Suppose you bought a 12 percent coupon bond one year ago for $1,040. The bond sells for $1,115 today.
Requirement 1:
Assuming a $1,000 face value, what was your total dollar return on this investment over the past year?
Requirement 2:
What was your total nominal rate of return on this investment over the past year?
Requirement 3:
If the inflation rate last year was 7 percent, what was your total real rate of return on this investment? (Do not round intermediate calculations.)
2
Using the following returns, calculate the arithmetic average returns, the variances, and the standard deviations for X and Y.
Returns
Year X Y
1 10 % 19 %
2 28 40
3 17 -13
4 -18 -27
5 19 48
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Requirement 1:
(a) Calculate the arithmetic average return for X.
(b) Calculate the arithmetic average return for Y.
Requirement 2:
(a) Calculate the variance for X. (Do not round intermediate calculations.)
(b) Calculate the variance for Y. (Do not round intermediate calculations.)
Requirement 3:
(a) Calculate the standard deviation for X. (Do not round intermediate calculations.)
(b) Calculate the standard deviation for Y. (Do not round intermediate calculations.)
3.
You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 5 percent, -10 percent, 24 percent, 16 percent, and 15 percent. The average inflation rate over this period was 3.4 percent and the average T-bill rate was 5.5 percent.
Requirement 1:
What was the average real return on Crash-n-Burn’s stock? (Do not round intermediate calculations.)
Requirement 2:
What was the average nominal risk premium on Crash-n-Burn’s stock? (Do not round intermediate calculations.)
4.
Suppose the returns on large-company stocks are normally distributed. The average annual return for large-company stocks from 1926 to 2007 was 11.5 percent and the standard deviation of those stocks for that period was 22.2 percent. Based on the historical record, use the cumulative normal probability table (rounded to the nearest table value) in the appendix of the text to determine the probability that in any given year you will lose money by investing in common stock.
A. $30.22%
B. $2.68%
C. $31.73%
D. $28.71%
E. $31.43%
Use appendix below:
rev: 09_20_2012
5.
You have $20,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 16 percent and Stock Y with an expected return of 7 percent.
Required:
(a) If your goal is to create a portfolio with an expected return of 11.7 percent, how much money will you invest in Stock X?
(b) If your goal is to create a portfolio with an expected return of 11.7 percent, how much money will you invest in Stock Y?
6.
A portfolio is invested 25 percent in Stock G, 65 percent in Stock J, and 10 percent in Stock K. The expected returns on these stocks are 11 percent, 20 percent, and 31 percent, respectively. What is the portfolio’s expected return?
rev: 09_20_2012
A. 16.53%
B. 19.60%
C. 18.85%
D. 19.79%
E. 17.91%
7.
You own a portfolio equally invested in a riskfree asset and two stocks. If one of the stocks has a beta of 1.5 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?
rev: 09_20_2012
A. 0.55
B. 1.50
C. 0.50
D. 1.42
E. 1.58
8.
A stock has a beta of 1.4, the expected return on the market is 10 percent, and the risk-free rate is 5 percent. What must the expected return on this stock be?
rev: 09_20_2012
A. 11.4%
B. 19%
C. 12.6%
D. 12%
E. 12.48%
9.
A stock has an expected return of 13 percent, its beta is 1.4, and the expected return on the market is 10 percent. What must the risk-free rate be? (Do not round your intermediate calculations.)
rev: 09_20_2012
A. 2.50%
B. 2.60%
C. 2.62%
D. -1.00%
E. 2.37%
10.
You want to create a portfolio equally as risky as the market, and you have $1,300,000 to invest. Consider the following information:
Asset Investment Beta
Stock A $260,000 0.65
Stock B $390,000 1.30
Stock C 1.55
Risk-free asset
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Required:
(a) What is the investment in Stock C? (Do not round your intermediate calculations.)
(b) What is the investment in risk-free asset? (Do not round your intermediate calculations.)
11.
The Up and Coming Corporation’s common stock has a beta of 1.1. If the risk-free rate is 5 percent and the expected return on the market is 12 percent, what is the company’s cost of equity capital? (Do not round your intermediate calculations.)
rev: 09_20_2012
A. 13.33%
B. 12.7%
C. 13.21%
D. 18.2%
E. 12.06%
12.
Stock in Country Road Industries has a beta of 0.91. The market risk premium is 10 percent, and T-bills are currently yielding 5 percent. The company’s most recent dividend was $1.9 per share, and dividends are expected to grow at a 6 percent annual rate indefinitely. If the stock sells for $36 per share, what is your best estimate of the company’s cost of equity? (Do not round your intermediate calculations.)
rev: 09_20_2012
A. 12.85%
B. 14.1%
C. 9.55%
D. 10.77%
E. 11.59%
13.
Jiminy’s Cricket Farm issued a 30-year, 6 percent semi-annual bond 9 years ago. The bond currently sells for 83 percent of its face value. The book value of the debt issue is $21 million. The company’s tax rate is 35 percent.
In addition, the company has a second debt issue on the market, a zero coupon bond with 9 years left to maturity; the book value of this issue is $78 million and the bonds sell for 78 percent of par.
Required:
(a) What is the company’s total book value of debt? (Do not round your intermediate calculations.)
(b) What is the company’s total market value of debt? (Do not round your intermediate calculations.)
(c) What is your best estimate of the aftertax cost of debt? (Do not round your intermediate calculations.)
14.
Fama’s Llamas has a weighted average cost of capital of 11.5 percent. The company’s cost of equity is 18 percent, and its pretax cost of debt is 9 percent. The tax rate is 34 percent. What is the company’s target debt-equity ratio? (Do not round your intermediate calculations.)
rev: 09_20_2012
A. 1.1691
B. 1.2158
C. 1.2275
D. 2.6
E. 1.1106
15.
Southern Alliance Company needs to raise $23 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The company has a target capital structure of 55 percent common stock, 9 percent preferred stock, and 36 percent debt. Flotation costs for issuing new common stock are 9 percent, for new preferred stock, 7 percent, and for new debt, 4 percent. What is the true initial cost figure Southern should use when evaluating its project? (Do not round your intermediate calculations.)
rev: 09_20_2012
A. $21,466,667
B. $23,747,042
C. $24,614,600
D. $25,725,962
E. $24,736,502
16.
Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds are listed in the following table. If the corporate tax rate is 32 percent, what is the aftertax cost of Ying’s debt?(Do not round your intermediate calculations.)
Bond Coupon Rate Price Quote Maturity Face Value
1 6.3% 105 5 years $ 20,000,000
2 7.3 114 10 years 37,000,000
3 6.5 106 22 years 45,000,000
4 7.1 116 33 years 56,000,000
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rev: 09_20_2012
A. 3.72%
B. 4.12%
C. 3.92%
D. 3.76%
E. 5.77%