vv.Subject :- Accounting Problem 13-18 Reward-to-Risk Ratios [LO4]Stock Y has a beta of 1.2 and an expected return of 14.5 percent. Stock Z has a beta of .7 and an expectedreturn of 9.3 percent. If the risk-free rate is 5.6 percent and the market risk premium is 6.6 percent, the reward-to-riskratios for Stocks Y and Z are1.30 percent, respectively. Sinceand Stock Z isovervalued9.83 xandundervaluedpercent, Stock Y isthe SML reward-to-risk is6.60(Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

In this question, we will calculate the correct answer for the reward-risk ratios for the stocks y…

Stock Y has a beta of 1.2 and an expected return of 14.5 percent. Stock Z has a beta of .7 and an return of 9.3 percent. If the risk-free rate is 5.6 percent and the market risk premium is 6.6 percent,

Stock Y has a beta of 1.2 and an expected return of 14.5 percent. Stock Z has a beta of .7 and an return of 9.3 percent. If the risk-free rate is 5.6 percent and the market risk premium is 6.6 percent,

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter11: Risk-adjusted Expected Rates Of Return And The Dividends Valuation Approach

Section: Chapter Questions

Problem 14PC: Problem 10.16 projected financial statements for Walmart for Years +1 through +5. The following data...

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Problem 13-10 Returns and Standard Deviations [LO1] Consider the following information: State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Stock C Boom .15 .37 .47 .27 Good .45 .22 .18 .11 Poor .35 −.04 −.07 −.05 Bust .05 −.18 −.22 −.08 a. Your portfolio is invested 20 percent each in A and C, and 60 percent in B. What is the expected return of the portfolio? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b-1. What is the variance of this portfolio? (Do not round intermediate calculations and round your answer to 5 decimal places, e.g., .16161.) b-2. What is the standard deviation? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Problem 11-25 Portfolio Returns and Deviations [LO 1, 2] Consider the following information on a portfolio of three stocks: State of Economy Probability of State of Economy Stock A Rate of Return Stock B Rate of Return Stock C Rate of Return Boom .13 .02 .32 .50 Normal .55 .10 .22 .20 Bust .32 .16 −.21 −.35 If your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the portfolio’s expected return, the variance, and the standard deviation? Note: Do not round intermediate calculations. Round your variance answer to 5 decimal places, e.g., .16161. Enter your other answers as a percent rounded to 2 decimal places, e.g., 32.16. If the expected T-bill rate is 4.25 percent, what is the expected risk premium on the portfolio? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.
11.12 Using CAPM A stock has a beta of 1.15, the expected return on the market is 11.1 percent, and the risk-free rate is 3.8 percent. What must the expected return on this stock be?
Ch. 11. Using CAPM, A stock has an expected return on 10.7 percent, the risk-free rate is 4.1 percent, and the market risk premium is 6 percent. What must the beta of this stock be? Round to two places past the decimal point as "X.XX"
Problem 11-16 Scenario Analysis (LO3) The common stock of Escapist Films sells for $25 a share and offers the following payoffs next year: Dividend Stock Price Boom $ 0 $ 18 Normal economy 1 26 Recession 3 34 The common stock of Leaning Tower of Pita Inc. is selling for $80 and offers these payoffs next year: Dividend Stock Price Boom $ 8 $ 240 Normal economy 4 90 Recession 0 0 Required: b-2. Calculate the expected rate of return and standard deviation of a portfolio half invested in Escapist and half in Leaning Tower of Pita. All three economic scenarios are equally likely to occur.
Q 19) Beangrinder Corp. has an expected rate of return on equity next year (ROE1) equal to 12% and a reinvestment rate next year (RIR1), equal to 50%. Beangrinder Corp.'s equity beta is equal to 1 and the company is expected to have an earnings per share next year (EPS1), equal to $3. The long-run risk-free rate is equal to 1% while the stock market risk premium is forecast to equal 7%. What is Beangrinder Corp.'s intrinsic equity value per share equal to: Options - $100 $25 $50 $75
Question 16 RWJ 13-2 CF Stock COOL has an expected return of 10.47 %. The expected market return is 8.31% and the risk-free rate is 4.73%. What is asset COOL’s beta? Question 17 RWJ 13-4 Joe is an analyst with Pomona Securities. His research shows that CPP Enterprises has an expected return of 12%. He also estimated the required rate for return using the Security Market Line for CPP Enterprises to be 10.30%. CPP Enterprises is: Group of answer choices Fairly priced Underpriced Overpriced CPP Enterprises is a bad investment
Q 19 Rank the following three stocks by their risk-return relationship, best to worst. Rail Haul has an average return of 12 percent and standard deviation of 25 percent. The average return and standard deviation of Idol Staff are 15 percent and 35 percent; and of Poker-R-Us are 9 percent and 20 percent. Rank Stock 1 2 3
