Question Finance

You recently purchased a stock that is expected to earn 12% in a booming economy, 8% in a normal economy and lose 5% in a recessionary economy. There is a 15% probability of a boom, a 75% chance of a normal economy, and a 10% chance of a recession. What is your expected rate of return on this stock?

What risk-free rate and the risk premium did you use to calculate the cost of equity?

21. Universal Forests current stock price is $154.00 and it is likely to pay a $5.23 dividend next year. Since analysts estimate Universal Forest will have a 13.0% growth rate what is the required return?

E[Rp ] = (1 − wTb )RF,b + wTb E[RTb ] = (1 − 1.1735) × 0.02 + 1.1735 × 0.04386 = 4.80%.

P = F(1 + i)-N where i is 15% as mentioned in the case suggestions and N is 8 as we found above, and F is $1.2375B

r = rf + β [E(rm ) − rf ] = 1.50% + 1.1 (7.50% − 1.50%) = 8.1% .

33) Each year for eight years, an investment will generate incremental sales of $8,000 and cash operating expenses of $2,500. The applicable tax rate is 30% and depreciation is $2,000. What is the net cash flows for each of the eight years?

12. Using the data from the previous question, what trade is necessary to increase the beta of the portfolio to 1.8 from the original beta of 1.5

9. You want to purchase a business with the following cash flows. How much would you pay for this business today assuming you needed a 14% return to make this deal?

2. What would have been Martin’s return for years 2000, 2001, and 2002 if his portfolio had remained with its initial holdings?

- A firm has a market value equal to its book value. Currently, the firm has excess cash of $1,200 and other assets of $10,800. Equity is worth $12,000. The firm has 750 shares of stock outstanding and net income of $775. What will the new earnings per share be if the firm uses its excess cash to complete a stock repurchase?

For this variable we take again the same risk free rate (4.66%) plus the equity market risk premium (5%) multiplied by the equity Beta of the E & P division (1.40). The beta we calculate with the comparables. The average equity beta in this industry is 1.15 and the average D/E ratio is 39.8%. With these information and the same formula as in question 3 we compute the asset beta

Using the same market risk premium and risk free rate (5.5% & 4.62% respectively) given in the case, the averaged beta of 1.40, the pretax cost of debt of 7.65%, and the weighted average of debt & equity, the products & systems

(10 points) Mango, Inc. has had debt with market value of $1 million that has paid a 6% coupon and has had an expiration date that is far, far away. The expected annual earnings before interest and taxes for the firm are $2 million and the firm has not grown, nor does it have plans for any growth. The firm however has just raised more equity to retire all its debt. If the required rate of return to equity-holders (after the capital structure change) is now 20%, what is the market value of the firm? Assume there are no taxes. (Enter just the number without the $ sign or a comma; round to the nearest whole dollar.)

1b. if you used the CAPM, which risk premium and risk free rate did you use? Why?