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Risk Analysis

The security market line depicts:

The security market line depicts: a. A security's expected return as a function of its systematic risk. b. The market portfolio as the optimal portfolio of risky securities. c. The relationship between a security's return and the return on an index. d. The complete portfolio as a combination of the market portfolio and the r

Stock and Risk Free Rate

In Problems 16-18 below, assume the risk-free rate is 8% and the expected rate of return on the market is 18%. 16. A share of stock is now selling for $100. It will pay a dividend of $9 per share at the end of the year. Its beta is 1.0. What do investors expect the stock to sell for at the end of the year? 18. A stock has an e

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 http://www.bondsonline.com/ 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

The risk adjusted discount rate

The risk adjusted discount rate is the sum of the risk-free rate and the risk premium. includes risk in the denominator of the present value calculation. includes risk in the numerator of the present value calculation. can be written as k = rf + RP. all except c. above.

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.

return on the common stock

1. J Hennessy Company is entirely financed by common stock and has a beta of 1.2. The stock has a price-earnings multiple of 10 and is priced to offer a 10 percent expected rate of return. The company decides to repurchase half of the common stock and substitute an equal value of debt. Assume that the debt yields a risk-free

Future Value of the Stock

See the attached file. 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

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

Well-drawn decision tree

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

CAPM and Expected Return

If the risk-free rate is 6 percent and the expected rate of return on the market portfolio is 14 percent, is a security with a beta of 1.25 and an expected rate of return of 16 percent overpriced or underpriced?

Cost of Capital Problem

1) Canyon Inc. has two divisions: Division A makes up 50 percent of the company, while Division B makes up the other 50 percent. Canyon's beta is 1.2. Looking at stand-alone competitors, Canyon's CFO estimates that Division A's beta is 1.5, while Division B's beta is 0.9. The risk-free rate is 5 percent and the market risk p