Average Annual Returns: 1926–2016 Investment Average Return Large-company stocks Small-company stocks Long-term corporate bonds Long-term government bonds uS. Treasury bills Inflation 12.0% 16.6 6.3 6.0 3.4 3.0 5. Nominal versus Real Returns [LO2] What was the average annual return on large-company stocks from 1926 through 2016: a. In nominal terms? b. In real terms? 6. Bond Returns [LO2] What is the historical real return on long-term government bonds? On long-tem corporate bonds? Rzr+h 7.4 EXAMPLE 7.5 |The Fisher Effect If investors require a 10 percent real rate of return, and the inflation rate is 8 percent, what must be the approximate nominal rate? The exact nominal rate? The nominal rate is approximately equal to the sum of the real rate and the inflation rate: 10% + 8% = 18%. From the Fisher effect, we have: 1+R = (1+r) × (1+h) = 1.10 x 1.08 = 1.1880 %3D Therefore, the nominal rate will actually be closer to 19 percent.

Average Annual Returns: 1926–2016 Investment Average Return Large-company stocks Small-company stocks Long-term corporate bonds Long-term government bonds uS. Treasury bills Inflation 12.0% 16.6 6.3 6.0 3.4 3.0 5. Nominal versus Real Returns [LO2] What was the average annual return on large-company stocks from 1926 through 2016: a. In nominal terms? b. In real terms? 6. Bond Returns [LO2] What is the historical real return on long-term government bonds? On long-tem corporate bonds? Rzr+h 7.4 EXAMPLE 7.5 |The Fisher Effect If investors require a 10 percent real rate of return, and the inflation rate is 8 percent, what must be the approximate nominal rate? The exact nominal rate? The nominal rate is approximately equal to the sum of the real rate and the inflation rate: 10% + 8% = 18%. From the Fisher effect, we have: 1+R = (1+r) × (1+h) = 1.10 x 1.08 = 1.1880 %3D Therefore, the nominal rate will actually be closer to 19 percent.

Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)

7th Edition

ISBN:9780357033609

Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Chapter12: Investing In Stocks And Bonds

Section: Chapter Questions

Problem 4FPE: The Castle Company recently reported net profits after taxes of $15.8 million. It has 2.5 million...

