Finance Chapter 8 Interative Problem

3) Ameritrade has a short history of trading, so its equity beta cannot be computed precisely using its own historical data. Exhibit 4 provides some choices for comparable firms. Which of these firms do you think are appropriate to use as comparables to determine the beta of Ameritrade’s planned advertising and technology investments? Why?

AGENDA 1. 2. 3. 4. 5. Announcements Financial Markets and Net Present Value Survey Results Optional Material (e.g. Cases, Practical

The CEO of Dynamic Manufacturing was at a conference and talked to a supplier about a new piece of equipment for its production process that she believes will produce ongoing cost savings. As the Operations Manager, your CEO has asked for your perspective on whether or not to purchase the machinery.

2. using the data from 1b and 1c construct a Characteristic Line and determine Beta for the company. Is this Equity or Asset Beta?

It would be great to live in a world where investing provided guaranteed payout with little or no risk, however, we all realize that is not the way investing works. Generally, the greater the risk, the greater potential for return or worse, loss. How we perceive and respond to risk is a very personal decision and there are several factors that go into making that decision. In this paper, I will discuss the risk of stock investing. There are two types of risk involved in investing in stock. One is diversifiable risk and is completely controlled by the investor. It means that a portfolio should be filled with stocks of varying degrees of risk. The other type of risk is market risk. The

Market risk, or beta risk, is described as a reflection of a project on stockholders’ risk of a diversified portfolio. Many factors can influence the market such as war, inflation, and recession. Market risk is measured by the firm’s beta coefficient to determine the effects the market has on the portfolio. In addition to market risk, there are two forms of risk that managers use to calculate the risk of a particular project related to holding a diversified portfolio. Stand-alone risk is used when the firm’s only holds one asset or a single stock. Corporate, or within-firm risk is the measurement of all assets or stocks held by the firm. Of these three risks, the Capital Asset Pricing Model states the market risk is the risk

Perry purchased 100 shares of Ferro, Inc. common stock for $25 per share one year ago. During the year, Ferro, Inc. paid cash dividends of $2 per share. The stock is currently

Moreover, once SMB and HML are defined, the corresponding coefficients bs and bv are determined by linear regressions and can take negative values as well as positive values. The signs of the coefficients suggested that small cap and value portfolios have higher expected returns and arguably higher expected risk than those of large cap and growth portfolios.

Assume that you recently graduated with a major in finance, and you just landed a job as a financial planner with Barney Smith Inc., a large financial services corporation. Your first assignment is to invest $100,000 for a client. Because the funds are to be invested in a business at the end of one year, you have been instructed to plan for a one-year holding period. Further, your boss has restricted you to the following investment alternatives, shown with their probabilities and associated outcomes. (Disregard for now the items at the bottom of the data; you will fill in the blanks later.)

Second, identify three companies that are in the same industry as Lennox International and that are traded on the S&P 500 and identify those companies' Beta and explain:

Question 10 You invest $1,000 in a portfolio composed of the risky market portfolio with an expected rate of return of 16% and a standard deviation of 20% and (risk-free) treasury bills with a rate of return of 6%. The slope of the capital market line formed with the risky market portfolio and the risk-free asset is _________. A. 1.10 B. 0.80 C. 0.50 D. 0.20 C Sharpe ratio = (16 – 6) / 20 = 0.5 Question 11 When calculating the variance of a portfolio 's percentage returns squaring the deviations from the mean percentage return results in ________. I. preventing the sum of the deviations from always equaling zero II. exaggerating the effects of large positive and negative deviations III. a number in units of percentage of returns A. III only B. I and II only C. I and III only D. I, II and III B Question 12 You would like to

2) What is the Weighted Average Cost of Capital for USEC in July 2006? (Assume the expected return on

So instead, we will look at comparable firms. Firms in the same industry pursuing the same types of projects will have the same sorts of risks, thus their asset betas will be approximately the same. The returns we calculate for these firms, based on stock price movement, dividends, and stock splits, are their equity betas.

As indicated by the case study S&P 500 index was use as a measure of the total return for the stock market. Our standard deviation of the total return was used as a one measure of the risk of an individual stock. Also betas for individual stocks are determined by simple linear regression. The variables were: total return for the stock as the dependent variable and independent variable is the total return for the stock. Since the descriptive statistics were a lot, only the necessary data was selected (below table.)

a. Calculate the annual rate of return for each asset in each of the 10 preceding years, and use those v the average annual return for each asset over the 10-year period. Return (X) Return (Y) 15.00% 2.27% 20.95% -1.25% 13.18% 20.00% 2.69% 4.00% 21.25% 19.26% 11.74% 7.50% 8.00% 13.50% 8.57% 13.81% 13.64% 9.13% 13.91% 13.75% 9.60% 11.14%