[SOLVED] Show on a graph like Figure 10-

Show on a graph like Figure 10-2 where a stock with a beta of 1.3 would be located on the security market line. Then show where that stock would be located if it is undervalued.

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> Year to date, Yum Brands had earned a 3.80 percent return. During the same time period, Raytheon earned 4.26 percent and Coca-Cola earned −0.46 percent. If you have a portfolio made up of 30 percent Yum Brands, 30 percent Raytheon, and 40 percent Coca- C

> Year-to-date, Oracle had earned a −1.34 percent return. During the same time period, Valero Energy earned 7.96 percent and McDonalds earned 0.88 percent. If you have a portfolio made up of 30 percent Oracle, 25 percent Valero Energy, and 45 percent McDo

> An investor owns $3,000 of Adobe Systems stock, $6,000 of Dow Chemical, and $7,000 of Office Depot. What are the portfolio weights of each stock?

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> Determine which one of the three portfolios dominates another. Name the dominated portfolio and the portfolio that dominates it. Portfolio Green has an expected return of 15 percent and risk of 21 percent. The expected return and risk of portfolio Red

> Determine which one of these three portfolios dominates another. Name the dominated portfolio and the portfolio that dominates it. Portfolio Blue has an expected return of 12 percent and risk of 18 percent. The expected return and risk of portfolio Yello

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> Rank the following three stocks by their risk-return relationship, best to worst. Night Ryder has an average return of 12 percent and standard deviation of 32 percent. The average return and standard deviation of WholeMart are 11 percent and 25 percent;

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> A corporate bond that you own at the beginning of the year is worth $975. During the year, it pays $35 in interest payments and ends the year valued at $965. What was your dollar return and percent return?

> Sprint Nextel Corp stock ended the previous year at $23.36 per share. It paid a $2.37 per share dividend last year. It ended last year at $18.89. If you owned 500 shares of Sprint, what was your dollar return and percent return?

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> You have a portfolio with an asset allocation of 35 percent stocks, 55 percent long-term Treasury bonds, and 10 percent T-bills. Use these weights and the returns in Table 9.2 to compute the return of the portfolio in the year 2010 and each year since. T

> You have a portfolio with an asset allocation of 50 percent stocks, 40 percent long-term Treasury bonds, and 10 percent T-bills. Use these weights and the returns in Table 9.2 to compute the return of the portfolio in the year 2010 and each year since. T

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> Cisco Systems has a beta of 1.25. Does this mean that you should expect Cisco to earn a return 25 percent higher than the S&P 500 Index return? Explain.

> How should you handle a case where required return computations from CAPM and the constant growth rate model are very different?

> Determine what level of market efficiency each event is consistent with: a. Immediately after an earnings announcement the stock price jumps and then stays at the new level. b. The CEO buys 50,000 shares of his company and the stock price does not change

> If you were to compute beta yourself, what choices would you make regarding the market portfolio, the holding period for the returns (daily, weekly, etc.), and the number of returns? Justify your choices.

> Find a beta estimate from three different sources for General Electric (GE). Compare these three values. Why might they be different?

> If stock prices are not strong-form efficient, then what might be the price reaction to a firm announcing a stock buyback? Explain.

> Describe a stock market bubble. Can a bubble occur in a single stock?

> Why do most investment scams conducted over the Internet and e-mail involve penny stocks instead of S&P 500 Index stocks?

> Explain how the concept of a positive risk-return relationship breaks down if you can systematically find stocks that are overvalued and undervalued.

> Note from Table 10-2 that some technology-oriented firms (Apple) in the Dow Jones Industrial Average have high market risk while others (Intel and Verizon) have low market risk. How do you explain this?

> Describe how different allocations between the risk-free security and the market portfolio can achieve any level of market risk desired. Give examples of a portfolio from a person who is very risk averse and a portfolio for someone who is not so averse t

> Consider that you have three stocks in your portfolio and wish to add a fourth. You want to know if the fourth stock will make the portfolio riskier or less risky. Compare and contrast how this would be assessed using standard deviation versus market ris

> Describe how adding a risk-free security to modern portfolio theory allows investors to do better than the efficient frontier.

