FIN500 Week 1-5 Homework Assignment
Southern New Hampshire University
Fin500
Module 1
Homework Assignment
Notes: Work should be done individually.Word-process your solutions within this template and show all steps used in arriving at the final answers. Incomplete solutions will receive partial credit. Copy and paste all necessary data and create tables as needed.
1.Discuss the three forms of business organization in the United States.
2.Suppose the real risk-free rate, r*, is 2% and investors expect inflation to be 4% next year, 5% the following year, and 7% per year thereafter. Assume the MRP is zero for Year 1 and increases by 0.1% each year. Compute the quoted, or risk-free, rate of return for Year 8.
3.What is a firm’s fundamental or intrinsic value? What might cause a firm’s intrinsic value to be different than its actual market value?
1.Which of the following would be most likely to lead to higher interest rates on all debt securities in the economy?
a. Households start saving a larger percentage of their income.
b. The economy moves from a boom to a recession.
c. The level of inflation begins to decline.
d. Corporations step up their expansion plans and thus increase their demand for capital.
e. The Federal Reserve uses monetary policy in an attempt to stimulate the economy.
2. The most widely accepted objective of the firm is to
a. minimize risk
b. maximize profits
c. maximize shareholder wealth
d. maximize earnings per share
3.Who was responsible for the financial crisis of 2007-2009?
a. The U.S. Federal Reserve, for its policy of easy money.
b. The U.S. government, for pushing banks to expand credit for low-income housing
c. Bankers, who aggressively promoted and resold subprime mortgages
d. All of these
FIN500
WeekTwo HomeworkAssignment
Notes:Work should be done individually.Word-process your solutions within this template and show all steps used in arriving at the final answers. Incomplete solutions will receive partial credit. Copy and paste all necessary data and create tables as needed.
1.Suppose a company has $350,000 in current assets. The company’s current ratio is 1.25. Compute the company’s current liabilities.
1. What is the market price of a share of stock for a firm that pays dividends of $1.20 per share, has a price-earnings ratio (P/E) of 14, and a dividend payout ratio of 0.4?
1.A firm’s price to earnings ratio (P/E) is 8 and its market to book ratio is 2. If its earnings per share are $4.00, what is the book value per share?
1.Assume a company had a profit margin of 5.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm’s ROE?
1.Suppose a company had sales last year of $415,000, and its year-end total assets were $355,000. The average firm in the industry has a total assets turnover ratio (TATO) of 2.4. Bonner’s new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales. By how much must the assets be reduced to bring the TATO to the industry average, holding sales constant?
FIN500
Week Three
Homework Assignment
Work should be done individually. Word-process your solutions within this template and show all steps used in arriving at the final answers. Incomplete solutions will receive partial credit. Copy and paste all necessary data and create tables as needed.
1. The expected returns earned from investment in the stock of two companies, Company A and Company B, are shown in the following table. Use the table to complete parts (a) through (c) below.
Demand for Product | Probability of Demand | Expected Return: Stock A | Expected Return: Stock B |
Strong | 0.3 | 40% | 20% |
Normal | 0.45 | 20% | 5% |
Weak | 0.25 | 0% | (5%) |
(a) Compute the expected rates of return for each stock.
(a) Compute the standard deviations for each stock.
(a) Compute the coefficient of variation for each stock. Based on the coefficient of variation, which stock has the higher risk for investment?
1. The expected returns earned from investment in the stock of two companies, Company A and Company B, are shown in the following table. Assume a two-stock portfolio with $25,000 in Company A and $75,000 in Company B. Compute the expected return on the portfolio.
Demand for Product | Probability of Demand | Expected Return: Stock A | Expected Return: Stock B |
Strong | 0.3 | 40% | 20% |
Normal | 0.45 | 20% | 5% |
Weak | 0.25 | 0% | (5%) |
1. Suppose you have a portfolio consisting of three stocks. You invest a total of $200,000 in the stocks. The investments and beta for the stocks are shown in the following table. Use the table to complete parts (a) through (c) below.
Stock | Investment | Beta |
1 | $60,000 | 1.25 |
2 | $40,000 | (0.5) |
3 | $100,000 | 1.5 |
(b)Compute the portfolio beta.
(C)Find the portfolio’s required rate of return, assuming the same risk-free rate and expected return for the market as in part (a).
FIN 500 Week Four Homework
Work should be done individually. Word-process your solutions within this template and show all steps used in arriving at the final answers. Incomplete solutions will receive partial credit. Copy and paste all necessary data and create tables if needed.
Problem 1
Compute the future value of $1000 at 8% compounded annually for 5 years.
Problem 2
Compute the present value of $1000 due after 5 years at 12%, compounded semiannually.
Problem 3
Compute the future value of a 8%, 10-year ordinary annuity that pays $500 each year.
Problem 4
Suppose the U.S. Treasury offers to sell you a bond for $676.84. No payments will be made until the bond matures 8 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price?
Problem 5
Master Card and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements. If the APR is stated to be 15.00%, with interest paid monthly, what is the card’s EFF%?
FIN 500 Week Five HomeworkQuestions
Problem 1
Suppose a corporation’s bonds have 8 years remaining to maturity. In addition, suppose the bonds have a $1000 face value, and the coupon interest rate is 7%. The bonds have a yield to maturity of 10%. Compute the market price of the bonds if interest is paid semiannually.
Problem2
A company’s bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000. What is their current yield?
Problem 3
Assume that a bond currently sell for $1,280 and have a par value of $1,000. The bond pays a $135 annual coupon and has a 15-year maturity, but they can be called in 5 years at $1,050. What is the yield to call (YTC)?