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The Castle Company recently reported net profits after taxes of $15.8 million. It has 2.5 million shares of common stock outstanding and pays preferred dividends of $1 million a year. The company’s stock currently trades at $60 per share. Compute the stock’s earnings per share (EPS). What is the stock’s P/E ratio? Determine what the stock’s dividend yield would be if it paid $1.75 per share to common stockholders.
Financial leverage Costco Wholesale Corporation (COST) and Wel-Mart Stroes Inc. (WMT)reported the following data (in milllions) for a recent year: Compute the return on stockholders equity. Round to one decimal place.
The following return series comes from Global Financial Data. Year Large Stocks LT Gov Bonds US T-bills CPI (Rf asset) (inflation) 2017 21.83% 6.24% 0.80% 2.07% 2018 -5.28% -1.25% 1.81% 2.10% 2019 25.45% 3.35% 2.15% 1.10% 2020 18.16% 10.25% 4.50% 1.88% 2021 28.70% -1.54% 0.40% 7.00% 2022 -19.78% -8.55% 2.20% 6.50% Calculate the average nominal return earned on large-company stocks. (Enter percentages as decimals and round to 4 decimals)
Annual and Average Returns for Stocks, Bonds, and T-Bills, 1950 to 2015 Stocks Long-Term Treasury Bonds T-bills 1950 to 2015 Average 12.6 % 6.6 % 4.40 % 1950 to 1959 Average 20.9 0.0 2.00 1960 to 1969 Average 8.7 1.6 4.00 1970 to 1979 Average 7.5 5.7 6.30 1980 to 1989 Average 18.2 13.5 8.90 1990 to 1999 Average 19.0 9.5 4.90 2000 to 2009 Average 0.9 8.0 2.70 2010 Annual Return 15.1 9.4 0.01 2011 Annual Return 2.1 29.9 0.02 2012 Annual Return 16.0 3.6 0.02 2013 Annual Return 32.4 −12.7 0.07 2014 Annual Return 13.7 25.1 0.05 2015 Annual Return 1.4 −1.2 0.21 2010 to 2015 Average 13.4 9.0 0.06 You have a portfolio with an asset allocation of 50 percent stocks, 40 percent long-term Treasury bonds, and 10 percent T-bills. Use these weights and the returns…
Assume that over the last several decades the total annual returns of large-company common stocks averaged 12.1% small company stocks averaged 16.5% long-term government bonds averaged 6% and us tbills averaged 3.4%. What was the average excess return earned by long-term government bonds and small company stocks respectively?
The following return series comes from Global Financial Data. Year Large Stocks LT Gov Bonds US T-bills CPI (Rf asset) (inflation) 2017 21.83% 6.24% 0.80% 2.07% 2018 -5.28% -1.25% 1.81% 2.10% 2019 25.45% 3.35% 2.15% 1.10% 2020 18.16% 10.25% 4.50% 1.88% 2021 28.70% -1.54% 0.40% 7.00% 2022 -19.78% -8.55% 2.20% 6.50% Calculate the average real risk premium earned on large-company stocks using the approximate Fisher equation. (Enter percentages as decimals and round to 4 decimals)
Assume these are the stock market and Treasury bill returns for a 5-year period: Year Stock Market Return (%) T-Bill Return (%) 2013 35.90 0.21 2014 15.20 0.21 2015 -5.10 0.21 2016 16.90 0.08 2017 25.90 0.10 a. What was the risk premium on common stock in each year? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Year Risk Premium 2013 % 2014 % 2015 % 2016 % 2017 % b. What was the average risk premium? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) c. What was the standard deviation of the risk premium? (Ignore that the estimation is from a sample of data.) (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Refer to Table 12.2. a. What is the historical real return on long-term government bonds? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the historical real return on long-term corporate bonds? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) TABLE 12.2 Average Annual Returns: 1926-2019 Investment Average Return Large-company stocks 12.1% Small-company stocks 16.3 Long-term corporate bonds 6.4 Long-term government bonds 6.0 U.S. Treasury bills 3.4 Inflation 2.9 Source: 2020 SBBI Yearbook. Duff & Phelps.
The following return series comes from Global Financial Data. Year Large Stocks LT Gov Bonds US T-bills CPI (Rf asset) (inflation) 2017 21.83% 6.24% 0.80% 2.07% 2018 -5.28% -1.25% 1.81% 2.10% 2019 25.45% 3.35% 2.15% 1.10% 2020 18.16% 10.25% 4.50% 1.88% 2021 28.70% -1.54% 0.40% 7.00% 2022 -19.78% -8.55% 2.20% 6.50% Calculate the average real return earned on US T-bills. (Enter percentages as decimals and round to 4 decimals)
Roundall dollar answers to 2 decimal places and record all interest rate, coupon rate and growth rate answers as a percentrounded to one decimal place. 26. The historical stock returns for GAF, Inc. are listed below: Year -Annual Stock Return2013 -12%2014 14%2015 35%2016 2%2017 -16%2018 8%2019 0%2020 34%2021 12%2022 6% What is the standard deviation of returns for GAF, Inc. stock over the 10-year time period? (Compute the standard deviation assuming this is a population of returns, not a sample – that is, use the procedure describedin the textbook for calculating the standard deviation of a series of stock returns).27. The end of year stock price and the dividend paid each year for Maxwell, Inc. stock for years 0 through 6 arelisted in the table below: Year -End of Year Stock Price- Dividend0 $12.00 $ 01 $14.86 $1.802 $7.95 $1.883 $8.00…
Estimating WACC and Expected Growth in Dividends ModelUnited Parcel Service Inc. was trading at $97.53 at December 31, 2018. Its dividend per share was $3.84, its market beta was estimated to be 1.44, its average pretax borrowing rate was 2.6%, and its assumed statutory tax rate was 22.4%, consisting of the 21% federal rate plus the 1.4% state and local rate, net of any federal benefits. UPS’s market value of equity (market capitalization) was $83.90 billion, computed as 860.2386 million shares times its $97.53 price, and its total market value (enterprise value) was $107.19 billion, computed as $83.90 billion in equity plus the fair value of long-term debt of $23.29 billion (disclosed in note 8 of the financial statements). Assume a risk-free rate of 2.1% and a market risk premium of 5% to answer the following requirements.(a) Estimate UPS's cost of debt capital, cost of equity capital, and weighted average cost of capital. (Round your answers to one decimal place.)Cost of debt…
Estimating WACC and Expected Growth in Dividends ModelUnited Parcel Service Inc. was trading at $97.53 at December 31, 2018. Its dividend per share was $3.84, its market beta was estimated to be 1.44, its average pretax borrowing rate was 2.6%, and its assumed statutory tax rate was 22.4%, consisting of the 21% federal rate plus the 1.4% state and local rate, net of any federal benefits. UPS’s market value of equity (market capitalization) was $83.90 billion, computed as 860.2386 million shares times its $97.53 price, and its total market value (enterprise value) was $107.19 billion, computed as $83.90 billion in equity plus the fair value of long-term debt of $23.29 billion (disclosed in note 8 of the financial statements). Assume a risk-free rate of 2.1% and a market risk premium of 5% to answer the following requirements.(a) Estimate UPS's cost of debt capital, cost of equity capital, and weighted average cost of capital. (Round your answers to one decimal place.)Cost of debt…