This website uses cookies to ensure you have the best experience. Learn more

Finance Chapter 3 Hw Essay

1385 words - 6 pages

Foundations of Finance Homework 3
Prof. Johannes Stroebel Due at the start of class 9

Topic 5: The Capital Asset Pricing Model
1. Assume the risk free rate equals Rf = 4%, and the return on the market portfolio has expectation E [RM ] = 12% and standard deviation σM = 15%. (a) What is the equilibrium risk premium (that is, the excess return on the market portfolio)? (b) If a certain stock has a realized return of 14%, what can we say about the beta of this stock? (c) If a certain stock has an expected return of 14%, what can we say about the beta of this stock? 2. You are given the following two equations: E(Ri ) = Rf + (E(RM ) − Rf )βi E(RM ) − Rf σp E(Rp ) = Rf + σM (1) (2)

You ...view middle of the document...

) 2. Suppose the price on the North Pole is $18 and the price on the the South Pole is $17? How can you make an arbitrage profit? (Assume no trading costs.) 3. Suppose that the price on the North Pole is $18, that buying or selling on the North Pole costs $2, and that buying or selling on the South Pole is free. What does the No-Arbitrage Condition say about the price on the South Pole? Suppose that there are two securities RAIN and SUN. RAIN pays $100 in there is any rain during the next world cup soccer final. SUN pays $100 in there is no rain. Suppose that the world cup soccer final is 1 year from today (although this is not true), and suppose that RAIN is trading at a price of $23 and SUN is trading at a price of $70. 1. If you buy 1 share of RAIN and 1 share of SUN, what is your payoff after 1 year, depending on the weather? 2. What does the No-Arbitrage Condition imply about the price of a 1-year zero-coupon bond? (Assume no trading costs.) 3. Suppose that a 1-year zero-coupon bond is trading at $90. Show how you would set up a transaction to earn a riskless arbitrage profit. (Assume no trading costs.) 4. Suppose that trading zero-coupon bonds is costless, but trading RAIN and SUN each cost $2 per $100 face value. Can you still make an arbitrage profit? 2

Topic 7: Equity Valuation
Suppose that the consensus forecast of security analysts of your favorite company is that earnings next year will be E1 = $5.00 per share. Suppose that the company tends to plow back 50% of its earnings and pay the rest as dividends. If the Chief Financial Officer (CFO) estimates that the company’s growth rate will be 8% from now onwards, answer the following questions. 1. If your estimate of the company’s required rate of return on its stock is 10%, what is the equilibrium price of the stock? 2. Suppose you observe that the stock is selling for $50.00 per share, and that this is the best estimate of its equilibrium price. What would you conclude about either (i) your estimate of the stock’s required rate of return; or (ii) the CFO’s estimate of the company’s future growth rate? 3. Suppose your own 10% estimate of the stock’s required rate of return is shared by the rest of the market. What does the market price of $50.00 per share imply about the market’s estimate of the company’s growth rate? This question requires data collection. You can find all numbers on The questions concern Microsoft (ticker: MSFT). 1. What is the current price and the current price-earnings ratio? 2. What is the current plowback ratio? 3. What is the growth rate of earnings for the next 5 years according to the analysts? Hint: look for annual growth rates under “Analyst Estimates” 4. What is the beta of MSFT? Hint:...

Other Papers Like Finance Chapter 3 Hw

Principles of Finance Essay

982 words - 4 pages M1038091, 1103809077 Principles of Finance , 1103809069 , 1103809060 PRINCIPLES OF FINANCE FALL 2010 HW 1: INTRODUCTION DUE WEDNESDAY OCTOBER 20, 2010 QUESTION 1: FINANCE What is the general concept/balancing act that represents the fundamental concept behind the field of finance? Illustrate with an example. In our opinion, the general concept/balancing act that represents the fundamental concept behind the field of finance is as

Foundations of Financial Markes and Insitutions Book Notes

4194 words - 17 pages of these firms will be different since hedge funds seek to generate abnormal returns. Chapter 3 chap 3 hw: 2,4-7,14,17,18 2) This will help insure that the depository institution interest rate that they are charging is in line with the markets interest rates which in turn makes it less likely that they will have a negative spread and lose money. Avoid interest rate risk 4) The Basel committee on banking supervision plays the primary

Fin 534 Student Guide

1252 words - 6 pages .  2. Analyze financial statements for key ratios, cash flow positions, and taxation effects.  3. Review fixed income strategies using time value of money concept, bond valuation methods, and interest rate calculations.  4. Estimate the risk and return on financial investments.  5. Apply financial management options to corporate finance.  6. Determine the cost of capital and how to maximize returns.  7. Formulate cash flow


825 words - 4 pages | 3. | The Entrepreneurial Process | Barringer Chapter 1 | | 4. | Recognizing opportunities and generating ideas | Barringer Chapter 2 | Week | 5. | Encourging and Protecting New Ideas | Barringer Chapter 2 | | 6. | Entrepreneurship In Pakistan part 1 | Article by Dr.Nadeem-ul-Haq | Week | 7. | Entrepreneurship In Pakistan part 2 | Article by Dr.Nadeem-ul-Haq | | 8. | FeasibilityAnalysis | Barringer

