Question: Using the data in Problem 23, plot

> Suppose you have $100,000 in cash, and you decide to borrow another $15,000 at a 4% interest rate to invest in the stock market. You invest the entire $115,000 in a portfolio J with a 15% expected return and a 25% volatility. a. What is the expected retu

> You expect HGH stock to have a 20% return next year and a 30% volatility. You have $25,000 to invest, but plan to invest a total of $50,000 in HGH, raising the additional $25,000 by shorting either KBH or LWI stock. Both KBH and LWI have an expected retu

> You have $10,000 to invest. You decide to invest $20,000 in Google and short sell $10,000 worth of Yahoo! Google’s expected return is 15% with a volatility of 30% and Yahoo!’s expected return is 12% with a volatility of 25%. The stocks have a correlation

> Suppose Target’s stock has an expected return of 20% and a volatility of 40%, Hershey’s stock has an expected return of 12% and a volatility of 30%, and these two stocks are uncorrelated. a. What is the expected return and volatility of an equally weight

> Consider a world that only consists of the three stocks shown in the following table: a. Calculate the total value of all shares outstanding currently. b. What fraction of the total value outstanding does each stock make up? c. You hold the market port

> Fred holds a portfolio with a 30% volatility. He decides to short sell a small amount of stock with a 40% volatility and use the proceeds to invest more in his portfolio. If this transaction reduces the risk of his portfolio, what is the minimum possible

> Consider the portfolio in Problem 27. Suppose the correlation between Intel and Oracle’s stock increases, but nothing else changes. Would the portfolio be more or less risky with this change? Data from Problem 27: A hedge fund has cre

> A hedge fund has created a portfolio using just two stocks. It has shorted $35,000,000 worth of Oracle stock and has purchased $85,000,000 of Intel stock. The correlation between Oracle’s and Intel’s returns is 0.65. T

> Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2015 (filed in October 2015). Answer the following questions from the notes to their financial statements: a. How many stores did Costco open outside of the U.S. i

> Using the same data as for Problem 23, calculate the expected return and the volatility (standard deviation) of a portfolio consisting of Johnson & Johnson’s and Walgreens’ stocks using a wide range of portfolio we

> Calculate (a) the expected return and (b) the volatility (standard deviation) of a portfolio that consists of a long position of $10,000 in Johnson & Johnson and a short position of $2000 in Walgreens. Data for Problem 25: Expected Return Stand

> For the portfolio in Problem 23, if the correlation between Johnson & Johnson’s and Walgreens’ stock were to increase, a. Would the expected return of the portfolio rise or fall? b. Would the volatility of the port

> Calculate (a) the expected return and (b) the volatility (standard deviation) of a portfolio that is equally invested in Johnson & Johnson’s and Walgreens’ stock. Data for Problem 23: Expected Return Standard

> Suppose Intel’s stock has an expected return of 26% and a volatility of 50%, while Coca-Cola’s has an expected return of 6% and volatility of 25%. If these two stocks were perfectly negatively correlated (i.e., their correlation coefficient is -1), a. Ca

> Suppose Ford Motor stock has an expected return of 20% and a volatility of 40%, and Molson Coors Brewing has an expected return of 10% and a volatility of 30%. If the two stocks are uncorrelated, a. What is the expected return and volatility of an equall

> You currently hold a portfolio of three stocks, Delta, Gamma, and Omega. Delta has a volatility of 60%, Gamma has a volatility of 30%, and Omega has a volatility of 20%. Suppose you invest 50% of your money in Delta, and 25% each in Gamma and Omega. a. W

> You own three stocks: 600 shares of Apple Computer, 10,000 shares of Cisco Systems, and 5000 shares of Colgate-Palmolive. The current share prices and expected returns of Apple, Cisco, and Colgate-Palmolive are, respectively, $500, $20, $100 and 12%, 10%

> Stock A has a volatility of 65% and a correlation of 10% with your current portfolio. Stock B has a volatility of 30% and a correlation of 25% with your current portfolio. You currently hold both stocks. Which will increase the volatility of your portfol

> Consider an equally weighted portfolio of stocks in which each stock has a volatility of 40%, and the correlation between each pair of stocks is 20%. a. What is the volatility of the portfolio as the number of stocks becomes arbitrarily large? b. What is

> See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. a. What were Mydeco’s retained earnings each year? b. Using the data from 2012, what was Mydeco’s total stockholdersâ€&#15

> What is the volatility (standard deviation) of an equally weighted portfolio of stocks within an industry in which the stocks have a volatility of 50% and a correlation of 40% as the portfolio becomes arbitrarily large?

