The real rate of interest has been estimated to be 3 percent, and the expected long-term annual inflation rate is 7 percent. a. What is the current risk-free rate of return on one-year Treasury bonds? b. If the yield on 10-year U.S. Treasury bonds is 12 percent, what is the maturity risk premium between a 10-year bond and a one-year bond? c. If Delta bonds, scheduled to mature in 10 years, currently sell to yield 13 percent, what is the default risk premium on these bonds? d. If investors in the common stock of Delta require a 16 percent rate of return, what is the seniority risk premium on Delta’s common stock?
> The chairman of Heller Industries told a meeting of financial analysts that he expects the firm’s earnings and dividends to double over the next six years. The firm’s current (that is, as of year 0) earnings and dividends per share are $4 and $2, respect
> Ten years ago, Video Toys began manufacturing and selling coin-operated arcade games. Dividends are currently $1.50 per share, having grown at a 15 percent compound annual rate over the past five years. That growth rate is expected to be maintained for t
> The Seneca Maintenance Company currently (that is, as of year 0) pays a common stock dividend of $1.50 per share. Dividends are expected to grow at a rate of 11 percent per year for the next four years and then to continue growing thereafter at a rate of
> What is the current per-share value of JRM Corporation to an investor who requires a 16 percent annual rate of return, if JRM’s current per-share dividend is $2 and is expected to remain at $2 for the foreseeable future?
> Simtek currently pays a $2.50 dividend (D0) per share. Next year’s dividend is expected to be $3 per share. After next year, dividends are expected to increase at a 9 percent annual rate for three years and a 6 percent annual rate thereafter. a. What is
> Over the past five years, the dividends of the Gamma Corporation have grown from $ 0.70 per share to the current level of $1.30 per share (D0). This growth rate (computed to 1/ 10 = of 1 percent accuracy) is expected to continue for the foreseeable futur
> Cascade Mining Company expects its earnings and dividends to increase by 7 percent per year over the next 6 years and then to remain relatively constant thereafter. The firm currently (that is, as of year 0) pays a dividend of $5 per share. Determine the
> What are the primary variables that influence the risk of a portfolio of assets?
> The common stock of General Land Development Company (GLDC) is expected to pay a dividend of $1.25 next year and currently sells for $25. Assume that the firm’s future dividend payments are expected to grow at a constant rate for the foreseeable future.
> The Foreman Company’s earnings and common stock dividends have been growing at an annual rate of 6 percent over the past 10 years and are expected to continue growing at this rate for the foreseeable future. The firm currently (that is, as of year 0) pay
> General Cereal common stock dividends have been growing at an annual rate of 7 percent per year over the past 10 years. Current dividends are $1.70 per share. What is the current value of a share of this stock to an investor who requires a 12 percent rat
> How does a shelf registration differ from other public security offerings?
> Identify the major issuance costs associated with a security offering by a corporation.
> Which do you think is more risky for a firm trying to raise capital—an underwritten offering or a best-efforts offering?
> What are the differences between a direct placement, a public cash offering, and a rights offering of securities?
> What are the primary functions served by investment bankers?
> What is the difference between majority voting and cumulative voting?
> Explain how the book value per share of common stock can change over time.
> Explain how diversification can reduce the risk of a portfolio of assets to below the weighted average of the risk of the individual assets.
> Explain why the valuation models for a perpetual bond, preferred stock, and common stock with constant dividend payments (zero growth) are virtually identical.
> In the context of the constant growth dividend valuation model, explain what is meant by a. Dividend yield b. Price appreciation yield
> Explain how each of the following factors would affect the valuation of a firm’s common stock, assuming that all other factors remain constant: a. The general level of interest rates shifts upward, causing investors to require a higher rate of return on
> Explain the relationship between financial decisions and shareholders’ wealth.
> According to the general dividend valuation model, a firm that reinvests all its earnings and pays no cash dividends can still have a common stock value greater than zero. How is this possible?
> What factor or factors make the valuation of common stocks more complicated than the valuation of bonds and preferred stocks?
> Discuss the various stockholder rights.
> Explain the differences between par value, book value, and market value per share of common stock.
> Discuss the reasons why a firm may repurchase its own common stock.
> Does the retained earnings figure on a company’s balance sheet indicate the amount of funds the company has available for current dividends or capital expenditures? Explain fully.
> Under what circumstances will the coefficient of variation of a security’s returns and the standard deviation of that security’s returns give the same relative measure of risk when compared with the risk of another security?
