PRINCIPLES OF CORPORATE FINANCE
13th Edition
ISBN: 9781264052059
Author: BREALEY
Publisher: MCG
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Textbook Question
Chapter 7, Problem 3PS
Arithmetic average and compound returns* Integrated Potato Chips (IPC) does not pay a dividend. Its current stock price is $150 and there is an equal probability that the return over the coming year will be –10%, +20%, or +50%.
- a) What is the expected price at year-end?
- b) If the probabilities of future returns remain unchanged and you could observe the returns of IPC over a large number of years, what would be the (arithmetic) average return?
- c) If you were to discount IPG’s expected price at year-end from part (a) by this number, would you underestimate, overestimate, or correctly estimate the stock’s
present value ? - d) If you could observe the returns of IPC over a large number of years, what would be the compound (geometric average)
rate of return ? - e) If you were to discount IPC's expected price at year-end from part (a) by this number, would you underestimate, overestimate, or correctly estimate the stock’s present value?
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a. Given the following holding-period returns, compute the average returns and the standard deviations for the Zemin Corporation and for the market.
b. If Zemin's beta is 0.83 and the risk-free rate is 9 percent, what would be an expected return for an investor owning Zemin? (Note: Because the preceding returns are based on monthly data, you
will need to annualize the returns to make them comparable with the risk-free rate. For simplicity, you can convert from monthly to yearly returns by multiplying the average monthly returns by 12.)
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2
a. Given the holding-period returns shown in the table, the average monthly return for the Zemin Corporation is 3%. (Round to two decimal places.)
The standard deviation for the Zemin Corporation is 2.74 %. (Round to two decimal places.)
Given the…
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(CAPM and expected returns)
a. Given the following holding-period returns, compute the average returns and the standard deviations for the Zemin Corporation and for the market.
b. If Zemin's beta is 0.83 and the risk-free rate is 9 percent, what would be an expected return for an investor owning Zemin? (Note: Because the preceding returns are based on monthly data, you
will need to annualize the returns to make them comparable with the risk-free rate. For simplicity, you can convert from monthly to yearly returns by multiplying the average monthly returns by 12.)
c. How does Zemin's historical average return compare with the return you believe you should expect based on the capital asset pricing model and the firm's systematic risk?
a. Given the holding-period returns shown in the table, the average monthly return for the Zemin Corporation is %. (Round to two decimal places.)
The standard deviation for the Zemin Corporation is %. (Round to two decimal places.)
Given the…
You want to check if GRBH stock is fairly priced in the markets by using the fundamental analysis. For this purpose, you have gathered the following information:
GRBH pays dividends once a year and the next dividend payment is expected to be made in one year. You project the EPS of the first and second year to be $5 and $7 respectively. The company dividend payout ratio is stable at 0.2. At the end of the second year, you assume that the company would become the average company in the industry. The industry average PE ratio is 8. You believe that the appropriate required rate of return on GRBH stock is 10% (CCR per annum).
And the current market price of GRBH stock is $45.
ind the present value of GRBH stock based on the information above. Is the stock over- or under-priced?
Chapter 7 Solutions
PRINCIPLES OF CORPORATE FINANCE
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