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Assume that investors are maximizing the expected return subject to not exceeding standard deviation they are able to tolerate. There are 2 assets available for all investors. The first asset is the stock market which provides the expected return of 15% and has the standard deviation of 20%. The second asset is the bank account which pays the interest rate of 1%. The expected return of the second asset is 1%. The bank generates profits by borrowing to customers at a higher rate than the interest rate it is paying on their bank accounts, so the bank will only borrow you money at 5% rate. Derive the formula for the capital market line (expected return as a function of the standard deviation) and draw it (drawing approximately by hand is perfectly ok). Hint 1: Divide the capital market line in two parts: where you put money into the bank account and where you borrow.
Compute the cost of capital for the individual components in the capital structure.
Compute the (a) current yield and (b) capital gains yield that the bond will generate this year.
You bought a share of 6.40 percent preferred stock for $96.68 last year. The market price for your stock is now $100.92. What is your total return for last year?
Mexican interest rates are normally substantially higher than U.S. interest rates. What does this imply about the forward rate as a forecast of the future spot rate? Does the forward rate reflect a forecast of appreciation or depreciation of the Mexi..
A record stating the amounts that are to go to the buyer and seller when a loan is closed is called
Stock Y has a beta of 1.07 and an expected return of 13.10 percent. Stock Z has a beta of .50 and an expected return of 7 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other?
A company has EAT, depreciation expense, capital expenses, debt and debt principal payments of $9m, $2.8m, $1.3m, $40m and $1.5m respectively. Between the first and the second years, it has current assets of $11m and $13.4m and current debts of $5m a..
A decrease in an asset account such as inventory would be considered a source of cash while a decrease in a liability account such as accounts payable would be considered a use of cash. Trade credit is extended on purchases to a firm’s customers and ..
Discuss the steps banks can take to reduce risk in the context of effective GAP management.
what is the total return from your investment (in percentage terms)?
The price per share of your all-equity firm is $30, and there are 2M shares outstanding. What is the new price per share after issuing this debt?
Which of the following would be an asset on your personal balance sheet? The amount you owe on your credit card. The difference between the amount you owe and the credit limit on your credit card
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