Project #28832 - Week 3

 

Hi, I will include the Excel worksheet and the link to the text I'm using (Ch 7,8). Thank you

Brealey, R. A., Myers, S. C. & Allen, F. (2011). Principles of Corporate Finance, Concise Edition, (2nd ed.). New York, NY: McGraw-Hill Irwin.

 

To complete the homework assignments in the templates provided:

       
                     

1.

The question is provided for each problem. You may need to refer to your textbook for additional information in a few cases.

 
                     

2.

You will enter the required information into the shaded cells.

       
                     

3.

The cells are coded:

           
                     
 

a) T requires a text answer. Essay questions require references; use the textbook. 

 
                     
 

b) C requires a calculation, using Excel formulas or functions. You cannot perform the operation on a calculator and then type the answer in the cell. You will enter the calculation in the cell, and only the final answer will show in the cell. I will be able to review your calculation and correct, if necessary.

 
 
 
                     
 

c) F requires a number only. In some problems, a “Step 1” is added to help you solve the problem.

                     
 

d) Formula requires a written formula, not the numbers. For example, the rate of return = [(1 + nominal)/ (1+inflation)]-1, or D (debt) + E (equity) = V (value).

 
                     

4.

Name your assignment file as "lastnamefirstinitial-FINC600-Week#", and submit by midnight ET, Day 7.

 

 

 

 

 

Problem 7-2

               

 

                   

 

The following table shows the nominal returns on U.S. Stocks and the rate of inflation:

 

     

 

 

 

 

 

 

 

 

     

 

 

 

 

 

 

 

 

     

 

 

 

Year

Nominal Return (%)

Inflation (%)

 

 

     

 

 

 

2004

12.5

3.3

 

 

     

 

 

 

2005

6.4

3.4

 

 

     

 

 

 

2006

15.8

2.5

 

 

     

 

 

 

2007

5.6

4.1

 

 

     

 

 

 

2008

-37.2

0.1

 

 

     

 

 

 

 

 

 

 

 

     

 

 

a)     What was the standard deviation of the market returns?

 

 

     

 

 

b)     Calculate the average real return.

 

 

 

     

 

 

 

 

 

 

 

 

     

 

                   

 

                   

 

Answers:

                 

 

                   

 

a)     What was the standard deviation of the market returns?

           

 

                   

 

 

Find the standard deviation by completing the table with the appropriate formulas

       

 

                   

 

   

Year

Nominal Return (%)

Difference from Average

Squared Difference

TIP: Click on the cell for directions

   

 

   

2004

12.5

C

C

       

 

   

2005

6.4

C

C

       

 

   

2006

15.8

C

C

       

 

   

2007

5.6

C

C

       

 

   

2008

-37.2

C

C

       

 

   

 

 

 

 

       

 

   

Total 2004-2008

C

 

C

       

 

   

Average

C

 

C

       

 

   

Std. Deviation

 

 

C

Use SQRT function for this answer only

                                                                                                                           

 

b)     Calculate the average real return.

                                                                                                                   
                                                                                                                           
 

Find the average real return by completing the table with the appropriate formulas

                                                                                                               
                                                                                                                           
   

Year

Nominal Return (%)

Inflation (%)

Real Return (%)

TIP: Click on the cell for directions

                                                                                                           
   

2004

12.5

3.3

C

                                                                                                               
   

2005

6.4

3.4

C

                                                                                                               
   

2006

15.8

2.5

C

                                                                                                               
   

2007

5.6

4.1

C

                                                                                                               
   

2008

-37.2

0.1

C

                                                                                                               
   

 

 

 

 

                                                                                                               
   

Average

 

 

C

                                                                                                               

 

 

 

 

 

Problem 7-11

                 
                   
                   

Each of the following statements is dangerous or misleading. Explain why.                                                                           
a. A long-term United States government bond is always absolutely safe.
b. All investors should prefer stocks to bonds because stocks offer higher long-run rates of return.
c. The best practical forecast of future rates of return on the stock market is a 5- or 10-year average of historical returns.

 
 
 
 
 
 
 
                   

Answers:

                 
                   
                   

a.

T

 
   
   
   
   
   
   
   
   
   
   
   
                   
                   

b.

T

 
   
   
   
   
   
   
   
   
   
   
   
   
                   
                   
                   

c.

T

 
   
   
   
   
   
   
   
   
   
   
   
   
                   

 

 

 

 

 

Problem 8-6

             

Suppose that the Treasury bill rate were 6% rather than 4%. Assume that the expected return on the market stays at 10%. Use the betas in Table 8.2 (p. 193) - also provided below.

 
               

a. Calculate the expected return from Dell.
b. Find the highest expected return that is offered by one of these stocks.
c. Find the lowest expected return that is offered by one of these stocks.
d. Would Ford offer a higher or lower expected return if the interest rate were 6% rather than 4%? Assume that the expected market return stays at 10%. 
e. Would Exxon Mobil offer a higher or lower expected return if the interest rate were 8%?

 
 
 
 
 
 
               

Answers:

             

 

Formula

Calculation

     

A.  Dell's expected return

Rf + (Beta (Rm - Rf))

C

 

   
               

B./C.

             

Stock

Beta (B)

Revised T Bill Risk-Free Rate

Market Return

Expected return

     

Amazon

2.16

F

F

C

     

Ford

1.75

F

F

C

     

Dell

1.41

F

F

C

     

Starbucks

1.16

F

F

C

     

Boeing

1.14

F

F

C

     

Disney

0.96

F

F

C

     

Newmont

0.63

F

F

C

     

Exxon Mobil

0.55

F

F

C

     

Johnson & Johnson

0.5

F

F

C

     

Campbell Soup

0.3

F

F

C

     
               

B.  Highest

T

     

C.  Lowest

T

     
               

D.   FORD will offer a ________expected return at 6%.

 

 

 

Higher or lower?

   

Interest rate

4%

6%

         

Rate of return

C

C

         
               

E.  Exxon  will offer a _______ expected return at 8%.

 

 

 

Higher or lower?

   

Interest rate

4%

8%

         

Rate of return

C

C

         
               

 

 

 

 

 

Problem 8-18

 

 

                 
   

 

                 

 

Some true or false questions about the APT:                                                                                                                           
a. The APT factors cannot reflect diversifiable risks.
b. The market rate of return cannot be an APT factor.
c. There is no theory that specifically identifies the APT factors.                                                                   d. The APT model could be true but not very useful, for example, if the relevant factors change unpredictably.

Respond to each question - true or false - and why.

   

 

   

 

   

 

   

 

   

 

   
   

 

                 
   

 

                 

Answer:

 

 

                 
 

T/F

 

                 

a.

 

 

 

WHY?

   

 

 
   

 

 
   

 

 
   

 

 
   

 

 
   

 

 
   

 

 
   

 

 
   

 

 
   

 

 
   

 

 
   

 

                 
   

 

                 

b.

 

 

 

WHY?

   

 

 
   

 

 
   

 

 
   

 

 
   

 

 
   

 

 
   

 

 
   

 

 
   

 

 
   

 

 
   

 

                 
   

 

                 

c.

 

 

 

WHY?

   

 

 
   

 

 
   

 

 
   

 

 
   

 

 
   

 

 
   

 

 
   

 

 
   

 

 
   

 

 
   

 

                 
   

 

                 

d.

 

 

 

WHY?

   

 

 
   

 

 
   

 

 
   

 

 
   

 

 
   

 

 
   

 

 
   

 

 
   

 

 
   

 

 
                         

 

 

 

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