Calculate the standard deviation of returns

Reference no: EM13693336

Problem 1:

Cost of debt using the approximation formula: For each of the following $1000 par-value bonds, assuming annual interest payment and a 40% tax rate, calculate the after tax cost to maturity using the approximation formula

Bond	Life (years)	Underwriting Fee	Discount (-) or premium (+)	Coupon Interest Rate
A	20	25	-$20	9%
B	16	40	+10	10
C	15	30	-15	12
D	25	15	Par	9
E	22	20	-60	11

***Note: After tax cost of debt for Bond A = 5.66%

Problem 2:

WACC: Book weights: Ridge Tool has on its books the amount and specific (after tax) costs shown in the following table for each source of capital

Source of Capital	Book Value	Individual Cost
Long-term debt	$700,000	5.3%
Preferred Stock	50,000	12.0
Common Stock Equity	650,000	16.0

a.) Calculate the firm's weighted average cost of capital using book value weights.

b.) Explain how the firm can use this cost in the investment decision-making process.

Problem 3:

You have been given the expected return data shown in the first table on three assets- F, G and H over the period 2016-2019.

	Expected Return
Year	Asset F	Asset G	Asset H
2016	16%	17%	14%
2017	17	16	15
2018	18	15	16
2019	19	14	17

Using these assets, you have isolated the three investment alternatives shown in the following table.

Alternative	Investment
1	100% of asset F
2	50% of asset F and 50% of asset G
3	50% of asset F and 50 of asset H

A. Calculate the expected return over the 4 year period of each of the three alternatives

B. Calculate the standard deviation of returns over the 4 year period for each of the three alternatives

C. Use your findings in part A and B to calculate the coefficient of variation for each of the three alternatives

D. On the basis of your findings, which of the three investment alternatives do you recommend? Why?

Problem 4:

You are considering three stocks: A, B and C for possible inclusion in your investment portfolio. Stock A has a beta of .80, stock B has a beta of 1.40 and stock C has a beta of -0.30.

A. Rank these stocks from the most risky to the least risky

B. If the return on the market portfolio increased by 12% what change would you expect in the return for each of the stocks?

C. If the return on the market portfolio decreased by 5%, what change would you expect in return for each of the stocks?

D. If you believed that the stock market was getting ready to experience a significant decline, which stock would you probably add to your portfolio? Why?

E. If you anticipated a major stock market rally, which stock would you add to your portfolio? Why?

Reference no: EM13693336

Questions Cloud

Foreign venue and external environment elements : Foreign Venue and External Environment Elements

Beginning a new venture : Beginning a new venture

The us-canada border : Why do you think the US-Mexico border region have been the subject of such close scrutiny, where as there is little attention to similar areas along the US-Canada border?

Language and culture are almost inseparable : Language and culture are almost inseparable

Calculate the standard deviation of returns : Calculate the expected return over the 4 year period of each of the three alternatives and calculate the standard deviation of returns over the 4 year period for each of the three alternatives

Explain how reckless'' theory of containment : Explain how Reckless' theory of Containment

Course wrap-up : Course Wrap-Up

Brand function as the link between consumers and companies : Brand function as the link between consumers and companies

Write a thorough discussion paper on shared risk contracting : Write a thorough discussion paper on Shared Risk Contracting

User Account

All Pages