How much are you willing to pay for the stock today

Assignment Help Financial Management
Reference no: EM131552293

Market analysts believe that the market value of stock ABC either increases to 180 or drops down to 20, with equal probability, a year from now. No dividends will be paid to shareholders during the coming year. Assume you are an investor with utility-function U = π 1/2 where π represents your utility of the ABC stock’s end-of-year market value.

(a) Given your risk-aversion; how much are you willing to pay for the stock today?

(b) Given your certainty equivalent (or reservation-price) calculated above, what is the riskpremium you are demanding in order to participate in the gamble of purchasing the ABC-stock today?

(c) Would a utility-funcion U = π 2 change your risk-premium calculated above in any way? Briefly explain your answer.

Reference no: EM131552293

Questions Cloud

What is the overall interest rate of this company : A company’s current balance sheet shows three different types of long-term debt. What is the overall interest rate of this company?
What is the expected value of the investment : Consider an investor with utility given U = v p where p is net cashflow (“profits”). What is the expected value of the investment?
Find the expected cash flow from each apartment complex : Find the expected cash flow from each apartment complex. What is the coefficient of variation for each apartment complex?
Capital asset pricing model most appropriately : Which one of the following explains the concept of CAPM (Capital Asset Pricing Model) most appropriately?
How much are you willing to pay for the stock today : Given your risk-aversion; how much are you willing to pay for the stock today?
We know beta is a company-specific risk index : We know “BETA” is a company-specific risk index.
Concept of the time value of money : Which one of the following describes the concept of the Time Value of Money (TVM) most appropriately?
Describes it normal market premium or normal risk premium : Which one of the following describes it (Normal Market Premium or Normal Risk Premium) most appropriately?
The company market value to increase : In which occasion, can you expect the company’s market value to increase?

Reviews

Write a Review

Financial Management Questions & Answers

  What is your companys weighted average flotation cost

What is your company’s weighted average flotation cost, assuming all equity is raised externally?

  New employee work for the owner to break even

A local business owner is considering adding another employee to his staff in an effort to increase the number of hours that the store is open per day. If the employee will cost the owner $4,000 per month and the store takes in $50/hour in revenue wi..

  Explain how applying costing methods

Explain how applying costing methods can aid in better managerial decision-making.

  Calculate riversides financial ratios

Calculate riversides financial ratios for 2010, assume that riverside had $1,000,000 in lease payments and 1,400,000 in debt principal repayments in 2010. Interpret the ratios. Use both trend and comparative analyses. For the comparative analysis ass..

  Calculate adjusted present value

Consider a project to produce solar water heaters. which reflects the project’s business risk. Calculate Adjusted present value

  Large capitalization stock

The expected return on any asset is dependent upon its beta. Explain what Beta is, why it is used and its relevance to investment decisions. Then select a large capitalization stock (GOOG, NFLX, KO, PEP, CMG, WMT, MSFT) and identify their company bet..

  What is the after-tax real rate of return on your investment

You purchase a share of stock for $60. One year later you receive $3.00 as dividend and sell the share for $63. What was your holding period return? Suppose the rate of inflation over the year was 10%. What was the exact rate of growth of purchasing ..

  Annual coupon payments and semiannual coupon payments

Thirteen years ago a firm issued $1,000 par value bonds with a 5% annual coupon rate and a term to maturity of 20 years. Market interest rates have decreased since then and similar bonds today would carry an annual coupon rate of 4%. What would these..

  How many observations should the manager take in order

How many observations should the manager take in order to be 95 percent confident that the results will not be more than 2.5 percent away from the true result?

  Importance of knowing a companys wacc and npv

Calculate GBATT's WACC - using the WACC and the above cash flows, calculate the NPV of each project and justify the importance of knowing a company's WACC and NPV.

  Market value of the firms equity securities

Many large corporations, such as General Motors, have written off large amounts of their nonperforming (or poorly performing) assets as they have shrunk their operations. What is the impact of these asset write-offs on the future return on assets, fu..

  What is the fair interest rate and inflation premium

You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 1.95 percent. What is the fair interest rate on Moore Corpo..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd