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Consider the following information for Stocks X, Y, and Z. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock X: Expected return .09, Standard deviation .15, and Beta=.8. Stock Y: Expected return .1075, Standard Deviation .15, and Beta=1.2. Stock Z: Expected return .1250, Standard Deviation .15, and Beta=1.6. Fund Q has one-third of its funds invested in each of the three stocks. The risk-free rate is 5.5%, and the market is in equilibrium. (That is, required returns equal expected returns.) a. What is the market risk premium (rM-rRF)? b. What is the beta of Fund Q? c. What is the required return of Fund Q? d. Would you expect the standard deviation of Fund Q to be less than 15%, equal to 15%, or greater than 15%? Explain.
You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago for $1.35 million in anticipation of using it as a..
A stock is currently selling for $78 per share. A call option with an exercise price of $81 sells for $3.90 and expires in three months. If the risk-free rate of interest is 2.7 percent per year, compounded continuously, what is the price of a put op..
Distributed.net (www.distrbuted.net) is an organization that coordinates research on distributed computing applications. People and organizations can join Distributed.net and contribute idle computing power to ongoing research projects that requir..
Little Book Company recently reported an EBITDA of $5 million and net income of $1.2 million. It had $1 million of interest expense, and its corporate tax rate was 40%. What was its charge for depreciation and amortization?
A five-year project has an initial fixed asset investment of $320,000, an initial NWC investment of $32,000, and an annual OCF of -$31,000. The fixed asset is fully depreciated over the life of the project and has no salvage value. If the required re..
Given the returns and probabilities for the three possible states listed here, calculate the covariance between the returns of Stock A and Stock B. For convenience, assume that the expected returns of Stock A and Stock B are 0.11 and 0.15, respective..
Messman Manufacturing will issue common stock to the public for $40. The expected dividend and growth in dividends are $3.50 per share and 3%, respectively. If the flotation cost is 9% of the issue's gross proceeds, what is the cost of external equit..
Assume that you contribute $320 per month to a retirement plan for 20 years. Then you are able to increase the contribution to $640 per month for another 30 years. Given a 7 percent interest rate, what is the value of your retirement plan after the 5..
Washington-Pacific (W-P) invests $3 million to buy a tract of land and plant some young pine trees. The trees can be harvested in 14 years, at which time W-P plans to sell the forest at an expected price of $6 million. What is W-P's expected rate of ..
A proposed new project has projected sales of $202,300, costs of $102,340, and depreciation of $7,140. The tax rate is 34 percent. Calculate operating cash flow using the four different approaches.
Daddi Mac, Inc., doesn’t face any taxes and has $247.60 million in assets, currently financed entirely with equity. Equity is worth $30 per share, and book value of equity is equal to market value of equity. What will be the level of expected EPS if ..
Assume the real rate of return in the economy is 2.5%, expected rate of inflation is 4%, and the risk premium is 5.9%, what is the risk-free rate and your required return?
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