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TVM, Share Price, CAPM Questions

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1) What is the holding period return (percentage return on this investment) to an investor who bought 100 shares of Charter Oil nine months ago for $36 a share, received two $50 dividend checks, and sold the stock today at $38 a share?

2) What is the market price of a share of stock for a firm that pays dividends of $1.20 per share, has a P/E of 14, and a dividend payout ratio of 0.4?

3) A firm's current ratio is 1.5, and its quick ratio is 1.0. If its current liabilities are $10,000, what are its inventories?

4) Determine the amount you would be wiling to pay for a $1,000 par value bond paying $80 interest each year (annual) and maturing in 12 years, assuming you wanted to earn a 9% rate of return.

5) Your grandparents put $1,000 into a saving account for you when you were born 30 years ago (one time only not annually). This account has been earning interest at a compound rate of 7%. What is its value today?

6) An insurance company offers you and end of year annuity of $48,000 per year for the next 20 years. They claim your return on the annuity is 9%. What is the most you would be willing to pay today for this annuity (answer is a number of Dollars)?

7) 1st bank offers you a car loan at an annual interest rate of 10% compounded monthly. What effective annual interest rate is the bank charging you?

8) Compute the risk premium (this is part of the required rate of return - I am not looking for the full RRR here) for the stock of Omega Tools if the risk free rate is 6%, the expected market return is 12%, and Omega's stock has a beta of .8.

9) Elephant Company common stock has a beta of 1.2. The risk-free rate is 6% and the expected market rate of return is 12%. Determine the RRR (required rate of return) on the security.

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Solution Preview

Answers are in the attached Excel file.
The procedure for doing the calculations have been explained in detail.

1)      What is the holding period return (percentage return on this investment) to an investor who bought 100 shares of Charter Oil nine months ago for $36 a share, received two $50 dividend checks, and sold the stock today at $38 a share?

Number of shares= 100

Purchase price of share= $36
Amount paid for purchase of shares= $3,600 =100 x $36.

Selling price of share= $38
Amount received for sale of shares= $3,800 =100 x $38.
Dividends received= (two $50 dividend checks)= $100 =2 x $ 50
Total amount received= $3,900 =$3,800. + $100.

Profit= $300 =$3,900. - $3,600.

Holding period return = Profit / Purchase Amount= 8.33% =$300./ $3,600.

Answer: holding period return (percentage return on investment)= 8.33%

2)      What is the market price of a share of stock for a firm that pays dividends of $1.20 per share, has a P/E of 14, and a dividend payout ratio of 0.4?

dividends per share = $1.20
dividend payout ratio = dividend per share / earnings per share= 0.4
Therefore, earnings per share = dividend per share / dividend payout ratio = $3.00 =$1.2 / 0.4

P/E= price per share / earnings per share= 14
Therefore, price per share = P/E x earnings per share= $42.00 =14 x $3.

Answer: market price of a share of stock= $42.00

3)      A firm's current ratio is 1.5, and its quick ratio is 1.0. If its current liabilities are $10,000, what are its inventories?

Current Ratio= Current Assets / Current Liabilities= 1.5
Current Liabilities= $10,000
Therefore, Current Assets= Current Ratio x Current Liabilities= $15,000 =1.5 x ...

Solution Summary

9 Financial Management Questions dealing with CAPM, share price, Time Value of money have been explained in detail in Excel.

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