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Risk return and value

1. Firm ABC's stock has a 50% chance of producing a 25% return, a 30 % chance of producing a 10% return and a 20 % chance of producing a -28% return. What is the firms expected rate of returns?

2. A 2- stock portafolio with a total value of $100,000. $37500 is invested in stock A with a beta of .75 and the remainder is invested in stock B with a beta of 1.42. What is the portafolio's beta?

3. ABC's stock has a beta of 1.40, the risk-free rate is 4.25% and the expected return on the market portfolio is 9.75%. What is the expected return on ABC's Stock?

4. you believe the following probability and distribution exists for stock ABC, What is the coefficient of variation on ABC's Stock?

State of Economic Probability of State Occurring Stock's Expected return
Boom 0.45 25%
Normal 0.50 15%
Recession 0.05 5%

5. ABC Corporation's stock had expected return of 11.75% last year, when the risk free rate was 5.50% and the MARKET RISK PREMIUM was 4.75%. then an increase in investor risk aversion caused the MARKET RISK PREMIUM to rise by 2%. The risk free rate and the firm's beta remain unchanged. What is ABC stock's new expected rate of return?

6. A stock will have a dividend of $0.75 at the end of the year. The required rate of return is r's= 10.5%, and the expected constant growth rate is g= 6.4%.. What is the stock's current price?

7. If D1 = $1.25, g =4.75% and expected to remain so, and P'0= $26.00. What is the stock's expected dividend yield for the coming year?

8.If D1 = $1.50, g =6.5% and expected to remain so, and P'0= $56.00. What is the stock's expected Capital gains for the coming year?

9. XYZ Inc. has an outstanding issue of perceptual preferred stock with an annual dividend of %7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the stock sell?

10. Acme corporation will pay a dividend of D'1= $1.72. Analysts expected the company's dividend to grow by 10% between year 1 and 2, and at a constant rate of 5% from year 2 to 3 and continue with the 5% thereafter. The required return on this stock is 9.00%. What is the best estimate of the stock's current market value?

Solution Preview

1. Firm ABC's stock has a 50% chance of producing a 25% return, a 30 % chance of producing a 10% return and a 20 % chance of producing a -28% return. What is the firms expected rate of returns?

Expected return = Summation of Pi*Ri = 50%*25%+30%*10%+20%*-28%=9.9%
Where Pi is the probability of scenario i happening and Ri is the return when that scenario happens

2. A 2- stock portafolio with a total value of $100,000. $37500 is invested in stock A with a beta of .75 and the remainder is invested in stock B with a beta of 1.42. What is the portafolio's beta?

Portfolio Beta = wa*Ba+wb*Bb
Wa=Weight of stock A in portfolio =37500/100000=0.375
Wb= Weight of stock B in portfolio = 1- weight ofstock A =1-0.375=0.625
Ba=Beta of stock A=0.75
Bb=Beta of stock B=1.42
Portfolio Beta = 0.375*0.75+0.625*1.42=1.17

3. ABC's stock has a beta of 1.40, the risk-free rate is 4.25% and the expected return on the market portfolio is ...

Solution Summary

The risk return and values are examined.

$2.19