You are trying to decide whether to buy stock in Company X or Company Y. Both companies need $1,000 capital investment and will earn $200 in good years (with probability 0.5) and $60 in bad years. The only difference between the companies is that Company X is planning to raise all of the $1,000 needed by issuing equity while Company Y plans to finance $500 through equity and $500 through bonds on which 10 percent interest must be paid. Complete the table below showing the expected value and standard deviation of the equity return for each of the companies. Instructions: Enter your responses as whole numbers. Company X Company Y Percent Equity (%) 100% Percent Bonds Pay on Bonds ($) 0 Pay to Equity Holders ($) Equity Return (%) 6-20% 2-30% Expected Value (%) % % Standard Deviation % 0 $60-$200 50% 50% $50 $10-$150 (Note: Remember the expected value for Company Y of the equity return is calculated as a percentage of $500- the amount put into equity.) Based on this table, in which company would you likely buy stock if you were risk averse?
You are trying to decide whether to buy stock in Company X or Company Y. Both companies need $1,000 capital investment and will earn $200 in good years (with probability 0.5) and $60 in bad years. The only difference between the companies is that Company X is planning to raise all of the $1,000 needed by issuing equity while Company Y plans to finance $500 through equity and $500 through bonds on which 10 percent interest must be paid. Complete the table below showing the expected value and standard deviation of the equity return for each of the companies. Instructions: Enter your responses as whole numbers. Company X Company Y Percent Equity (%) 100% Percent Bonds Pay on Bonds ($) 0 Pay to Equity Holders ($) Equity Return (%) 6-20% 2-30% Expected Value (%) % % Standard Deviation % 0 $60-$200 50% 50% $50 $10-$150 (Note: Remember the expected value for Company Y of the equity return is calculated as a percentage of $500- the amount put into equity.) Based on this table, in which company would you likely buy stock if you were risk averse?
Chapter15: Dividend Policy
Section: Chapter Questions
Problem 4P
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Question
Ef 347.
Transcribed Image Text:You are trying to decide whether to buy stock in Company X or Company Y. Both companies need $1,000 capital investment and will
earn $200 in good years (with probability 0.5) and $60 in bad years. The only difference between the companies is that Company X is
planning to raise all of the $1,000 needed by issuing equity while Company Y plans to finance $500 through equity and $500 through
bonds on which 10 percent interest must be paid.
Complete the table below showing the expected value and standard deviation of the equity return for each of the companies.
Instructions: Enter your responses as whole numbers.
Percent
Equity (%)
100%
Percent Bonds
Company Y.
Company X.
Pay on Bonds ($)
0
Pay to Equity
Holders ($)
$60-$200
Equity
Return (%)
6-20%
2-30%
Expected
Value (%)
%
%
Company X
0
%
Company Y
50%
50%
$50
$10-$150
%
(Note: Remember the expected value for Company Y of the equity return is calculated as a percentage of $500 - the amount put into
equity.)
Based on this table, in which company would you likely buy stock if you were risk averse?
Standard
Deviation
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