Corporate Finance: Questions and Solutions

This document includes the solutions for questions related to the material covered in class for Chapters 11, 12 and 13. Thus, you are not required to return this last problem set.
Your work on the problem sets is over!!!!
During last week of classes we will go over questions on the final exam.

Please, do not forget to complete the teaching evaluations on-line at https://sete.unt.edu/ Corporate Finance: The Core (Berk/DeMarzo)
Chapter 11 - Optimal Portfolio Choice Use the information for the question(s) below. Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation (BLL) at $40 per share. 1) Suppose over the next year Ball has a return of 12.5%, Lowes has a return of 20%, and Abbott Labs has a return of -10%. The return on your portfolio over the year is:
A) 0%
B) 7.5%
C) 3.5%
D) 5.0%
Answer:
C
Explanation: A)
B)
C) tock
S
Weight
Return
W × R
ABT
0.5
-0.1
-0.05
LOW
0.3
0.2
0.06
BLL
0.2
0.125
0.025
Rp =
0.035
D)

2) Suppose over the next year Ball has a return of 12.5%, Lowes has a return of 20%, and Abbott Labs has a return of -10%. The weight on Abbott Labs in your portfolio after one year is closest to:
A) -10.0%
B) 43.5%
C) 45.0%
D) 50.0%
Answer:
B
Explanation: A)
B) tock
S
Weight
Return
W × R
ABT
0.5
-0.1
-0.05
LOW
0.3
0.2
0.06
BLL
0.2
0.125
0.025
Rp =
0.035
Value of portfolio = 20000(1 + .035) = 20700
Value of ABT = $10000(1 + -.10) = $9000
Weight for ABT = 9000 / 20700 = 0.434783
C)
D)

3) Suppose you invest $15,000 in Merck stock and $25,000 in Home Depot stock. You expect a return of 16% for
Merck and 12% for Home Depot. What is the expected return on your portfolio?
A) 13.50%
B) 14.00%
C) 13.75%
D) 14.50%
Answer:
A
Explanation: A) = (15,000 /