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    Leaning Tower of Pita Expected Rate of Return

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    The common stock of Leaning Tower of Pita, Inc., a restaurant chain will generate the following payoffs to investors next year:

    Dividend Stock Price
    Boom $5.00 $195
    Normal economy $2.00 $100
    Recession $0.00 $0

    The company goes out of business if a recession hits. Calculate the expected rate of return and standard deviation to Leaning Tower of Pita shareholders. Assume for simplicity that the three possible states of the economy are equally likely. The stock is selling today for $90.


    Problem 9-14

    Enter formulas to calculate the expected rate of return on the stock. Use the MS Excel STDEVP function to calculate the standard deviation.

    Stock price today $90.00

    Expected return
    each scenario
    Boom FORMULA
    Normal economy FORMULA
    Recession FORMULA

    Expected rate of return FORMULA

    Standard Deviation FORMULA

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    Solution Preview

    Stock price today $90.00

    Expected return
    each scenario
    Boom = (Dividend + Price at year end - price now)/Price now = (5+195-90)/90 = 1.2222 or ...

    Solution Summary

    Excel spreadsheet calculates expected rate of return, standard deviation, etc. for a couple questions given.