Reference no: EM137454

7-17 Integrative-Expected return, standard deviation, and coefficient of variation Three assets-F, G, and H-are currently being considered by Perth Industries. The probability distributions of expected returns for these assets are shown in the following table.

Asset F			Asset G		Asset H
I	Pri	Return ki	Pri	Return ki	Pri	Return ki
1	.1	40%	.4	35%	.1	40%
2	.2	10	.3	10	.2	20
3	.4	0	.3	-20	.4	10
4	.2	-5			.2	0
5	.1	-10			.1	-20

a.   Calculate the expected return, k, for each of the three assets. Which provides the largest expected return?

b.   Calculate the standard deviation, σ, for each of the three assets' returns. Which appears to have the greatest risk?

c.   Calculate the coefficient of variation, CV, for each of the three assets. Which appears to have the largest relative risk?

 (Hennessey 424)

Hennessey, Lawrence J. Gitman and Sean M. Principles of Corporate Finance VitalSource eBook for Athabasca University.Pearson Learning Solutions.VitalBook file.

The citation provided is a guideline. Please check each citation for accuracy before use.

7-36 Manipulating CAPM Use the basic equation for the capital asset pricing model (CAPM) to work each of the following:

a.   Find the required return for an asset with a beta of 0.90 when the risk-free rate and market return are 8 and 12 percent, respectively.

b.   Find the risk-free rate for a firm with a required return of 15 percent and a beta of 1.25 when the market risk premium is 7 percent. What is the market return?

c.   Find the market return for an asset with a required return of 16 percent and a beta of 1.10 when the risk-free rate is 9 percent.

d.   Find the beta for an asset with a required return of 15 percent when the risk-free rate is 5 percent and the market risk premium is 6.25 percent.

 (Hennessey 431)

Hennessey, Lawrence J. Gitman and Sean M. Principles of Corporate Finance VitalSource eBook for Athabasca University.Pearson Learning Solutions.VitalBook file.

The citation provided is a guideline. Please check each citation for accuracy before use.

 

8-17 Bond value and time Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have $1,000 par values and 11 percent coupon rates and pay semiannual interest. Bond A has exactly 5 years to maturity, and bond B has 15 years to maturity.

a.   Calculate the value of bond A if the required return is (1) 8 percent, (2) 11 percent, and (3) 14 percent.

b.   Calculate the value of bond B if the required return is (1) 8 percent, (2) 11 percent, and (3) 14 percent.

c.   From your findings in a andb, complete the following table, and discuss the relationship between time to maturity and changing required returns.

Required Return	Value of Bond A	Value of Bond B
8%	?	?
11	?	?
14	?	?

 

d.   If Lynn wanted to minimize interest-rate risk, which bond should she purchase? Why?

 (Hennessey 490-491)

Hennessey, Lawrence J. Gitman and Sean M. Principles of Corporate Finance VitalSource eBook for Athabasca University.Pearson Learning Solutions.VitalBook file.

The citation provided is a guideline. Please check each citation for accuracy before use.

 

8-29 Common share value-Constant growthIt is early January 2009, and Elk County Telephone has paid the dividends shown in the following table over the past 6 years. The implied growth rate is expected to continue well into the future.

Year	Dividend per share
2003	$2.25
2004	2.37
2005	2.46
	2.60
2007	2.76
2008	2.87

a.   If you can earn 13 percent on similar-risk investments, what is the most you would now pay for Elk's common shares?

b.   If you can earn only 10 percent on similar-risk investments, what is the most you would be willing to pay per share?

c.   Compare and contrast your findings in a andb, and discuss the impact of changing risk on share value.

 (Hennessey 493-494)

Hennessey, Lawrence J. Gitman and Sean M. Principles of Corporate Finance VitalSource eBook for Athabasca University.Pearson Learning Solutions.VitalBook file.

The citation provided is a guideline. Please check each citation for accuracy before use.