Calculate the risk premium and probabilities , Financial Management

Johnson & Johnson (JNJ) is trading at 68.15 (Sep 12th 2012 close). JNJ is a large health care conglomerate. It has done well so far this year (though not as well as the market) and may continue to do well. You believe that it is less vulnerable to the risks of the "fiscal cliff" and decide to take a closer look at it.

After careful analysis you conclude that in one year the price will be (44, 58, 71, 76, 91) with associated probabilities of (0.1, 0.2, 0.4, 0.2, 0.1). Looking at the company's past record you determine that JNJ will pay a dividend of 2.52 (two quarterly dividends of 0.61 and two quarterly dividends of 0.65). If you invest your funds risk-free in the money market you will receive 1%.

a. What is the expected return of JNJ stock? What is the risk premium of JNJ stock?

b. Calculate the standard deviation of the return of JNJ stock (remember that you are using probabilities to do this, not historical data).

You become convinced that this investment opportunity is a good one. In the current conditions

JNJ seems like a safe investment. You decide to buy JNJ stock on margin. You purchase 200 shares, financing half with your own investment and borrowing half from your broker.

c. How much do you borrow from your broker? What is your initial margin?

Tomorrow bad news reaches the economy and the price of JNJ stock drops to 44 immediately.

d. What is the new margin on the account? Do you receive a margin call? If you do, assume that you close your position immediately.

e. Calculate the return on your investment. What would the return have been if you had not borrowed any funds (Hint: what is the return on JNJ stock)?

 

Posted Date: 3/6/2013 2:55:50 AM | Location : United States







Related Discussions:- Calculate the risk premium and probabilities , Assignment Help, Ask Question on Calculate the risk premium and probabilities , Get Answer, Expert's Help, Calculate the risk premium and probabilities Discussions

Write discussion on Calculate the risk premium and probabilities
Your posts are moderated
Related Questions
Q. Show the Accounting Profit Criteria? Accounting Profit Criteria: - Under accounting profit criteria there is merely one method for making capital expenditure decisions. This


After read all the available information carefully, prepare a two page (double-spaced) essay and answer the following questions: Assume that we have the following data: C=100+0.50Y

Determine about the Systems based audit Systems based audit is useful as it would help identify risks within the processes in an organisation and review how adequate the contr

The amount by which the market price exceeds the conversion value or the investment value is called as the premium.

which are the components of working capital management?

evaluation and maintenance of MIS

The capital structure of Wild West Inc. is as follows: Debts: $5,000,000 (face value) bonds with coupon rate at 8.00% and current price at par Preferred shares: $2,000,000

Enumerate about the Turnkey operations An illustration of a turnkey business would be a franchise for example immediate brand, systems and product with exclusive territory. A t

Q. Problems in computations of cost of retaining earning? Problems in computations of cost of retaining earning: it is sometimes argued that retained earning do not involve any