> Suppose the average stock has a volatility of 50%, and the correlation between pairs of stocks is 20%. Estimate the volatility of an equally weighted portfolio with (a) 1 stock, (b) 30 stocks, (c) 1000 stocks.

> Using the data from Table 11.3, what is the volatility of an equally weighted portfolio of Microsoft, Alaska Air, and Ford Motor stock? Table 11.3: Alaska Air Southwest Airlines Ford Motor General Mills Microsoft HP Kellogg Volatility (Standard Dev

> Using the data in Table 11.1, a. Compute the annual returns for a portfolio with 25% invested in North Air, 25% invested in West Air, and 50% invested in Tex Oil. b. What is the lowest annual return for your portfolio in part a? How does it compare with

> Suppose Tex stock has a volatility of 40%, and Mex stock has a volatility of 20%. If Tex and Mex are uncorrelated, a. What portfolio of the two stocks has the same volatility as Mex alone? b. What portfolio of the two stocks has the smallest possible vol

> Suppose Avon and Nova stocks have volatilities of 50% and 25%, respectively, and they are perfectly negatively correlated. What portfolio of these two stocks has zero risk?

> Suppose Wesley Publishing’s stock has a volatility of 60%, while Addison Printing’s stock has a volatility of 30%. If the correlation between these stocks is 25%, what is the volatility of the following portfolios of Addison and Wesley: (a) 100% Addison,

> Arbor Systems and Gencore stocks both have a volatility of 40%. Compute the volatility of a portfolio with 50% invested in each stock if the correlation between the stocks is (a) +1, (b) 0.50, (c) 0, (d) -0.50, and (e) -1.0. In which cases is the volatil

> Using the data in Table 10.2, a. What was the average annual return of Microsoft stock from 2002–2014? b. What was the annual volatility for Microsoft stock from 2002–2014? Table 10.2: S&P 500 Index Dividends Pai

> Assume that historical returns and future returns are independently and identically distributed and drawn from the same distribution. a. Calculate the 95% confidence intervals for the expected annual return of four different investments included in Table

> Nokela Industries purchases a $40 million cyclo-converter. The cyclo-converter will be depreciated by $10 million per year over four years, starting this year. Suppose Nokela’s tax rate is 40%. a. What impact will the cost of the purchase have on earning

> Using the data in the following table, calculate the return for investing in Boeing stock (BA) from January 2, 2008, to January 2, 2009, and also from January 3, 2011, to January 3, 2012, assuming all dividends are reinvested in the stock immediately.

> Repeat Problem 4 assuming that the stock fell $5 to $45 instead. a. Is your capital gain different? Why or why not? b. Is your dividend yield different? Why or why not? Data from Problem 4: You bought a stock one year ago for $50 per share and sold it

> You bought a stock one year ago for $50 per share and sold it today for $55 per share. It paid a $1 per share dividend today. a. What was your realized return? b. How much of the return came from dividend yield and how much came from capital gain?

> State whether each of the following is inconsistent with an efficient capital market, the CAPM, or both: a. A security with only diversifiable risk has an expected return that exceeds the risk-free interest rate. b. A security with a beta of 1 had a retu

> Suppose the market risk premium is 6.5% and the risk-free interest rate is 5%. Calculate the cost of capital of investing in a project with a beta of 1.2.

