Homework Set III

The solutions to the questions below should be typed (Word or Excel file) and show all steps of calculations.(No points will be given without the steps or work to the final answers)

1. One year ago, you purchased 500 shares of Best Wings, Inc. stock at a price of $9.75 a share. The company pays an annual dividend of $0.10 per share. Today, you sold all of your shares for $15.60 a share. What is your total percentage return on this investment?
2. A stock had returns of 11 percent, -18 percent, -21 percent, 20 percent, and 34 percent over the past five years. What is the standard deviation of these returns?
3. What are the two primary lessons learned from capital market history? Use historical information to justify that these lessons are correct.
4. You are comparing stock A to stock B. Given the following information, what is the difference in the expected returns of these two securities?

1. What is the standard deviation of the returns on a stock given the following information?

1. You own a portfolio that has $2,000 invested in Stock A and $3,500 invested in Stock B. The expected returns on these stocks are 14 percent and 9 percent, respectively. What is the expected return on the portfolio?
2. The common stock of Alpha Manufacturers has a beta of 1.14 and an actual expected return of 15.26 percent. The risk-free rate of return is 4.3 percent and the market rate of return is 12.01 percent.Based on CAPM, what can you say about the current stock price (underpriced, overpriced, or fairly priced)?Explain.

1. What is the variance of the returns on a portfolio that is invested 60 percent in stock S and 40 percent in stock T?

1. What is the beta of the following portfolio?

1. The common stock of Jensen Shipping has an expected return of 14.7 percent. The return on the market is 10.8 percent and the risk-free rate of return is 3.8 percent. What is the beta of this stock?
2. Explain how the slope of the security market line is determined and why every stock that is correctly priced, according to CAPM, will lie on this line.
3. Explain the difference between systematic and unsystematic risk. Also explain why one of these types of risks is rewarded with a risk premium while the other type is not.
4. Jefferson & Sons is evaluating a project that will increase annual sales by $145,000 and annual cash costs by $94,000. The project will initially require $110,000 in fixed assets that will be depreciated straight-line to a zero book value over the 4-year life of the project. The applicable tax rate is 32 percent. What is the operating cash flow for this project?
5. Gateway Communications is considering a project with an initial fixed asset cost of $2.46 million which will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $300,000. The project will not directly produce any sales but will reduce operating costs by $725,000 a year. The tax rate is 35 percent. The project will require $45,000 of inventory which will be recouped when the project ends. Should this project be implemented if the firm requires a 14 percent rate of return? Why or why not?
6. A year ago, you purchased 300 shares of Stellar Wood Products, Inc. stock at a price of $8.62 per share. The stock pays an annual dividend of $0.10 per share. Today, you sold all of your shares for $4.80 per share. What is your total dollar return on this investment?