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Analysis of past monthly movements in IBM's stock price produces the following estimates: α = 2.5% and β = 1.6. If the market index subsequently rises by 12% in one month and IBM's stock price increases by 20%, what is the abnormal change in IBM's stock price?
The Fed makes an open-market purchase of $5 million in an economy in which no bank holds excess reserves and the assumptions of the simple multiplier hold with a reserve requirement of 8 percent. Draw up the bank's balance sheet and calculate the ban..
Bayou Okra Farms just paid a dividend of $3.30 on its stock. The growth rate in dividends is expected to be a constant 6 percent per year indefinitely. Investors require a return of 15 percent for the first three years, a return of 13 percent for the..
Consider a bond with a settlement date of 01/19/1994. The maturity of the bond is March 15, 2021. The coupon rate is 5.5%. If the yield to maturity of the bond is 5.34% (bond equivalent yield, semi annual compounding), what is the list price of the b..
You own a one-year call option to buy one acre of Los Angeles real estate. The exercise price is $2.04 million, and the current, appraised market value of the land is $1.74 million. You have a European call option. What is it worth of the European ca..
A bicycle manufacturer currently produces 300,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $2 a chain. The plant manager believes that it would be cheaper to make the..
Two projects being considered are mutually exclusive and have the following projected cash flows. If the required rate of return on these projects is 10 percent, which would be chosen and why?
Suppose the Federal Reserve purchases $10 billion worth of foreign currency in exchange for deposit accounts at the Federal Reserve. Show the changes that result from this transaction on the Fed’s balance sheet
Tina Fashions is expected to pay an annual dividend of $1.10 a share next year. The market price of the stock is $21.80 and the growth rate is 4.5 percent. What is the firm's cost of equity?
Investor buys a stock today assuming to resell it one year from now for $70. Dividend expected to be paid in one year is $10. If required rate of return is 25%, how much the investor is ready to pay for the stock today? That is, what is the PV of fut..
Jackson just received a settlement in a lawsuit that promises $230 in 7 years. The lawsuit will also pay him a second amount of $620 that will be received in 12 years. Jackson, being profligate, wants instead to spend the settlement money today. What..
Explain the evolution of corporate governance. What problems developed? What are the current trends? What are the major criticisms of boards of directors? Which single criticism do you find to be the most important? Why?
An insurance firm agrees to pay you $6,620 at the end of 20 years if you pay premiums of $200 per year at the beginning of each year for 20 years. Find the internal rate of return.
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