> Given the results to Problem 35, why don’t all investors hold Autodesk’s stock rather than Hershey’s stock? Data from Problem 35: Suppose the market risk premium is 5% and the risk-free interest rate is 4%. Using the data in Table 10.6, calculate the e

> Suppose the market risk premium is 5% and the risk-free interest rate is 4%. Using the data in Table 10.6, calculate the expected return of investing in a. Starbucks’ stock. b. Hershey’s stock. c. Autodeskâ€

> Suppose the risk-free interest rate is 4%. a. i. Use the beta you calculated for the stock in Problem 33(a) to estimate its expected return. ii. How does this compare with the stock’s actual expected return? b. i. Use the beta you calculated for the stoc

> Suppose the market portfolio is equally likely to increase by 30% or decrease by 10%. a. Calculate the beta of a firm that goes up on average by 43% when the market goes up and goes down by 17% when the market goes down. b. Calculate the beta of a firm t

> Based on the data in Table 10.6, estimate which of the following investments you expect to lose the most in the event of a severe market down turn: (1) A $2000 investment in Hershey, (2) a $1500 investment in Macy’s, or (3) a $1000 inve

> Suppose your firm receives a $5 million order on the last day of the year. You fill the order with $2 million worth of inventory. The customer picks up the entire order the same day and pays $1 million upfront in cash; you also issue a bill for the custo

> You turn on the news and find out the stock market has gone up 10%. Based on the data in Table 10.6, by how much do you expect each of the following stocks to have gone up or down: (1) Starbucks, (2) Tiffany & Co., (3) Hershey, and (4) McDonald&acirc

> What does the beta of a stock measure?

> Characterize the difference between the two stocks in Problems 1 and 2. What trade-offs would you face in choosing one to hold? Data from Problems 1: The figure on page 351 shows the one-year return distribution for RCS stock. Calculate a. The expected

> Download the spreadsheet from containing the realized return of the S&P 500 from 1929–2008. Starting in 1929, divide the sample into four periods of 20 years each. For each 20-year period, calculate the final amount an investor would have earned given a

> Suppose the risk-free interest rate is 5%, and the stock market will return either 40% or -20% each year, with each outcome equally likely. Compare the following two investment strategies: (1) invest for one year in the risk-free investment, and one year

> Identify each of the following risks as most likely to be systematic risk or diversifiable risk: a. The risk that your main production plant is shut down due to a tornado. b. The risk that the economy slows, decreasing demand for your firm’s products. c.

> Explain why the risk premium of a stock does not depend on its diversifiable risk.

> Consider an economy with two types of firms, S and I. S firms all move together. I firms move independently. For both types of firms, there is a 60% probability that the firms will have a 15% return and a 40% probability that the firms will have a -10% r

> Consider the following two, completely separate, economies. The expected return and volatility of all stocks in both economies is the same. In the first economy, all stocks move together—in good times all prices rise together and in bad times they all fa

> Can a firm with positive net income run out of cash? Explain.

> Using the data in Problem 20, calculate a. The expected overall payoff of each bank. b. The standard deviation of the overall payoff of each bank. Data from Problem 20: Consider two local banks. Bank A has 100 loans outstanding, each for $1 million, th

> Consider two local banks. Bank A has 100 loans outstanding, each for $1 million, that it expects will be repaid today. Each loan has a 5% probability of default, in which case the bank is not repaid anything. The chance of default is independent across a

> The following table shows the one-year return distribution of Startup, Inc. Calculate a. The expected return. b. The standard deviation of the return. Probability 40% 20% 20% 10% 10% Return – 100% -75% -50% -25% 1000%

> What if the last two and a half decades had been “normal”? Download the spreadsheet from containing the data for Figure 10.1. a. Calculate the arithmetic average return on the S&P 500 from 1926 to 1989. b. Assuming

> Using the data from Problem 17, repeat your analysis over the 1990s. a. Which asset was riskiest? b. Compare the standard deviations of the assets in the 1990s to their standard deviations in the Great Depression. Which had the greatest difference betwee

> Download the spreadsheet from containing the data for Figure 10.1. a. Compute the average return for each of the assets from 1929 to 1940 (The Great Depression). b. Compute the variance and standard deviation for each of the assets from 1929 to 1940. c.

> How does the relationship between the average return and the historical volatility of individual stocks differ from the relationship between the average return and the historical volatility of large, well-diversified portfolios?

