the inflation rate is 4.2%. What is the expected market risk premium?

		A. 10.13%
		B. 11.50%
		C. 11.20%
		D. 7.12%
		E. 9.20%

Answer 1

1

FVOrdinary Annuity = C*(((1 + i )^n -1)/i)

C = Cash flow per period

i = interest rate

n = number of payments

10000= Cash Flow*(((1+ 4/100)^7-1)/(4/100))

Cash Flow = 1266.1

FVAnnuity Due = c*(((1+ i)^n - 1)/i)*(1 + i )

C = Cash flow per period

i = interest rate

n = number of payments

FV= 1266.09612*(((1+ 4/100)^7-1)/(4/100))*(1+4/100)

FV = 10400

2

ACME
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(A)^2* probability
Recession	0.18	-18	-3.24	-28.22	0.014334631
Normal	0.6	14	8.4	3.78	0.000857304
Boom	0.22	23	5.06	12.78	0.003593225
	Expected return %=	sum of weighted return =	10.22	Sum=Variance ACME=	0.01879
			Standard deviation of ACME%	=(Variance)^(1/2)	13.71

Please ask remaining parts separately, questions are unrelated. I have done one bonus