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BUSFIN 1328 Spring 2024
Problem Set 1
Show your work
, please. TOTAL 100 points
The assignment is due on Thursday, February 1, 2024, at 11 a.m.
I need only one write-up back from each group with the first and last names of students forming the group (and your student ID numbers). Highlight your answers, please. Please upload it to Canvas. CAPM
Question 1 (3 points)
What is the beta of a portfolio with E(r
P
)=18%, if r
f
=6% and E(r
M
)=14%?
Question 2 (7 points)
The market price of a security is 50$. Its expected rate of return is 14%. The risk-free rate is 6% and the market risk premium is 8.5%. What will be the market price of the security if its covariance with the market portfolio doubles (and all other variables remain unchanged)? Assume that the stock is expected to pay a constant dividend in perpetuity. Hint: Recall that in the case of perpetual dividends price of the stock is equal to D/r
Question 3 (2 points each, 4 points in total)
Are the following true or false?
a.
Stocks with a beta of zero offer an expected rate of return of zero.
b.
The CAPM implies that investors require a higher return to hold highly volatile securities.
Question 4 (6 points)
A share of stock sells for $50 today. It will pay a dividend of $6 per share at the end of the year. Its beta is 1.2. R
f
=6%. R
M
=16%.
What do investors expect the stock to sell for at the end of the year?
Question 5
In 1997 the rate of return on short-term government securities (perceived to be risk-free) was about 5%. Suppose the expected rate of return required by the market for a portfolio with a beta of 1 is 12%. According to the CAPM (security market line):
a.
(3 points) What is the expected rate of return on the market portfolio?
b.
(3 points) What would be the expected rate of return on a stock with beta=0?
c.
(5 points) Suppose you consider buying a share of stock at $40. The stock is expected to pay $3 dividends next year and you expect it to sell then for $41. The stock risk has been evaluated by beta=-0.5. Is the stock overpriced or underpriced?
1
Stock Valuation
Question 1 a.
(10 points) You are a stock analyst in charge of valuing high-technology firms, and you are expected to come out with buy-sell recommendations for your clients. You are currently analyzing a firm called eGreg.com that specializes in Internet business communication. You are
expecting explosive growth in this area. However, the company is not currently profitable even though you believe it will be in the future. Your projections are that the firm will pay no dividends for the next 10 years. Eleven years from now, you expect the stock to pay its first dividend of $2 per share. You expect dividends to increase at a rate of 25 percent per year for the nine years after that. At that point, the industry will start to mature and slow down; dividends will continue to grow but only at a rate of 9 percent per year. The stock is priced in the market at $15 per share. If you believe that a fair rate of return on a stock of this type is 14 percent, what is your estimate of the value of the stock, and should you issue a recommendation to buy or to sell?
b.
(10 points) The day after you make your estimate in part (a) news indicates that things are not going as smoothly as predicted for this business. Your estimates of the initial dividend and the growth rates remain the same, but the timing has changed. You now decide that the firm will pay its first dividend ($2) in 16 years. The high growth period (25 percent per year) will last for
only four years before slowing to a growth of 9 percent per year.
Given a rate of return of 14 percent, what is your new estimate of the value of the stock, and should you change your recommendation?
Question 2 (10 points) An enterprise is expected to pay a dividend of $0.50 in one year. The dividend is expected to grow at a rate of 15 percent per year for the next four years up to and including year 5 as the firm goes through a period of rapid growth. After that, it is expected to grow at an average rate of 5 percent per year forever. If the required return is 20 percent, what is the value of a share?
Question 3
You are estimating the price-earnings multiple to use to value Paramount Global by looking at the average price-earnings multiple of comparable firms. The following are the price-earning ratios of firms in the entertainment business.
Firm
PE Ratio
Disney
22.09
Warner Bros Discovery Inc
36.00
Comcast
14.10
Netflix
26.70
Charter Communications
13.50
You can find more information about the companies at this link:
https://disfold.com/united-states/industry/entertainment/companies/
2
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Suppose that an entity has paid one of its liabilities twice during the year, in error The effects of this
O Assets, liabilities, and equity are understated.
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You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is
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A company is expecting EBIT of Rs. 5,00,000 per annum on investment of Rs.
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A project currently generates sales of $18 million, variable costs equal 60% of sales, and fixed costs are $3.6 million. The firm's tax rate
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0
3.00
1
0.81
2017…
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Entries for notes payable
Bennett Enterprises issues a $660,000, 45-day, 9%, note to Spectrum Industries for merchandise inventory.
Assume a 360-day year. If required, round your answers to the nearest dollar.If an amount box does not require an entry, leave it blank.
a. Journalize Bennett Enterprises' entries to record:
1. the issuance of the note.
2. the payment of the note at maturity.
2
b. Journalize Spectrum Industries' entries to record:
1. the receipt of the note.
2. the receipt of the payment of the note at maturity.
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Current Position Analysis
The following items are reported on a company's balance sheet:
$365,600
Marketable securities
285,700
Accounts receivable (net)
254,900
Inventory
236,400
Accounts payable
394,000
Determine (a) the current ratio and (b) the quick ratio. Round to one declmal place.
a. Current ratio
b. Quick ratio
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a. Divide current assets by current liabilities.
b. Divide quick assets by current liabilities. Quick assets are cash, temporary investments, and receivables.
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QUESTION 14
Use the table below to answer questions 12 through 15.
O B. active strategy
Month
O C. need more information to answer the question
January
February
March
April
May
June
July
August
September
October
Portfolio
A's Return
(%)
2.15
0.89
1.15
-0.47
1.71
0.10
1.04
2.70
0.66
2.15
November
December
What can you say about the investment management strategy pursued by this portfolio manager?
O A. passive strategy
Benchmark
Index Return
(%)
1.65
-0.10
0.52
-0.60
0.65
0.33
2.31
1.10
1.23
2.02
-1.38
-0.59
-0.61
-1.20
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QuestionT1
The following information for Stock A, Stock B and Stock C are given:
State of Economy
Probability of State
Stock A Return
Stock B Return
Boom
0.10
0.30
0.20
Good
0.40
0.20
0.10
Poor
0.50
-0.25
-0.06
Variance(Stock C)-0.08
Covariance(Stock A, Stock C)-0.020
Covariance(Stock B, Stock C)-0.007
If you form a portfolio and invest 20% of your money into Stock A, 35% into Stock B and, 45% of it into Stock C, what will be the standard deviation of the portfolio? (Answer is
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Your answer:
1433
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41°C
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Horizontal Analysis
The comparative accounts payable and long-term debt balances for a company follow.
Current Year
Previous Year
Accounts payable
$40,964
$41,800
Long-term debt
45,594
44,700
Based on this information, what is the amount and percentage of increase or decrease that would be shown on a balance sheet with horizontal analysis?
Enter all answers as positive numbers.
Amount of Change
Increase/Decrease
Percentage
Accounts payable
Decrease
Increase
Long-term debt
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Calculate the change in the amount and divide by the base (older) year amount to determine the horizontal analysis percentages.
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Your grandfather has agreed to deposit a certain amount of money each year into an account paying 7.90 percent annually to help you
go to graduate school. Starting next year, and for the following four years, he plans to deposit $2,350, $8,600, $7,200, $6,600, and
$12,150 into the account. How much will you have at the end of the five years? (Round answer to 2 decimal places, e.g. 15.25.)
Future value at end of five years
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