> Compute the 95% confidence interval of the estimate of the average monthly return you calculated in Problem 13(a). Data from Problem 13: Using the same data as in Problem 12, compute the a. Average monthly return over this period. b. Monthly volatility

> Explain the difference between the average return you calculated in Problem 13(a) and the realized return you calculated in Problem 12. Are both numbers useful? If so, explain why. Data from Problem 13: Using the same data as in Problem 12, compute the

> Using the same data as in Problem 12, compute the a. Average monthly return over this period. b. Monthly volatility (or standard deviation) over this period. Data from Problem 12: Download the spreadsheet from that contains historical monthly prices an

> See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. Use the data from the balance sheet and cash flow statement in 2012 to determine the following: a. How much cash did Mydeco have at the end of 2011? b. What were Mydeco&

> Download the spreadsheet from that contains historical monthly prices and dividends (paid at the end of the month) for Ford Motor Company stock (Ticker: F) from August 1994 to August 1998. Calculate the realized return over this period, expressing your a

> Consider an investment with the following returns over four years: a. What is the compound annual growth rate (CAGR) for this investment over the four years? b. What is the average annual return of the investment over the four years? c. Which is a bett

> Using the data in Table 10.2, a. What was the average dividend yield for the SP500 from 2002–2014? b. What was the volatility of the dividend yield? c. What was the average annual return of the SP500 from 2002–2014 exc

> The figure on page 351 shows the one-year return distribution for RCS stock. Calculate a. The expected return. b. The standard deviation of the return. 35 30 25 20 15 10 5 -25% -10% 0% 10% 25% Return Probability (%)

> In 2006 and 2007, Kenneth Cole Productions (KCP) paid annual dividends of $0.72. In 2008, KCP paid an annual dividend of $0.36, and then paid no further dividends through 2012. KCP was acquired at the end of 2012 for $15.25 per share. a. What would an in

> Canadian-based mining company El Dorado Gold (EGO) suspended its dividend in March 2016 as a result of declining gold prices and delays in obtaining permits for its mines in Greece. Suppose you expect EGO to resume paying annual dividends in two years ti

> Dorpac Corporation has a dividend yield of 1.5%. Dorpac’s equity cost of capital is 8%, and its dividends are expected to grow at a constant rate. a. What is the expected growth rate of Dorpac’s dividends? b. What is the expected growth rate of Dorpac’s

> No Growth Corporation currently pays a dividend of $2 per year, and it will continue to pay this dividend forever. What is the price per share if its equity cost of capital is 15% per year?

> Krell Industries has a share price of $22 today. If Krell is expected to pay a dividend of $0.88 this year, and its stock price is expected to grow to $23.54 at the end of the year, what is Krell’s dividend yield and equity cost of capital?

> In mid-2015, Coca-Cola Company (KO) had a share price of $41, and had paid a dividend of $1.32 for the prior year. Suppose you expect Coca-Cola to raise this dividend by approximately 7% per year in perpetuity. a. If Coca-Cola’s equity cost of capital is

> See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. a. In what year was Mydeco’s net income the lowest? b. In what year did Mydeco need to reduce its cash reserves? c. Why did Mydeco need to reduce its c

> Suppose Hawaiian Airlines (HA) has 53 million shares outstanding. Estimate Hawaiian’s share value using each of the five valuation multiples in Problem 28, based on the median valuation multiple of the other seven airlines shown.

> Consider the following data for the airline industry for December 2015 (EV = enterprise value, Book = equity book value). Discuss the potential challenges of using multiples to value an airline. Market Enterprise Value (EV) Company Name Capitalizati

> In addition to footwear, Kenneth Cole Productions designs and sells handbags, apparel, and other accessories. You decide, therefore, to consider comparable for KCP outside the footwear industry. a. Suppose that Fossil, Inc., has an enterprise value to EB

> Suppose that in January 2006, Kenneth Cole Productions had sales of $518 million, EBITDA of $55.6 million, excess cash of $100 million, $3 million of debt, and 21 million shares outstanding. a. Using the average enterprise value to sales multiple in Tabl

> Suppose that in January 2006, Kenneth Cole Productions had EPS of $1.65 and a book value of equity of $12.05 per share. a. Using the average P/E multiple in Table 9.1, estimate KCP’s share price. b. What range of share prices do you est

> You notice that PepsiCo (PEP) has a stock price of $72.62 and EPS of $3.80. Its competitor, the Coca-Cola Company (KO), has EPS of $1.89. Estimate the value of a share of Coca-Cola stock using only this data.