> Define the following terms associated with common stock: a. Nonvoting stock b. Stock split c. Reverse stock split d. Stock dividend e. Book value f. Treasury stock
> International Many Foods, Inc.’s common stock has a beta of 0.9. The stock does not currently pay a dividend, but is expected to appreciate in value from a current price of $15 to $25 in the next five years. The risk-free rate is 6 percent and the market
> Consider again the SML given by Equation 8.18 and shown in Figure 8.15. Assume that the risk-free rate (r ^f) of 6 percent is based on an expected inflation premium of 4 percent. Suppose expected inflation increases by two percentage points to 6 percent.
> Suppose that a portfolio consists of the following stocks: The risk-free rate (r ^f) is 5 percent and the market risk premium (r ^m–r ^f) is 8.8 percent. a. Determine the beta for the portfolio. b. Determine how much General Electri
> Bostonmarket.com stock has an estimated beta of 1.5. The stock pays no dividend and is not expected to pay one for the foreseeable future. The current price of the stock is $50. You expect this price to rise to $60 by the end of the coming year. You beli
> The real rate of return has been estimated to be 2 percent given current economic conditions. The 30-day risk-free rate (annualized) is 5 percent. Twenty-year U.S. government bonds currently yield 8 percent. The yield on 20-year bonds issued by the Fores
> New Castle Company common stock has a beta of 1.50. The stock currently pays a dividend of $3 per share. The risk-free rate is 8 percent, and the market risk premium is expected to be 8.0 percent. The returns from New Castle stock are normally distribute
> Two securities have the following characteristics: Furthermore, the correlation of returns between the securities is -1.0. Determine the risk (standard deviation) of a portfolio consisting of equal proportions of Securities A and B. Security A Secu
> a. Estimate beta for each of the following securities assuming that the standard deviation of returns for the market portfolio (m) is 8.0 percent. b. Based on the Capital Asset Pricing Model, with a risk-free rate (r ^ f) of 7 percent and a market risk
> The current (time zero) price of one share of Farrell Corporation’s common stock is $25. The price is expected to increase by $5 over the coming year. The company is not expected to pay a dividend during the year. The standard deviation of the expected p
> If inflation expectations increase, what would you expect to happen to the returns required by investors in bonds? What would happen to bond prices?
> Three Rivers Investment Company desires to construct a portfolio with a 20 percent expected return. The portfolio is to consist of some combination of Security X and Security Y, which have the following expected returns, standard deviations of returns, a
> The expected return and standard deviation of returns of General Mills common stock over the next year are estimated to be 20 percent and 12 percent, respectively. Assume that the returns are approximately normally distributed. a. Determine the probabi
> Equation 8.9 can be modified to compute the risk of a three-security portfolio as follows: You have decided to invest 40 percent of your wealth in Security A, 30 percent in Security B, and 30 percent in Security C. The following information is availabl
> The stock of Jones Trucking is expected to return 13 percent annually with a standard deviation of 8 percent. The stock of Bush Steel Mills is expected to return 17 percent annually with a standard deviation of 14 percent. The correlation between the ret
> The return on the Tarheel Corporation stock is expected to be 14 percent with a standard deviation of 8 percent. The beta of Tarheel is 0.8. The risk-free rate is 7 percent, and the expected return on the market portfolio is 15 percent. What is the proba
> Security A offers an expected return of 15 percent with a standard deviation of 7 percent. Security B offers an expected return of 9 percent with a standard deviation of 4 percent. The correlation between the returns of A and B is þ0.6. If an investor pu
> The stock of Koch Brickyard Inc., is expected to return 14 percent with a standard deviation of 5 percent. Uptown Potbelly Stove Works’ stock is expected to return 16 percent with a standard deviation of 9 percent. a. If you invest 30 percent of your fu
> Using Equation 8.17, suppose you have computed the required rate of return for the stock of Bulldog Trucking to be 16.6 percent. Given the current stock price, the current dividend rate, and analysts’ projections for future dividend growth, you expect to
> a. Suppose a U.S. Treasury bill, maturing in one year, can be purchased today for $92,500. Assuming that the security is held until maturity, the investor will receive $100,000 (face amount). Determine the rate of return on this investment.• b. Suppose
> What is the nature of the risk associated with “risk-free” U.S. government bonds?
