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Risk Analysis

International Finance

Suppose that a foreign project has a beta of 1.12, the risk free return is 9.3% and the required return on the market is estimated at 18%. Then the cost of capital for the project is a. 17.21% b. 21.37% c. 19.04% d. 20.03% The cost of capital for a project depends on a. the correlation between returns on the project


You have just read the annual report of a mutual fund. It boasted of a 26% return and advertised that it had beaten the market return last year by three percentage points. In doing some research you discover the fund had a beta of +1.5 and the return on risk free Treasury securities was 15%. Assuming a market risk premium of 8

Required rate of return

Ritter Company's stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is Ritter's required rate of return?

Hedging and Risk-neutral probability

13. Consider a six-month put option on a stock with a strike price of $32. The current stock price is $30 and over the next six months, it is expected to rise to $36 or fall to $27. The risk-free interest rate is 6%. What is the risk-neutral probability of the stock rising to $36? a. 0.365 b. 0.415 c. 0.435 d. 0.465

Estimate of a stocks current price

A company currently pays a dividend of $2.00 per share, It is estimated that the company's dividend will grow at a rate of 20% per year for the next 2 years, then the dividend will grow at a constant rate of 7% thereafter. The company's stock has a beta equal to 1.2, the risk-free rate is 7.5%, and the market risk premium is 4%.

Draw a yield curve for each of the main bond classifications

Visit to complete the project below. You will be particularly interested in "Today's Market" and the "Corporate Bond Yields" sections. Project Draw a yield curve for each of the main bond classifications (Treasury, Corporate, Municipal, and Foreign) you saw from the Bonds Online website, placin

MMB has common stock has a beta of 1.5.

MMB has common stock has a beta of 1.5. A security analyst forecasts an expected return of 15% over the next year. The market risk premium is 8% and the risk free rate is 4%. In a CAPM framework, does the analyst believe that Fenway common stock is fairly priced?

A source of business risk is

A source of business risk is a. the firm's leverage. b. general business conditions. c. the firm finding an oil well on its property. d. inflationary changes in costs. e. b. and d. above.

If, at the end of the project life, a piece of equipment having a book value of $4,000 is expected to bring $3,000 upon resale, and the income tax rate is 40%, how much will be the cash flow?

If, at the end of the project life, a piece of equipment having a book value of $4,000 is expected to bring $3,000 upon resale, and the income tax rate is 40%, how much will be the cash flow? a. $2,800 b. $3,000 c. $3,400 d. $4,000 The use of sensitivity analysis will generally result in: a. The calculation of a cert

"All our projects are discounted at the same interest rate," says the treasurer of a large company. Would you dispute the advisability of such a procedure?

Cost of Capital

After looking at the project and talking with some people that have been around the organization for many years, you recognize that the 10% cost of capital is not reflective of the company's current cost of capital. The head of treasury has assured you that the company can raise debt at 7% in today's market and that if the firm

Risks and Returns

Problem 6-1 Phoenix Company common stock is currently selling for $20 per share. Security analysts at Smith Blarney have assigned the following probability distribution to the price of (and rate of return on) Phoenix stock one year from now: Price Rate of Return Probability $16 -20% 0.25 20 0% 0.30 24 +20%

Decision Analysis: Gamma Construction Company

Gamma Construction Company has been asked to bid on the construction of 20 lighted tennis courts for State University. Each court will cost $20,000 in construction costs, and in addition, there will be a fixed expense of $10,000 to cover the preparation and submittal of the bid. Gamma is considering five different bid levels.

Required Return

A company has a beta of 1.3. The risk free interest rate today is 8% and the return on a market portfolio of stocks is 14%. (Therefore the market risk is 6%, the difference the market return and the risk free return). I. What is the required return (equity cost) on the company's stock? II. If the risk free rate rises to 9%

Financial Economics

3. If the correlation coefficient between the returns of two assets is zero, it means that a. there is no possibility for reducing risk through diversification b. the two assets can be combined in a way which leads to zero risk c. at least one of the two assets is risk free (i.e. the standard deviation of returns is zero)

Financial Economics

1. Downup company has the following return history: for the first 6 years, the stock went down 10% each year (this period is remembered as the "down" period by Downup shareholders), then in the next six years the stock went up 15% each year ("the UP phase"). Hotcold was established in the same year as the rival Downup. The retur

Financial Economics

1. Assume that the risk-free rate of interest is 3% and the expected rate of return on the market is 9%. A share of stock is selling for $55 at the beginning of the year. It will pay a dividend of $2 per share at the end of the year. Its beta is 1.2. What do investors expect the stock to sell for at the end of the year? 2

stocks in securities markets

Suppose that there are many stocks in securities markets and you locate two of them which have the following characteristics: Stock Expected Return Standard Deviation A 3% 6% B 8% 10% Correlation of the two returns = -1 a. If you wanted to invest in Stocks A and B in such a way as to mi

Financial Economics

You know that there is a 40% probability that Microsoft will be selling for $22.50 three months from now and a 60% probability that it will be selling for $42.50. Microsoft does not pay a dividend. Currently, Microsoft is selling for $30. You are thinking of either buying 100 shares or selling short 100 shares. If you go lon

Financial Economics

1. You know that someone invested $1,500 in the Ec140 mutual fund ten years ago (and they reinvested all dividend and capital gains distributions). You now learn that their balance in the fund has grown to $9,245. (a) What has the geometric rate of return been for the Ec140 fund for the last ten years? (b) What do you know ab

Risk Analysis Question

1. Suppose that the Beauty Company faces the choice of introducing a new beauty cream or investing the same amount of money in Treasury bills with a return of $10,000.00. If the company introduces the beauty cream, there is an 80 percent probability that a competing firm will introduce a similar product and a 20 percent chance

Economic Decision Making

1. The table below summarizes the payoffs you can expect to receive from investing in a limited partnership owning interests in an oil field. If the field is leased, you will receive the base lease amount plus royalties on any oil discoveries. If the field is drilled for oil, you will receive your share of the oil value. If