Problem 4
Consider some bonds with an annual coupon payment of 7.25%. The bonds have a par value of $1,000, a current price of $1,125, and they will mature in 13 years. What is the yield to maturity on these bonds?
Notes
Your first case assignment deals with the concepts of risk and return. Please read the case questions through and give some thought to your answers before you commence. Answer all parts of the ten (10) questions presented below. Your report should be well-organized, type-written/word processed, and independently prepared. Each student’s report must be his/her own original work and the write-up must also be individually prepared.
1. Buxton Corporation is planning to invest in a security that has several potential rates of return. Using the following probability distribution of returns during different states of the economy, what is the expected rate of return on this investment? In addition, compute the standard deviation of the returns (?). Finally, briefly explain what these numbers represent.
Probability | Expected Return |
0.10 | -10% |
0.20 | 5% |
0.30 | 10% |
0.40 | 25% |
2. Using the capital asset pricing model (CAPM), estimate the appropriate required rate of return for the following three stocks, assuming that the risk-free rate (r_{RF}) is 5 percent and the expected return for the market (r_{M}) is 17 percent.
Stock | Beta (?) |
A | 0.75 |
B | 0.90 |
C | 1.40 |
3. Based on the following table of actual (or ex post) returns for both Inquiry Corporation and the market from 2007 through 2010, calculate the average return and the standard deviation for both Inquiry and the market (keep in mind that this data is historical and not based on a probability distribution, so be sure to use the correct formulas).
Year | Inquiry Corporation | Market |
2007 | 4% | 2% |
2008 | 6% | 3% |
2009 | 0% | 1% |
2010 | 2% | -1% |
4.
(a) Derive the expected return (r_{P}) and beta (?_{P}) for a portfolio based on the following information:
Stock | Percentage of Portfolio | Beta (?) | Expected Return |
1 | 40% | 1.00 | 12% |
2 | 25% | 0.75 | 11% |
3 | 35% | 1.30 | 15% |
(a) Given the information in the table above, present the equation for the security market line and explain where the return for this specific portfolio would lie (plot) relative to the SML (i.e., below or above the line). Assume that the risk-free rate (r_{RF}) is 8 percent and that the expected return on the market portfolio (r_{M}) is 12 percent.
5 Reliable Printing is evaluating a security. One-year Treasury bills (r_{RF}) are currently paying 3.1 percent. Calculate the following investment’s expected return and its standard deviation (?). Should Reliable Printing invest in this security? Briefly explain.
Probability | Expected Return |
0.15 | -1% |
0.30 | 2% |
0.40 | 3% |
0.15 | 8% |
6. You have researched the common stock of two companies (A and B) and have compiled the following information:
COMPANY A COMPANY B
Probability | Return | Probability | Return |
0.20 | -2% | 0.10 | 4% |
0.50 | 18% | 0.30 | 6% |
0.30 | 27% | 0.40 | 10% |
0.20 | 15% |
Calculate the expected return, standard deviation (?), and the coefficient of variation (CV) for each stock and, based on the CV, which stock should you invest in? Briefly explain.
7. Assume you own a portfolio consisting of the following stocks:
Stock | Percentage of Portfolio | Beta (?) | Expected Return |
1 | 20% | 1.00 | 16% |
2 | 30% | 0.85 | 14% |
3 | 15% | 1.20 | 20% |
4 | 25% | 0.60 | 12% |
5 | 10% | 1.60 | 24% |
(a) Determine the expected return on your portfolio.
(b) Determine the portfolio beta (?_{P}).
(c) Given the portfolio beta and the assumptions that the risk-free rate (r_{RF}) is 7 percent and the expected return on the market portfolio (r_{MKT}) is 15.5 percent, present the equation for the security market line (SML).
(d) Based on your equation for the SML and the expected returns from the data in the table, which stocks appear to be winners (i.e., underpriced) and which stocks appear to be losers (i.e., overpriced)?
8. The common stock for a particular company is known to have a beta (?) of 1.20. The expected return on the market (r_{M}) is 9 percent and the risk-free rate (r_{RF}) is 5 percent.
(a) Compute a fair rate of return based on this information.
(b) What would be a fair rate of return if the beta were 0.85?
(c) What would be a fair rate of return if the expected return on the market increased to 12 percent and the beta remained at 0.85?
9 The expected return for the general market (r_{MKT}) is 12.8 percent, and the market risk premium (i.e., RP_{M}) is 4.3 percent. Moe, Larry, and Curley have betas of 0.82, 0.57, and 0.68, respectively. What are the required rates of return for the three securities?
10 Hickory Stick’s common stock has a beta (?) of 0.95. The expected return for the market (r_{M}) is 7 percent and the risk-free rate (r_{RF}) is 4 percent.th
(a) What is the required rate of return based on this information?
(b) What would be the required rate of return if the beta were 1.25?
11 An exhaustive financial analysis has produced the following returns on two investments under three different scenarios:
Expected Returns
Scenario | Probability | Stock X | Stock Y |
S_{1} | 0.3 | 10% | 8% |
S_{2} | 0.4 | 16% | 15% |
S_{3} | 0.3 | 12% | 20% |
(a) Calculate the expected return on each investment.
(b) Calculate the standard deviations (?) for both X and Y.
(c) Calculate the coefficient of variation (CV) for both X and Y.
(d) If you were to create a portfolio consisting of 67% of Stock X and 33% of Stock Y, what will be the expected return (r_{P}) and the standard deviation (?_{P}) for your portfolio?