> The stock of Pizza Hot Inc., a Mexican pizza chain, has an estimated beta of 1.5. Calculate the required rate of return on Pizza Hot’s stock if the SML is estimated as follows: kj =0:06+0:094(j based on: a. An initial inflation expectation of 4 percent
> Given a risk-free rate (r ^f) of 6 percent and a market risk premium (r ^m ï€­ï€ r ^f) of 8.2 percent, calculate the required rate of return on each of the following stocks, based on the betas given in Table 8.8: a. American
> You have the following information on two securities in which you have invested: a. Which stock is riskier in a portfolio context? Which stock is riskier if you are considering them as individual assets (not part of a portfolio)? b. Compute the expecte
> You are considering investing in two securities, X and Y. The following data are available for the two securities: a. If you invest 40 percent of your funds in Security X and 60 percent in Security Y and if the correlation of returns between X and Y is
> An investor currently has all of his wealth in Treasury bills. He is considering investing one-third of his funds in General Electric, whose beta is 1.30, with the remainder left in Treasury bills. The expected risk-free rate (Treasury bills) is 6 percen
> The expected rate of return for the stock of Cornhusker Enterprises is 20 percent, with a standard deviation of 15 percent. The expected rate of return for the stock of Mustang Associates is 10 percent, with a standard deviation of 9 percent. a. Which st
> The return expected from Project No. 542 is 22 percent. The standard deviation of these returns is 11 percent. If returns from the project are normally distributed, what is the chance that the project will result in a rate of return above 33 percent? Wha
> You have estimated the following probability distributions of expected future returns for Stocks X and Y: a. What is the expected rate of return for Stock X? For Stock Y? b. What is the standard deviation of expected returns for Stock X? For Stock Y?
> Is it possible for investors ever to require a lower rate of return on a company’s equity than on its debt, assuming that the debt is in a junk-bond category of quality?
> What is the primary difference between 20-year bonds issued by the U.S. government and 20-year bonds issued by IBM?
> If the returns from a security were known with certainty, what shape would the probability distribution of returns graph have?
> Why do yield curves sometimes have a downward slope and at other times have an upward slope?
> What factors determine investors’ required rates of return on corporate bonds? common stocks? U.S. government bonds?
> Discuss the general relationship between risk and expected return.
> How is risk defined in a financial sense?
> What is the risk structure of interest rates?
> What is the term structure of interest rates?
> The enclosed area in Figure 8.16 shows all the possible portfolios obtained by combining the given securities in different proportions (that is, the opportunity set). a. Which of the portfolios (A, B, C, D, E, or F) is (are) on the efficient frontier?
> Under what circumstances can the beta concept be used to estimate the rate of return required by investors in a stock? What problems are encountered when using the CAPM?
> How is a security’s beta value computed?
> What variables must be known (or estimated) in applying the capitalization of cash flow method of valuation to a physical or financial asset?
> The stock of Amrep Corporation has a beta value estimated to be 1.4. How would you interpret this beta value? How would you evaluate the firm’s systematic risk?
> Define the following terms. a. Risk b. Probability distribution c. Standard deviation d. Required rate of return e. Coefficient of variation f. Efficient portfolio g. Efficient frontier h. Capital market line i. Beta coefficient j. CAPM k. Corre
> What basic features of a lease are necessary to create a landlord-tenant relationship?
> What is a landlord’s lien and how may it be exercised?
> What is the difference between a tenancy at will and a tenancy at sufferance?
> What conditions must be satisfied before a person can acquire property by adverse possession?
> What warranties are contained in a quitclaim deed?
> What are the warranties implicit in a warranty deed?
> How does a license differ from an easement?
> What is the difference between an easement and a profit?
> To what extent may a life tenant use the land in which he or she has a life estate?
> What is a fee simple absolute
> What are goods?
> What two factors are usually considered by the courts in deciding whether property is a fixture?
> What is eminent domain?
> Do landowners always acquire air rights and subsurface rights to their property?
> If an engagement is called off, who should get the engagement ring?
> What effect do lost-property statutes have on the distinction among lost, mislaid, and abandoned property, and treasure trove?
> How is a bailment created?
> What are fungible goods?
> What is the difference between actual delivery and constructive delivery in creating a bailment?
> Are innkeepers and hotel owners strictly liable when their guests lose personal property on the premises?
> How may a bailor satisfy his duty to provide the bailee with goods that are free from hidden de¬fects that could injure the bailee?
> In most situations, when a breach of contract occurs, the injured party has a duty to do what?
> Discuss the two basic duties of a bailee.
> Does the 2005 act adequately balance the interests of creditors and debtors? Why or why not?
> Do bailees have the right to limit their bailment liability?
> What are fungible goods?