> How might the magnitude of the market risk premium impact people’s desire to buy stocks?

> In 2000, the S&P 500 Index earned −9.1 percent while the T-bill yield was 5.9 percent. Does this mean the market risk premium was negative? Explain.

> Why expected return is considered “forward-looking”? What are the challenges for practitioners to utilize expected return?

> Consider an asset that provides the same return no matter what economic state occurs. What would be the standard deviation (or risk) of this asset? Explain.

> Compare and contrast the assumptions that need to be made to compute a required return using CAPM and the constant growth rate model.

> As discussed in the text, beta estimates for one firm will vary depending on various factors like such as the time over which the estimation is conducted, the market portfolio proxy, and the return intervals. You will demonstrate this variation using ret

> Build a spreadsheet that automatically computes the expected market return and risk for different assumptions about the state of the economy. a. First, create the following spreadsheet and compute the expected return and standard deviation. b. Compute t

> When you go on the Web to find a firmâs beta, you do not know how recently it was computed, what index was used as a proxy for the market portfolio, or which time series of returns the calculations used. Earlier in this chapter, it was

> No Nuns Cos. has a 25 percent tax rate and has $350 million in assets, currently financed entirely with equity. Equity is worth $37 per share, and book value of equity is equal to market value of equity. Also, letâs assume that the firm

> For the same economic state probability distribution in Problem 10-1, determine the standard deviation of the expected return. Economic Probability Return State Fast growth Slow growth 0.3 40% 0.4 10% Recession 0.3 -25%

> A manager believes his firm will earn a 14 percent return next year. His firm has a beta of 1.2, the expected return on the market is 11 percent, and the risk-free rate is 5 percent. Compute the return the firm should earn given its level of risk and d

> A manager believes his firm will earn a 14 percent return next year. His firm has a beta of 1.5, the expected return on the market is 12 percent, and the risk-free rate is 4 percent. Compute the return the firm should earn given its level of risk and

> For the same economic state probability distribution in Problem 10-2, determine the standard deviation of the expected return. Economic Probability Return State Fast growth Slow growth 0.2 35% 0.6 10% Recession 0.2 -30%

> You own $10,000 of Olympic Steel stock that has a beta of 2.2. You also own $7,000 of Rent-a-Center (beta = 1.5) and $8,000 of Lincoln Educational (beta = 0.5). What is the beta of your portfolio?

> You own $7,000 of Human Genome stock that has a beta of 3.5. You also own $8,000 of Frozen Food Express (beta = 1.6) and $10,000 of Molecular Devices (beta = 0.4). What is the beta of your portfolio?

> Compute the expected return given these three economic states, their likelihoods, and the potential returns: Economic Probability Return State Fast growth Slow growth 0.3 40% 0.4 0.3 10 Recession -25

> Universal Forest’s current stock price is $57.50 and it is likely to pay a $0.26 dividend next year. Since analysts estimate Universal Forest will have a 9.5 percent growth rate, what is its required return?

> Paccar’s current stock price is $48.20 and it is likely to pay a $0.80 dividend next year. Since analysts estimate Paccar will have an 8.8% growth rate, what is its required return?

> The Japanese stock market bubble peaked at 38,916 in 1989. Two and a half years later it had fallen to 15,900. What was the percentage decline?

> Would you expect a utility company to have high or low debt levels? Why?

> The Nasdaq stock market bubble peaked at 4,816 in 2000. Two and a half years later it had fallen to 1,000. What was the percentage decline?

> You have a portfolio with a beta of 1.1. What will be the new portfolio beta if you keep 85 percent of your money in the old portfolio and 15 percent in a stock with a beta of 0.5?

> You have a portfolio with a beta of 1.35. What will be the new portfolio beta if you keep 85 percent of your money in the old portfolio and 5 percent in a stock with a beta of 0.78?

> Paycheck, Inc. has a beta of 0.94. If the market return is expected to be 11 percent and the risk-free rate is 3 percent, what is Paycheck’s risk premium?

> Netflix, Inc. has a beta of 3.61. If the market return is expected to be 13 percent and the risk-free rate is 3 percent, what is Netflix’ risk premium?

