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Problem
Consider the following information:
Stock A
Stock B
T-bills
Beta
0.6
1.2
0.0
Expected return, %
5.0
8.0
2.0
(a) Assuming that all stocks are priced correctly according to the CAPM, compute the expected return on the market portfolio.
(b) Stocks are generally regarded as being risky investments. According to the CAPM, is it possible for a stock to have an expected return that is less than the risk-free rate? Explain.
(c) Is it possible for a stock to have a negative standard deviation in returns? Explain.
(d) Consider two separate stocks: the returns on the stock of AppleCo have a standard deviation of 32% and a beta of 0.9; the returns on the stock of BananaCo have a standard deviation of 20% and a beta of 1.2. Which company's stock should provide a greater return to investors? Why?
Calculate the weighted average cost of capital for Dell using book value weights and market value weights assuming Dell has a 35 percent marginal tax rate.
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Understanding risks is important for any business. As discussed in our text by Bryant, Hunton, and Bagranoff, risks are categorized in four major parts:
Given the values and cost data shown in the accompanying table for each of 3 firms, F, G, and H, answer the following questions.
In December 1988, equipment worth $6700, including a computer priced at $3000, was purchased for cash. William paid an additional $1000 for a computer software package to be used by the company.
You are attempting to develop a break-even for a capitation contract with a major HMO. Your hospital has agreed to provide all inpatient hospital services for 10,000 covered lives.
Calculate the firm's earnings per share (EPS) for each year, recognizing that the number of shares of common stock outstanding has remained unchanged since the firm's inception. Comment on the EPS performance in view of your response in part a.
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Debenture holders were paid $2,59,375 together with interest preferential creditors were pain in full. Expenses of liquidation came to $2,550 and cash on hand was $5,000, and assets realized $3,95,000. Calculate the liquidator's remuneration.
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What is the operating income (EBIT) for both firms and what are the earnings after interest - Why are the percentage changes different
Suppose the firm in Problem A had 40,000 shares of common stock outstanding. What are the earnings per share, or EPS, figure? What are the dividends per share figure?
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