Acc 350 Hw 7

1342 words - 6 pages Your names: ___________________ Class time: ___________________ ACC350 - HW #7 (Chapter 10) Solutions Wednesday, October 23, 2013 Multiple Choice Questions 1. CD Productions needs to know its anticipated cash inflows for the next quarter by month. Cash sales are 10 percent of total sales each month. Historically, sales on account have been collected as follows: 60 percent in the month of sale, 30

Product Management

4674 words - 19 pages &D policies and incentivization Differential advantage analysis Ability to: Conceive, design novel products Ability to produce Ability to finance Ability to market Ability to manage Predicting future product strategies • Trend analysis (Pentium) • Cause – effect • Simulation Category Attractiveness Chapter 4 Aggregate Market Factors • • • • • • Category Size: Higher market size? Market growth rate: How to identify? PLC: How

Real Estate Finance Midterm Keller

1673 words - 7 pages : | | | |  3. | Question : | (TCO A) In traditional city patterns, the highest land use density is found in _____________ , | |   | Student Answer: | |  office parks |   | | |  shopping centers |   | | |  the central business district |   | | |  the industrial district (Chapter 3 - page) |   | Instructor Explanation: C is the correct answer | Chapter 3 - page 50-52 | | |   | Points Received: | 5 of 5 |   | Comments

Content and Structure Report and Defense

926 words - 4 pages representations of the data (tables, figures, /quotes, etc.) are informative, and directly related to and referred to within the text. For students Strategic Marketing Ch3 = external analysis. For students Strategic Management, SCM and Finance CH 3 can be: Ist situation/pareto/ e.g Ch4: Results/ answers on research question chapter 1.5. CH 4. Findings are well-described (Application of generally accepted theories and frameworks

Corporate Finance

1146 words - 5 pages include two or three new end-of-chapter problems that require the use of the Educational Version of Market Insight, Standard & Poor’s powerful and well- known Compustat® database. These problems provide an easy, online way for students to incorporate current, real-world data into their learning. See examples in Chapter 3, page 92; Chapter 4, page 125. xv Basic (continued ) Intermediate (Questions 19–20) Challenge (Questions 21–23) c


1037 words - 5 pages . Complete the following exercises from Chapter 10 11 and submit them to the instructor by the end of Day 3. This assignment will be graded as a completion only. The instructor will post the answers to these exercises by the end of Day 5 for you to check your accuracy and comprehension of the subject matter. Exercises: 10-1, 10-3, 10-6, 11-1, 11-6, 11-15. ACC 202 Week 1 Assignment Week One Problems Week One Problems. Complete the


1574 words - 7 pages contracts and/or formal customer/supplier relationships. • Much in-house development or upgrading of in-house software is typical. • The relationships between ‘internal’ customers and development varies greatly ‘when measured by a formal-informal scale.’ • Some managers claim that the closer the relationships to the formal form, the greater the probability for project success. Homework – Chapter 1 hw • Seven issues characterize

Related Essays

Chapter 3 International Finance Essay

4385 words - 18 pages Chapter 3—International Financial Markets 1. Assume that a bank's bid rate on Swiss francs is $.45 and its ask rate is $.47. Its bid-ask percentage spread is: a.|about 4.44%.| b.|about 4.26%.| c.|about 4.03%.| d.|about 4.17%.| ANS: B SOLUTION:|Bid-ask percentage spread = ($.47 - $.45)/$.47 = 4.26%| PTS: 1 2. Assume that a bank's bid rate on Japanese yen is $.0041 and its ask rate is $.0043. Its bid-ask percentage spread is

Managerial Finance Chapter 3 Problems

595 words - 3 pages Managerial Financial 3-1: Greene Sisters has a DSO of 20 days. The company’s average daily sales are $20,000. What is the level of its accounts receivable? Assume there are 365 days in a year. Answer: Days Sales Outstanding = Receivables / Average Sales per day or Receivables / (Annual Sales/365) DSO 20 = Receivables / 20000 Receivables = DSO x Average daily sales = 20 x $20,000 Receivables = $400,000 3-2: Vigo Vacations has an

Family Of Diversity Cultral Essay

3871 words - 16 pages Lutheran so they were both Christian together. They went to Bournemouth, England and crossed paths with missionaries, and converted to Mormonism. At this point they decided to move to Salt Lake City. When HW was 3 here and her siblings were relocated from England to Salt Lake to follow the book of Mormon. Years later HW left the church, but she was raised in a blend of Mormon, Christianity and Islam because her father never wanted to commit to

Ungs2050 Essay

418 words - 2 pages Calendar Overall for Case-Study Presentation & Mid-Term Exam – MGT 4760 (Strategic Management) Sem 1, 2012/2013 Sec 8 (M-W) No. | Week | Topics | Class Day | Date | Schedule | Details | | 1 | Chapter 1: The Nature of Strategic Management | 1- Mon 2- Wed | 10/912/9 | | | | 2 | Chapter 2: The Business Vision and Mission | 3- Mon 4- Wed | 17/919/9 | | | | 3 | Chapter 3: The External Assessment | 5- Mon 6