Fall Homework
Show your work. The first 7 questions are worth 5 points each.
1. Which form of the efficient market hypothesis implies that security prices reflect all information contained in past prices? Weak
2. Holden Bicycles has 1,000 shares outstanding each with a par value of $0.10 each. If they are sold to shareholders at $19 each, what would the capital surplus be? $18,900
3. You own 1,000 shares of a stock. You can cast your 1,000 votes for a single director. What kind of voting does the stock have? Straight
4. You bought 100 shares of stock at $20 each. At the end of the year, you received a total of $400 in dividends, and your stock was worth $2,500 total. What was your total percentage return? (2500+400-2000)/2000 = 45%
5. The beta of stock A is 0.70. The risk-free rate is 5 percent, and the market risk premium is 8.5 percent. Assume the capital-asset-pricing model holds. What is the expected return on stock A? E(RA) – 5 +0.7(8.5)=10.95%
6. Suppose Garageband.com has a 28 percent cost of equity capital and a 10% before tax cost of debt capital. The firm’s debt-to-equity ratio is 1.0. The tax rate is 30 percent. What is the firm’s WACC? WACC = .5(10(1-.3)+.5(28)=17.5%
7. Suppose that we have identified three important systematic risk factors given by exports, inflation and industrial production. In the beginning of the year, growth in these three factors is estimated at -1%, 2.5% and 3.5% respectively. However, actual growth in these factors turns out to be 1%, -2% and 2%. The factor betas are given by βEX = 1.8, βI = 0.7 and βIP = 1.0. If the expected return on the stock is 6% and no unexpected news concerning the stock surfaces, calculate the stock’s total return. R = 6+1.8(1-(-1)) + .7(-2-2.5)+1(2-3.5) = 4.95%
8. Give the following information: (15 points)
Security
Return
Standard Deviation
Beta
A
16%
25%
0.8
B
12%
20%
1.2
Risk-free asset
4%
a. Which of A and B has the least total risk? The least systematic risk?
A has the least
1. Which form of the efficient market hypothesis implies that security prices reflect all information contained in past prices? Weak
2. Holden Bicycles has 1,000 shares outstanding each with a par value of $0.10 each. If they are sold to shareholders at $19 each, what would the capital surplus be? $18,900
3. You own 1,000 shares of a stock. You can cast your 1,000 votes for a single director. What kind of voting does the stock have? Straight
4. You bought 100 shares of stock at $20 each. At the end of the year, you received a total of $400 in dividends, and your stock was worth $2,500 total. What was your total percentage return? (2500+400-2000)/2000 = 45%
5. The beta of stock A is 0.70. The risk-free rate is 5 percent, and the market risk premium is 8.5 percent. Assume the capital-asset-pricing model holds. What is the expected return on stock A? E(RA) – 5 +0.7(8.5)=10.95%
6. Suppose Garageband.com has a 28 percent cost of equity capital and a 10% before tax cost of debt capital. The firm’s debt-to-equity ratio is 1.0. The tax rate is 30 percent. What is the firm’s WACC? WACC = .5(10(1-.3)+.5(28)=17.5%
7. Suppose that we have identified three important systematic risk factors given by exports, inflation and industrial production. In the beginning of the year, growth in these three factors is estimated at -1%, 2.5% and 3.5% respectively. However, actual growth in these factors turns out to be 1%, -2% and 2%. The factor betas are given by βEX = 1.8, βI = 0.7 and βIP = 1.0. If the expected return on the stock is 6% and no unexpected news concerning the stock surfaces, calculate the stock’s total return. R = 6+1.8(1-(-1)) + .7(-2-2.5)+1(2-3.5) = 4.95%
8. Give the following information: (15 points)
Security
Return
Standard Deviation
Beta
A
16%
25%
0.8
B
12%
20%
1.2
Risk-free asset
4%
a. Which of A and B has the least total risk? The least systematic risk?
A has the least