FIN 380 Exam 2 Supplemental Homework Problems

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Chapter 8
Supplemental Homework/Practice Problems
Solutions may be found on the FIN 380 site of i-Tunes U near the bottom of the file list under "Supplemental Homework - Chapter 8"

8-1. AEH, Inc. just paid a $1.00 dividend and is expected to pay a $1.06 dividend next year. What is AEH’s capital gains yield (growth rate, “g”)?

8-2. XYZ, Inc. stock sells for $50.00 and is expected to sell for $54.50 next year. What is XYZ’s capital gains yield (Hint: the percentage change in stock price is the same as the growth rate, “g”)?

8-3. PDQ, Inc. stock current sells for $15.00 per share. The company is expected to pay a $1.50 dividend and sell for $17.25 one year from now.

a. What is PDQ’s dividend yield?

b. What is PDQ’s
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Use the following Security Market Line to answer a – d below:

a. What is the risk free rate (Treasury Bill return)?

b. What is the market risk premium (slope of the SML)?

c. What is the CAPM equation based on the data represented by the above SML (be sure to incorporate Beta into the equation; it is the independent variable – do not set it equal to one or any other value)?

d. What is the required return for an asset with a Beta of 2.0 based on your equation in 1c above (Calculate it below, and plot it on the graph above; Does the graph confirm your calculation?)?

13-2. What is the standard deviation of asset A:

State Probability Return on A
Boom .25 .16
Normal .50 .09
Bust .25 -.07

13-3. Identify the probability contained under each curve for the shaded areas indicated below.

a. b.

c. d.

13-4. What is the probability that a normally distributed asset with a mean of 12% and a standard deviation of 4% will provide a return below 8%? Explain!

13-5. What is the standard deviation of returns for the following stock (ck. fig. 10.07%)?

State Probability Return Boom .3 .23 Normal .4 .10 Bust .3 -.03

Assuming that the returns above are normally distributed, what is the probability that the stock will lose value (have a return less than zero)? Use 10% for the standard deviation.

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