ASSIGNMENT 3

MGF 301

Corporation Finance

Spring 2016

DUE: Wednesday, April 6th at 12:30pm in Jacobs 365

You may work in a group of up to 4 on this Assignment. Please indicate clearly on all submitted Assignments who the members of the group are. Please note, all assignments submitted with more than 4 group members will automatically receive a 0 grade.

No late assignments will be accepted. You may hand in the assignment in person in Jacobs 365 (put it under the door if no one is there) or submit it by email to the link in UBLearns before the time it is due. All electronic submissions must be to the link in UBLearns (Note: please follow all the Digital Submission rules (see Syllabus).

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Answer all of the following questions. For each answer, show your work to get full points (stating the answer alone is not sufficient).

1. You purchased 1,000 shares of stock ABC for $34 per share and 300 shares of stock XYZ for $240 per share exactly one year ago. During the year, stock ABC paid a $1.60 dividend per share and XYZ did not pay a dividend. The current stock prices are ABC=$40 per share and XYZ = $180 per share. Answer the following (showing all work):

(a) Calculate the actual return (also called percentage return) on your investment in (i) ABC, (ii) XYZ and (iii) the portfolio over the last year.

(b) Calculate (i) the dividend yield and (ii) the percentage capital gain for the portfolio.

(c) Calculate the real rate of return on the portfolio if the inflation rate was 2%.

2. You are interested in buying a stock that has a price of $32. You have projected that next year there is: a 10% probability the stock will equal $1, a 20% probability the stock will equal $24, a 30% probability the stock will equal $33, a 30% probability the stock will equal $45, and a 10% probability the stock will equal $60. Answer the following (showing all work):

(a) what is the expected return on the stock if you buy today and sell next year?

(b) what is the expected standard deviation of the stock?

3. Find two publicly traded stocks in different industries and look up estimates of their .

(a) Using %, E(Rm) = 8%, calculate the E(r) for each stock.

(b) Explain in words a non-finance student could understand why the one stock has a higher expected return than the other.

4. Find an announcement of new information made within a month from today (i.e., earnings announcement, merger, etc.) for any publicly traded stock that moves the stock price at least 1%. Print out or draw a chart that shows at least 2 days before the event and at least one day after. [Note: make sure you find the first announcement of the information.]

(a) Using this chart, analyze if the evidence is consistent with the semi-strong form market efficiency.

(b) Is the stock market reaction consistent with the strong form of market efficiency?

5. Geothermal corporation issued a press release before the stock market opened announcing that its earnings are below last years earnings. Explain how each of the following individual scenarios could be consistent with the semi-strong form of market efficiency.

(a) When trading opened after the announcement, the stock price quickly increased by 20%.

(b) The stock price of Geothermal increased slowly over the 30 days before the announcement that earnings were lower than last year.

(c) The stock price decreased by 10% immediately following the announcement but then increased throughout the day so that the closing price was only 2% below the previous day.

(d) The stock price of Geothermal did not change after the announcement was made public

ASSIGNMENT 3 MGF 301 Corporation Finance Spring 2016 DUE: Wednesday, April 6th at 12:30pm in Jacobs 365 You may work in a group of up to 4 on this Assignment. Please indicate clearly on all submitted Assignments who the members of the group are. Please note, all assignments submitted with more than 4 group members will automatically receive a 0 grade. No late assignments will be accepted. You may hand in the assignment in person in Jacobs 365 (put it under the door if no one is there) or submit it by email to the link in UBLearns before the time it is due. All electronic submissions must be to the link in UBLearns (Note: please follow all the Digital Submission rules (see Syllabus). ________________________________________________________________________________________________________ Answer all of the following questions. For each answer, show your work to get full points (stating the answer alone is not sufficient). 1. You purchased 1,000 shares of stock ABC for $34 per share and 300 shares of stock XYZ for $240 per share exactly one year ago. During the year, stock ABC paid a $1.60 dividend per share and XYZ did not pay a dividend. The current stock prices are ABC=$40 per share and XYZ = $180 per share. Answer the following (showing all work): (a) Calculate the actual return (also called percentage return) on your investment in (i) ABC, (ii) XYZ and (iii) the portfolio over the last year. (b) Calculate (i) the dividend yield and (ii) the percentage capital gain for the portfolio. (c) Calculate the real rate of return on the portfolio if the inflation rate was 2%. 2. You are interested in buying a stock that has a price of $32. You have projected that next year there is: a 10% probability the stock will equal $1, a 20% probability the stock will equal $24, a 30% probability the stock will equal $33, a 30% probability the stock will equal $45, and a 10% probability the stock will equal $60. Answer the following (showing all work): (a) what is the expected return on the stock if you buy today and sell next year? (b) what is the expected standard deviation of the stock? 3. Find two publicly traded stocks in different industries and look up estimates of their . (a) Using Rf=1%, E(Rm) = 8%, calculate the E(r) for each stock. (b) Explain in words a non-finance student could understand why the one stock has a higher expected return than the other. 4. Find an announcement of new information made within a month from today (i.e., earnings announcement, merger, etc.) for any publicly traded stock that moves the stock price at least 1%. Print out or draw a chart that shows at least 2 days before the event and at least one day after. [Note: make sure you find the first announcement of the information.] (a) Using this chart, analyze if the evidence is consistent with the semi-strong form market efficiency. (b) Is the stock market reaction consistent with the strong form of market efficiency? 5. Geothermal corporation issued a press release before the stock market opened announcing that its earnings are below last year's earnings. Explain how each of the following individual scenarios could be consistent with the semi-strong form of market efficiency. (a) When trading opened after the announcement, the stock price quickly increased by 20%. (b) The stock price of Geothermal increased slowly over the 30 days before the announcement that earnings were lower than last year. (c) The stock price decreased by 10% immediately following the announcement but then increased throughout the day so that the closing price was only 2% below the previous day. (d) The stock price of Geothermal did not change after the announcement was made public