Problem 10.16 projected financial statements for Walmart for Years +1 through +5. The following data for Walmart include the actual amounts for 2012 and the projected amounts for Years +1 through +5 for comprehensive income and common shareholders equity, assuming it will use implied dividends as the financial flexible account to balance the balance sheet (amounts in millions). Assume that the market equity beta for Walmart at the end of 2012 was 1.00. Assume that the risk-free interest rate was 3.0% and the market risk premium was 6.0%. Also assume that Walmart had 3,314 million shares outstanding at the end of 2012, and share price was 69.09. REQUIRED a. Use the CAPM to compute the required rate of return on common equity capital for Walmart. b. Compute the weighted-average cost of capital for Walmart as of the start of Year +1. At the end of 2012, Walmart had 48,222 million in outstanding interest-bearing debt on the balance sheet and no preferred stock. Assume that the balance sheet value of Walmarts debt is approximately equal to the market value of the debt. Assume that at the start of Year +1, it will incur interest expense of 4.2% on debt capital and that its average tax rate will be 32.0%. Walmart also had 5,395 million in equity capital from noncontrolling interests. Assume that this equity capital carries a 15.0% required rate of return. (For our forecasts, we assume noncontrolling interests are similar to preferred shares and receive dividends equal to the required rate of return each year.) c. Use the clean surplus accounting approach to derive the projected dividends for common shareholders for Years +1 through +5 based on the projected comprehensive income and shareholders equity amounts. (Throughout this problem, you can ignore dividends to noncontrolling interests.) d. Use the clean surplus accounting approach to project the continuing dividend to common shareholders in Year +6. Assume that the steady-state long-run growth rate will be 3% in Years +6 and beyond. e. Using the required rate of return on common equity from Requirement a as a discount rate, compute the sum of the present value of dividends to common shareholders for Walmart for Years +1 through +5. f. Using the required rate of return on common equity from Requirement a as a discount rate and the long-run growth rate from Requirement d, compute the continuing value of Walmart as of the beginning of Year +6 based on its continuing dividends in Years +6 and beyond. After computing continuing value, bring continuing value back to present value at the start of Year +1. g. Compute the value of a share of Walmart common stock, as follows: (1) Compute the sum of the present value of dividends including the present value of continuing value. (2) Adjust the sum of the present value using the midyear discounting adjustment factor. (3) Compute the per-share value estimate. h. Using the same set of forecast assumptions as before, recompute the value of Walmart shares under two alternative scenarios. To quantify the sensitivity of your share value estimate for Walmart to these variations in growth and discount rates, compare (in percentage terms) your value estimates under these two scenarios with your value estimate from Requirement g. Scenario 1: Assume that Walmarts long-run growth will be 2%, not 3% as before, and assume that its required rate of return on equity is 1 percentage point higher than the rate you computed using the CAPM in Requirement a. Scenario 2: Assume that Walmarts long-run growth will be 4%, not 3% as before, and assume that its required rate of return on equity is 1 percentage point lower than the rate you computed using the CAPM in Requirement a. i. What reasonable range of share values would you expect for Walmart common stock? Where is the current price for Walmart shares relative to this range? What do you recommend?
E. 12.11% 2. North Around, Inc. stock is expected to return 22 percent in a boom, 13 percent in a normal economy, and -15 percent in a recession. The probabilities of a boom, normal economy, and recession are 6 percent, 92 percent, and 2 percent, respectively. What is the standard deviation on the returns of this stock? A. 011387 B. 000169 C.001506 D. 045318 E. 011561
12.1 Factor Models A researcher has determined that a two-factor model is appropriate to determine the return on a stock. The factors are the percentage change in GNP and an interest rate. GNP is expected to grow by 3.5 percent and the interest rate is expected to be 2.9 percent. A stock has a beta of 1.3 on the percentage change in GNP and a beta of −.47 on the interest rate. If the expected rate of return on the stock is 10.2 percent, what is the revised expected return on the stock if GNP actually grows by 3.2 percent and the interest rate is 2.7 percent?
8.9 Stock R has a beta of 2.3, Stock S has a beta of 0.9, the required return on an average stock is 8%, and the risk-free rate of return is 6%. By how much does the required return on the riskier stock exceed the required return on the less risky stock? Round your answer to two decimal places.