> Nanometrics, Inc. has a beta of 3.15. If the market return is expected to be 10 percent and the risk-free rate is 3.5 percent, what is Nanometrics’ required return?

> Hastings Entertainment has a beta of 0.65. If the market return is expected to be 11 percent and the risk-free rate is 4 percent, what is Hastings’ required return?

> The average annual return on the S&P 500 Index from 1996 to 2005 was 10.8 percent. The average annual T-bill yield during the same period was 3.6 percent. What was the market risk premium during these ten years?

> Could you calculate the component cost of equity for a stock with nonconstant expected growth rates in dividends if you didn’t have the information necessary to compute the component cost using the CAPM? Why or why not?

> Under what situations would you want to use the CAPM approach for estimating the component cost of equity? The constant-growth model?

> If the U.S. government completely eliminated taxation at the corporate level, how would this influence the capital structures of firms in a world with bankruptcy?

> Expressing WACC in terms of iE, iP, and iD, what is the theoretical minimum for the WACC?

> Why don’t we multiply the cost of preferred stock by one minus the tax rate, as we do for debt?

> How would you handle calculating the cost of capital if a firm were planning to issue two different classes of common stock?

> Suppose a new project was going to be financed partially with retained earnings. What flotation costs should you use for retained earnings?

> When will the subjective approach to forming divisional WACCs be better than using the firmwide WACC to evaluate all projects?

> Suppose your firm wanted to expand into a new line of business quickly, and that management anticipated that the new line of business would constitute over 80 percent of your firm’s operations within three years. If the expansion was going to be financed

> Why do we use market-based weights instead of book-value-based weights when computing the WACC?

> LilyMac Studios, a national chain of photography studios, is considering opening up a chain of coffee shop/art galleries. While the existing operations of the firm have a beta of 1.17, the new chain is expected to have a beta of 0.8. LilyMac currently ha

> Suppose that B2B, Inc. has a capital structure of 37 percent equity, 17 percent preferred stock, and 46 percent debt. If the before-tax component costs of equity, preferred stock and debt are 14.5 percent, 11 percent, and 9.5 percent, respectively, what

> Explain why, in a world with both corporate taxes and the chance of bankruptcy, a small firm with volatile EBIT is unlikely to have much debt.

> Suppose that JB Cos. has a capital structure of 78 percent equity, 22 percent debt, and that its before-tax cost of debt is 11 percent while its cost of equity is 15 percent. If the appropriate weighted average tax rate is 25 percent, what will be JB’s W

> Suppose that TapDance, Inc.’s capital structure features 65 percent equity, 35 percent debt, and that its before-tax cost of debt is 8 percent, while its cost of equity is 13 percent. If the appropriate weighted average tax rate is 34 percent, what will

> Suppose that Brown-Murphies’ common shares sell for $19.50 per share, that the firm is expected to set their next annual dividend at $0.57 per share, and that all future dividends are expected to grow by 4 percent per year, indefinitely. If Brown- Murphi

> Suppose that MNINK Industries’ capital structure features 63 percent equity, 7 percent preferred stock, and 30 percent debt. If the before-tax component costs of equity, preferred stock and debt are 11.60 percent, 9.5 percent, and 9 percent, respectively

> BetterPie Industries has three million shares of common stock outstanding, two million shares of preferred stock outstanding, and 10,000 bonds. If the common shares are selling for $47 per share, the preferred shares are selling for $24.50 per share, and

> Johnny Cake Ltd. has ten million shares of stock outstanding selling at $23 per share and an issue of $50 million in 9 percent, annual coupon bonds with a maturity of 17 years, selling at 93.5 percent of par. If Johnny Cake’s weighted average tax rate is

> TAFKAP Industries has three million shares of stock outstanding selling at $17 per share and an issue of $20 million in 7.5 percent, annual coupon bonds with a maturity of 15 years, selling at 106 percent of par. If TAFKAP’s weighted average tax rate is

> WhackAmOle has two million shares of common stock outstanding, 1.5 million shares of preferred stock outstanding, and 50,000 bonds. If the common shares are selling for $63 per share, the preferred shares are selling for $52 per share, and the bonds are

Question: Show on a graph like Figure 10-

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