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    ROI and Expected Return

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    1) The Transatlantic Transfer Co. is an all-equity financed firm. The beta is .75, the market risk premium is 8% and the risk-free rate is 4%. What is the expected return of Transatlantic?

    2) Tom borrowed $3,500 to consolidate his debts. He was able to borrow at a 12% annual percentage rate (APR) with monthly compounding. Tom is required to make equal monthly payments for the next 36 months. What are his monthly payments?

    3) A mortgage instrument pays $1.5 million at the end of each of the next two years. An investor has an alternative investment with the same amount of risk that will pay interest at 8% compounded annually. What should the investor pay for the mortgage instrument?

    4) An investment project has the cashflow stream of -250, 75, 125, 100, and 50. The cost of capital is 12%. What is the payback period?

    5) What is the end value of investing $5,000 for 14 months at a stated annual interest rate of 6 percent compounded monthly?

    6) Andale has just paid a dividend of $4.50. These dividends are expected to grow at a rate of 5% for the foreseeable future. The risk of this company suggests that future cash flows should be discounted at a rate of 9%. What should be paid for Andale common stock?

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    Solution Preview

    Please see attachment.

    1) The Transatlantic Transfer Co. is an all-equity financed firm. The beta is .75, the market risk premium is 8% and the risk-free rate is 4%. What is the expected return of Transatlantic?
    Risk-free rate 4%
    Beta 0.75
    Market premium 8%
    Expected return 10% =4% + (.75 * 8%)

    2) Tom borrowed $3,500 to consolidate his debts. He was able to borrow at a 12% annual percentage rate (APR) with monthly compounding. Tom is required to make equal monthly payments for the next 36 months. What are his monthly ...

    Solution Summary

    ROI and expected return is examined.

    $2.19

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