Reference no: EM131483074
1. Based on the probability and percentage of return for the three economic states in the table below, compute the expected return.
|
Economic State
|
Probability
|
Percentage of Return
|
|
Fast Growth
|
0.10
|
60
|
|
Slow Growth
|
0.50
|
30
|
|
Recession
|
0.40
|
-23
|
2. If the risk-free rate is 7 percent and the risk premium is 4 percent, what is the required return?
3. Suppose that the average annual return on the Standard and Poor's 500 Index from 1969 to 2005 was 14.8 percent. The average annual T-bill yield during the same period was 5.6 percent. What was the market risk premium during these 10 years?
4. Conglomco has a beta of 0.32. If the market return is expected to be 12 percent and the risk-free rate is 5 percent, what is Conglomco's required return? Use the capital asset pricing model (CAPM) to calculate Conglomco's required return.
5. Calculate the beta of a portfolio that includes the following stocks:
To calculate the beta of a portfolio, you will use this formula: the sum of beta of each stock times (×) its weight in the portfolio.
- Conglomco stock, which has a beta of 3.9 and comprises 35 percent of the portfolio.
- Supercorp stock, which has a beta of 1.7 and comprises 25 percent of the portfolio.
- Megaorg stock, which has a beta of 0.3 and comprises 40 percent of the portfolio.
1. Based on the cash flows shown in the chart below, compute the NPV for Project Huron. Suppose that the appropriate cost of capital is 12 percent. Advise the organization about whether it should accept or reject the project.
|
Project Huron
|
|
Time
|
0
|
1
|
2
|
3
|
4
|
|
Cash Flow
|
$12,000
|
$2,360
|
$4,390
|
$1,520
|
$3,300
|
2. Based on the cash flows shown in the chart below, compute the IRR and MIRR for Project Erie. Suppose that the appropriate cost of capital is 12 percent. Advise the organization about whether it should accept or reject the project.
|
Project Erie
|
|
Time
|
0
|
1
|
2
|
3
|
4
|
5
|
|
Cash Flow
|
$12,000
|
$2,360
|
$4,390
|
$1,520
|
$980
|
$1,250
|