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[answered] Managerial Finance 1. You bought a stock one year ago for $


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Managerial Finance

 

1. You bought a stock one year ago for $51.53 per share and sold it today for $58.26 per share. It paid a $1.59 per share

 

dividend today.

 

a. What was your realized return?

 

b. How much of the return came from dividend yield and how much came from capital gain?

 

a. What was your realized return?

 

The realized return was %. (Round to two decimal places.) b. How much of the return came from dividend yield and how much came from capital gain?

 

The return that came from dividend yield is

 

The return that came from capital gain is %. (Round to two decimal places.)

 

%. (Round to two decimal places.) 2. You bought a stock one year ago for $50.44 per share and sold it today for $44.04 per share. It paid a $1.01 per share

 

dividend today.

 

a. What was your realized return?

 

b. How much of the return came from dividend yield and how much came from capital gain?

 

a. What was your realized return?

 

The realized return was %. (Round to two decimal places.) b. How much of the return came from dividend yield and how much came from capital gain?

 

The return that came from dividend yield is

 

The return that came from capital gain is %. (Round to two decimal places.)

 

%. (Round to two decimal places.) 3. Consider two local banks. Bank A has 77 loans outstanding, each for $1.0 million, that it expects will be repaid today. Each

 

loan has a 7% probability of default, in which case the bank is not repaid anything. The chance of default is independent

 

across all the loans. Bank B has only one loan of $77 million outstanding, which it also expects will be repaid today. It also

 

has a 7% probability of not being repaid. Which bank faces less risk? Why? 4. Consider the following two, completely separate, economies. The expected return and volatility of all stocks in both

 

economies is the same. In the first economy, all stocks move together ?in good times all prices go up together and in bad

 

times they all fall together. In the second economy, stock returns are independent ?one stock increasing in price has no

 

effect on the prices of other stocks. Assuming you are riskaverse and you could choose one of the two economies in which

 

to invest, which one would you choose? Explain.

 

(Select the best choice below.)

 

A. A riskaverse investor is indifferent in both cases because he or she faces unpredictable risk.

 

B. A riskaverse investor would prefer the economy in which stock returns are independent

 

because by combining the stocks into a portfolio he or she can get a higher expected return

 

than in the economy in which all stocks move together.

 

C. A riskaverse investor would choose the economy in which stock returns are independent

 

because risk can be diversified away in a large portfolio.

 

D. A riskaverse investor would choose the economy in which stocks move together because the

 

uncertainty is much more predictable, and you have to predict only one thing.

 

5. What does the beta of a stock measure?

 

(Select the best choice below.)

 

A. B eta meas ures leverage.

 

B. B eta meas ures the amount of s ys tematic ris k in a s tock.

 

C. B eta meas ures liquidity.

 

D. B eta meas ures interes t rate ris k. 6. Suppose the market risk premium is 6% and the riskfree interest rate is 3%. Using the data in the table, 1, calculate the

 

expected return of investing in a. Starbucks' stock.

 

b. Hershey's stock.

 

c. Autodesk's stock.

 

a. Starbuck's stock.

 

The expected return of Starbucks stock is %. (Round to two decimal places.) b. Hershey's stock.

 

The expected return of Hershey stock is %. (Round to two decimal places.) c. Autodesk's stock.

 

The expected return of Autodesk stock is %. (Round to two decimal places.) 1: Data Table

 

(Click on the icon located on the topright corner of the data table below in order to copy its contents into a spreadsheet.) Starbucks

 

Beta Hershey 0.80 Autodesk

 

1.96 0.33

 

7. You own three stocks: 600 shares of Apple Computer, 10,000 shares of Cisco Systems, and 5,000 shares of ColgatePalmolive. The current share prices and expected returns of Apple, Cisco, and Colgate-Palmolive are, respectively,

 

$415, $22, $98 and 12%, 10%, 8%.

 

a. What are the portfolio weights of the three stocks in your portfolio?

 

b. What is the expected return of your portfolio?

 

c. Suppose the price of Apple stock goes up by $23, Cisco rises by $3, and Colgate-Palmolive falls by $15. What are

 

the new portfolio weights?

 

d. Assuming the stocks expected returns remain the same, what is the expected return of the portfolio at the new

 

prices?

 

a. What are the portfolio weights of the three stocks in your portfolio?

 

The portfolio weight of Apple Computer is %. (Round to two decimal places.) The portfolio weight of Cisco Systems is %. (Round to two decimal places.) The portfolio weight of Colgate-Palmolive

 

b. What is the expected return of your portfolio? %.

 

(Round to two decimal

 

places.) The expected return on the portfolio is

 

c. is %. (Round to two decimal places.) Suppose the price of Apple stock goes up by $23, Cisco rises by $3, and Colgate-Palmolive falls by $15. What are the

 

new portfolio weights?

 

The new portfolio weight of Apple is %. (Round to two decimal places.) The new portfolio weight of Cisco is %. (Round to two decimal places.) The new portfolio weight of Colgate-Palmolive is %. (Round to two decimal places.) d. Assuming the stocks expected returns remain the same, what is the expected return of the portfolio at the new

 

prices?

 

The new expected return is %. (Round to two decimal places.) 1 . Suppose Autodesk stock has a beta of 2.20, whereas Costco stock has a beta of 0.74. If the risk free interest rate is 4.5%

 

and the expected return of the market portfolio is 13.5%, what is the expected return of a portfolio that consists of ?55%

 

Autodesk stock and 45% Costco stock, according to the CAPM? The expected return is

 

9. %. (Round to two decimal places.) Unida Systems has 37 million shares outstanding trading for $11 per share. In addition, Unida has $94 million in

 

outstanding debt. Suppose Unida's equity cost of capital is 14%, its debt cost of capital is 9%, and the corporate tax

 

rate is 30%.

 

a. What is Unida's unlevered cost of capital?

 

b. What is Unida's aftertax debt cost of capital?

 

c. What is Unida's weighted average cost of capital?

 

a. What is Unida's unlevered cost of capital?

 

Unida's unlevered cost of capital is %. (Round to one decimal place.) b. What is Unida's aftertax debt cost of capital?

 

Unida's aftertax debt cost of capital is %. (Round to one decimal place.) c. What is Unida's weighted average cost of capital?

 

Unida's weighted average cost of capital is %. (Round to one decimal place.) 10. You would like to estimate the weighted average cost of capital for a new airline business. Based on its industry asset

 

beta, you have already estimated an unlevered cost of capital for the firm of 10%. However, the new business will be

 

23% debt financed, and you anticipate its debt cost of capital will be 7%. If its corporate tax rate is 33%, what is your

 

estimate of its WACC?

 

The equity cost of capital is

 

The weighted average cost of capital is %. (Round to one decimal place.)

 

%. (Round to one decimal place.) 11. Watch the video called "The Capital Structure Choice: CISCO"2.

 

Which of the following is part of a firm's capital structure?

 

A. Equity B. Preferred Stock C. Debt D. All answers are correct. 2: http://media.pearsoncmg.com/aw/aw_finance_videos/capitalstructure/index.php?video=CapStruct&size=Lg 12. Watch the video called "The Capital Structure Choice: CISCO ".

 

Since debt has a lower cost than equity, the firm can reduce its capital costs by simply replacing equity with debt.

 

A. True B. False

 


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