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
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%
Two projects have the following NPVs and standard deviations Which of the two projects is more risky? Project A Project B NPV 200 300 Standard deviation
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.
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
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%
Look at the CEO's spreadsheet and use present value analysis to discount the cash flows. Determine if the project is a net positive or negative impact on a company, NPV. Calculate the certainty equivalent cash flows and NPV. What kind of questions would you ask the CEO about economic assumptions? Articulate the economic and poli
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
Morgan Stanley economists have determined the states of nature and corresponding returns for both Morgan Stanley stock and the S&P 500 index.
1. Morgan Stanley economists have determined the states of nature and corresponding returns for both Morgan Stanley stock and the S&P 500 index. What is the covariance of the returns on Morgan Stanley stock with the S&P 500? What is the beta of Morgan Stanley stock? Probability Morgan Stanley S&P500
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
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
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
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
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
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
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?
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
Risk Premiums. Here are stock market and Treasury bill returns between 1997 and 2001: Year: 1997 Stock Market Return= 31.29 T-Bill Return = 5.26 Year: 1998 Stock Market Return = 23.43 T-Bill Return = 4.86 Year: 1999 Stock Market Return = 23.56 T-Bill Return = 4.68 Year: 2000 Stock Market Return = -10.89 T-Bill Return = 5.8
Brandon Inc. consists of 2 divisions of equal size, and Brandon is 100 percent equity financed. Division A cost of equity capital is 9.8 percent, while Division B cost of equity capital is 14 percent. Brandon's composite WACC is 11.9 percent. Assume that all Division A projects have the same risk and that all Division B proje
A friend in finance shows you the following two figures (see attachment). He asks you to find about them. S represents the safe asset. M represents the market portfolio. a) What is the name of the line segment S and M in Figure 1? b) What is the name of the line segment S and M in Figure 2? c) How can one achieve a portfolio
5. Company XYZ studied the relationship between the states of nature and the corresponding returns for both XYZ stock and the S&P 500 index. This is reported on the table below where we asume that there are 2 states. Probability XYZ S&P 500 Boom Times 0.8 12.30% 14.20% Bad Times 0.2 -2.70% -6.80
Stock price at the end of the year. See attached file for full problem description. The beta of a stock is 1.2 and at the beginning of the year is selling for $55. The expected rate of return on the market portfolio is 9%, while the risk free rate of return is 3%. The stock is expected to pay a dividend of $2 at the end of t
5) If the expected returns for the risk-free asset and a risky asset are 4% and 17% respectively, what percentages of your money must be invested in the risky asset and the risk-free asset, respectively, to form a portfolio with an expected return of 0.11? 6) Discuss how the CAPM might be used in capital budgeting decisions a
Investors expect 5% rate of inflation in the future. Real risk-free rate is equal to 3% The market risk premium is 5%. The beta is 2.0 The realized rate of return has averaged 15% over the last five years. What is the required rate of return.
Stock currently sells for 35.02 a share, the market required rate of return is 17%, the beta is 0.10, ant the risk-free rate of return is 3.3%. If I were to hold this stock for 2 years what is the future value of the stock expected at the end of year two?
Please help with the following problem. I have a 4 million dollar investment fund it consists of 4 stocks stock investment beta a 400000 1.50 b 600000 -0.50 c 1000000
An investor has $5,000 invested in a stock which has an estimated beta of 1.2, and another $15,000 invested in the stock of the company for which he works. The risk-free rate is 6 percent and the market risk premium is also 6 percent. The investor calculates that the required rate of return on his total ($20,000) portfolio is 15
1. An investment costs $3,000 today and provides cash flows at the end of each year for 20 years. The investment's expected return is 10 percent. The projected cash flows for years 1, 2, 3 are $100, $200, and $300 respectively. What is the annual cash flow received for each of the years 4 through 20 (17 years)? (Assume the same
1. You have a friend who is always getting into trouble by taking unwise risks. What advice, based on what you have learned in this course, would you give this person? Conversely, what advice would you give someone you believe to be excessively wary of risk? Also, assume you are an investor in the stock market. What would be you
A $1,000 par value bond with a 10 year maturity date pays $35 quarterly interest. Your required rate of return is 12% with quarterly compounding. How much should you pay for this bond? The growth rate of Campbell Company is expected to be 4% for 1 year, 5% the next year, then 6 % for the following year and then the growth r