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    Financial Management Appropriate Returns

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    1. (Capital asset pricing model) MFI Inc. has a beta of .86. If the expected market return is 11.5 percent and the risk-free is 7.5 percent, which is the appropriate return of MFI (using the CAPM)?

    2. (Computing bolding-period returns)
    a. From the price data here, compute the holding-period returns for Jazman and Solomon for periods 2 through 4.

    PERIOD JAZMAN SOLOMON
    1 $9 $27
    2 11 28
    3 10 32
    4 13 29

    b. How would you interpret the meaning of a holding-period return?

    3. (Bondholder' expected rate of return) The market price is $900 for a 10-year bond ($1,000 par value) that pays percent interest (4 percent semiannually). What is the bond's expected rate of return?

    4. You own a bond that has a par value of $1,000 and matures in 5 years. It pays a 9 percent annual coupon rate. The bond currently sells for $1,200. What is the bond's expected rate of return?

    5. (Bond valuation) ExxonMobil 20-year bonds pay 9 percent interest annually on a $1,000 par value. If bonds sell at $945, what is the bond's expected rate of return?

    6. (Bondholders' expected rate of return) Zenith Co.'s bonds mature in 12 years and pay 7 percent interest annually. If you purchase the bonds for $1,150 what is your expected rate of return?

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    Answer:
    Given that,
    Beta for MFI, β=0.86
    Expected market return, Rm=11.5%
    Risk Free Rate, Rf=7.5%

    Hence, using CAPM:
    Appropriate return of MFI=7.5%+(11.5%-7.5%)*0.86=10.94%

    We have,
    Given that,
    PERIOD JAZMAN SOLOMON
    1 $9 $27
    2 11 28
    3 10 32
    4 13 29

    Hence,
    Jazman Holding Period Return=($13-$9)/$9=44.44%
    Solomon Holding Period ...

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