> Kenneth Cole Productions (KCP) was acquired in 2012 for a purchase price of $15.25 per share. KCP has 18.5 million shares outstanding, $45 million in cash, and no debt at the time of the acquisition. a. Given a weighted average cost of capital of 11%, an

> Consider the valuation of Kenneth Cole Productions. a. Suppose you believe KCP’s initial revenue growth rate will be between 4% and 11% (with growth slowing in equal steps to 4% by year 2011). What range of share prices for KCP is consistent with these f

> IDX Technologies is a privately held developer of advanced security systems based in Chicago. As part of your business development strategy, in late 2008 you initiate discussions with IDX’s founder about the possibility of acquiring the business at the e

> Anle Corporation has a current price of $20, is expected to pay a dividend of $1 in one year, and its expected price right after paying that dividend is $22. a. What is Anle’s expected dividend yield? b. What is Anle’s expected capital gain rate? c. What

> See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. a. From 2012 to 2016, what was the total cash flow from operations that Mydeco generated? b. What fraction of the total in (a) was spent on capital expenditures? c. What

> What does the phrase limited liability mean in a corporate context?

> Benchmark Metrics, Inc. (BMI), an all-equity financed firm, reported EPS of $5.00 in 2008. Despite the economic downturn, BMI is confident regarding its current investment opportunities. But due to the financial crisis, BMI does not wish to fund these in

> Suppose Amazon.com Inc. pays no dividends but spent $3 billion on share repurchases last year. If Amazon’s equity cost of capital is 8%, and if the amount spent on repurchases is expected to grow by 6.5% per year, estimate Amazon’s market capitalization.

> What is the value of a firm with initial dividend Div, growing for n years (i.e., until year n + 1) at rate g1 and after that at rate g2 forever, when the equity cost of capital is r ?

> Colgate-Palmolive Company has just paid an annual dividend of $1.50. Analysts are predicting dividends to grow by $0.12 per year over the next five years. After then, Colgate’s earnings are expected to grow 6% per year, and its dividend payout rate will

> Procter and Gamble (PG) paid an annual dividend of $1.72 in 2009. You expect PG to increase its dividends by 8% per year for the next five years (through 2014), and thereafter by 3% per year. If the appropriate equity cost of capital for Procter and Gamb

> DFB, Inc., expects earnings at the end of this year of $5 per share, and it plans to pay a $3 dividend at that time. DFB will retain $2 per share of its earnings to reinvest in new projects with an expected return of 15% per year. Suppose DFB will mainta

> Assume Evco, Inc., has a current price of $50 and will pay a $2 dividend in one year, and its equity cost of capital is 15%. What price must you expect it to sell for right after paying the dividend in one year in order to justify its current price?

> Mersey Chemicals manufactures polypropylene that it ships to its customers via tank car. Currently, it plans to add two additional tank cars to its fleet four years from now. However, a proposed plant expansion will require Mersey’s transport division to

> Cellular Access, Inc. is a cellular telephone service provider that reported net income of $250 million for the most recent fiscal year. The firm had depreciation expenses of $100 million, capital expenditures of $200 million, and no interest expenses. W

> After looking at the projections of the Home Net project, you decide that they are not realistic. It is unlikely that sales will be constant over the four-year life of the project. Furthermore, other companies are likely to offer competing products, so t

> Suppose the following orders are received by an exchange for Cisco stock: Limit Order: Buy 200 shares at $25 Limit Order: Sell 200 shares at $26 Limit Order: Sell 100 shares at $25.50 Limit Order: Buy 100 shares at $25.25 a. What are the best bid and

> Hyperion, Inc. currently sells its latest high-speed color printer, the Hyper 500, for $350. It plans to lower the price to $300 next year. Its cost of goods sold for the Hyper 500 is $200 per unit, and this year’s sales are expected to be 20,000 units.

> For the assumptions in part (a) of Problem 5, assuming a cost of capital of 12%, calculate the following: a. The break-even annual sales price decline. b. The break-even annual unit sales increase. Data from Problem 5: After looking at the projections

> Using the FCF projections in part (b) of Problem 11, calculate the NPV of the Home Net project assuming a cost of capital of a. 10%. b. 12%. c. 14%. What is the IRR of the project in this case?