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a. You expect that company A will pay its first dividend of $2 per share 3 years from today. After that the dividend is expected to grow at an annual rate of 5% for ever. The risk free rate is 6%, and the expected rate of return on the market is 10%. Also, the covariance between stock A and the market is 0.10, and standard deviation of the market portfolio is 20%. What is the fair value of the stock today?
b. Assume that the actual price is less than what you have calculated in part a. What does this say about its actual return compared to what is predicted by the security market line?
c. If it is true that properly priced securities fall on the security market line, what would you expect to happen to the price of stock A given that it is currently less than your calculation from part a? Explain why you believe that a price change would occur.
You are comparing two savings accounts. Account A has an APR of 4.65 percent and an EAR of 4.75 percent. Account B has an APR of 4.70 percent and an EAR of 4.70 percent. Given this, you should invest in account:
Assume that Reginald Worthington, who pays 40 percent in income taxes, plans to contribute $100,000 to not-for-profit Ravenswood Community Hospital. Without the contribution, his tax bill would be $500,000. What would be his tax bill if he makes the ..
An agreement to exchange currencies sometime in the future is referred to as which one of the following?
What is the standard deviation of the market portfolio?
An American company would like to borrow fixed-rate. What is total cost savings which can be realized through an interest rate/currency swap between the two?
Suppose the market risk premium is 9% and the risk free rate is 6% In a period where the market moved up by 30% during a single year, you observe the following risk and return data for mutual funds: Which fund has offered the best risk adjusted retur..
The stock currently trades at $40 in June. An option trader considers the following strategy concerning the stock XYZ. Trader sells one AUG 38 put for $1 and buys a AUG 42 call for 1$. Please construct a figure that depicts the value of the strategy ..
Your firm needs a computerized machine tool lathe which costs $53,000 and requires $12,300 in maintenance for each year of its 3-year life. After three years, this machine will be replaced. The machine falls into the MACRS 3-year class life category...
By how much would the component cost of debt used to calculate the WACC change (in percent) if the new tax rate was adopted?
Jordan Enterprises is considering a capital expenditure that requires an initial investment of $ 63,000 and returns after tax cash inflows $13,246 per year for 10 years. The firm has a maximum acceptable payback period of 8 years. The company should..
Icarus Airlines is proposing to go public, and you have been given the task of estimaing the vlaue of tis equity. Management plans to maintain debt at 32% of the company's present value, and you believe that at this capital strucutre the company's de..
An investor has two bonds in his portfolio that both have a face value of $1,000 and pay a 10% annual coupon. Bond L matures in 17 years, while Bond S matures in 1 year. What will the value of the Bond S be if the going interest rate is 9%? Round you..
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