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You are considering the purchase of two stocks, A and B. The initial price of each stock is $100. The prices of the stocks at the end of the year depend on the state of the economy over the year as follows (neither stock pays a dividend):
Price in One Year
State of Economy Probability Stock A Stock B
Boom .40 110 126
Moderate Growth .40 106 112
Recession .20 96 83
What are the expected rates of return and standard deviations for A and B?
If the risk-free rate is 4%, what is the risk premium on stock A? What is the risk premium on stock B? Which stock has the better risk-reward tradeoff as measured by the Sharpe ratio?
A European put option on one underlying share of stock B with a strike price of $112 and time to expiration of 1 year has a premium of $10. Consider a portfolio where you buy one share of stock B and buy one put option. What is the one-year holding period rate of return on this portfolio for each state of the economy? What is the expected rate of return on the portfolio? What is the standard deviation? In what sense does buying the put option when you own the stock constitute a purchase of insurance in this case?
In exactly 15 months a bill of $21,200 is due. Today you deposit money such that if the account earns a target rate of return of 8.90% per annum, compounded monthly, the bill is perfectly financed. No other deposits or withdrawals have been made. You..
What is the modified internal rate of return (MIRR) of this project? Assume that the required rate is 14% What is the modified internal rate of return (MIRR) of this project? Assume that the required rate is 14% Year CF 0 -$22,000 1 $ 8,700 2 $ 1,400..
Compute the fair value of a chooser option which expires aftern=10periods. At expiration the owner of the chooser gets to choose
you expect kt industries kti will have earnings per share of 3 this year and expect that they will pay out 1.50 of
Fleury Co. has a 34 percent tax rate. Its total interest payment for the year just ended was $41.0 million. Required: What is the interest tax shield?
Assume the alpha company is considering producing a new widget. the required machinery will cost 1,200,000 it will be depreciated using a 5-year macrs asset life. alpha has already spent 250,000 in renovations to make room for the new machinery(expen..
The Wise Co. purchased a new truck two years ago for $56,000. The company uses MACRS depreciation for accounting purposes. The truck is classified as 5-year property, which has depreciation allowances of 20%, 32%, and 19.20% for the first three years..
A steel factory has the right to discharge waste into a river. The waste reduces the number of fish, causing damage for fisheries. Let Q denote the quantity of waste dumped. Calculate the efficient quantity of waste. What would be the quantity dumped..
Calculate a firm's free cash flow if it has net operating profit after taxes of $60,000, depreciation expense of $10,000, net fixed asset investment requirement of $40,000, a net current asset requirement of $30,000, and a tax rate of 30%.
The In-Tech Co. just paid a dividend of $1 per share. Analysts expect its dividend to grow at 25% per year for the next three years and then 5% per year thereafter. If the required rate of return on the stock is 18%, what is the current value of the ..
Suppose you sell nine May 2014 gold futures contracts on this day, at the last price of the day which is $1,295.60 per ounce. Each contract is for 100 ounces. What will your cumulative mark to market be if gold prices turn out to be $1,298.31 per oun..
Lincoln Funeral Home has a capital structure consisting of 20% debt and 80% equity. Lincoln’s debt currently has an 8% yield to maturity. The risk free rate is 5% and the market risk premium is 7%. Using CAPM, Lincoln estimates that the cost of equit..
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