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Consider the following scenario analysis: Rate of Return Scenario
Probability Stocks Bonds
Recession .20 −6 % +17 %
Normal economy .50 +20 +8
Boom .30 +29 +6
a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? Yes No
b. Calculate the expected rate of return and standard deviation for each investment. (Do not round intermediate calculations. Round your answers to 1 decimal place.) Expected Rate of Return Standard Deviation Stocks % % Bonds % % c. Which investment would you prefer? Stocks Bonds
Required rate of return Stock R has a beta of 1.3, Stock S has a beta of 0.6, the expected rate of return on an average stock is 12%, and the risk-free rate of return is 7%. By how much does the required return on the riskier stock exceed the require..
The Charleston Company is a relatively small, privately owned firm. Last year the company had after-tax income of $20,000, and 15,000 shares were outstanding. The owners were trying to determine the market value for the stock, prior to taking the com..
DAR Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 175,000 shares of stock outstanding.
Netscrape Communications does not currently pay a dividend. You expect the company to begin paying a $4.2 per share dividend in 10 years, and you expect dividends to grow perpetually at 5.7 percent per year thereafter. If the discount rate is 13 perc..
The Social Security System is an example of a public pension plan that is a pay-as-you-go system. What is a pay-as-you-go pension plan?
How much should you deposit today in order to withdraw $5,000 for next 5 years? Your first withdraw will start 6 year from now and your deposit will earn 4% interest.
Suppose your company has a building worth $340 million. Because it is located in a high-risk area for natural disasters, the probability of a total loss in any particular year is 1.4 percent. What is your company’s expected loss per year on this buil..
Use the following data from a firm's pro forma (i.e., projected or forecasted) financial statements to calculate the following profitability ratios for the firm, assuming that all stocks are common stocks: (a) net profit margin; (b) return on total a..
Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $3,300 and sell its old washer for $900. The new washer will last for 6 years and save $700 a year in expenses. The opportunity cost of c..
Charlie's Cycles Inc. has $120 million in sales. The company expects that its sales will increase 7% this year. Charlie's CFO uses a simple linear regression to forecast the company's inventory level for a given level of projected sales. What are you..
A manufacturing company has fixed costs of $120,000 per month and variable costs of $6 per unit. Determine the break even quantity for each of these price points. Determine the markup as a percentage of the selling price when the cost is $7 and the s..
Use the following returns for X and Y. Returns Year X Y 1 22.4 % 28.2 % 2 – 17.4 – 4.4 3 10.4 30.2 4 20.8 – 15.8 5 5.4 34.2. Calculate the average returns for X and Y. Calculate the standard deviations for X and Y.
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