S07Assg6soln

S07Assg6soln - Fin 2200 CORPORATION FINANCE Sum 2007...

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Fin 2200 – CORPORATION FINANCE Sum 2007 Professors A. Dua Assignment #6 key 1. Bell Canada Enterprises (BCE) was priced at $34 per share one year ago when you bought 300 shares. It just paid a dividend of $5.50 per share. Your accountant has determined that you received a dollar return of $2.60 per share on your investment. Determine a) the current price per share. $ return = dividend return + share price return 2.60 = 5.50 + (P 1 – 34) P 1 = 2.60 – 5.50 + 34 P 1 = $31.10 b) the percent return on your investment. % return= dividend yield + capital gains (losses) yield = 5.50/34 + (31.10 – 34)/34 = 7.647059% c) what BCE’s risk premium was, if the risk-free rate over the year was 4.5% Risk premium = actual return – risk-free rate = 7.647059% – 4.5% = 3.147059% 2. In the last five years, Canadian Publishers Inc. (CPI) had the following returns: Year 1 2 3 4 5 Return 64% -32% 27% -13% 44% Determine a) the mean (arithmetic average) annual return. % 18 5 % 44 %) 13 ( % 27 %) 32 ( % 64 n R R R R R R 5 4 3 2 1 = + - + + - + = + + + + = b) the 5-year holding period return. % 434565 . 77 1 ) 44 . 1 )( 13 . 1 )( 27 . 1 )( 32 . 1 )( 64 . 1 ( 1 ) R 1 )( R 1 )( R 1 )( R 1 )( R 1 ( R 5 4 3 2 1 H = - - - = - + + + + + =
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Fin 2200 – CORPORATION FINANCE Page 2 of 13 Term 2 2006/2007 Professors A. Dua, J. Falk, A. Paseka, R. Scott Assignment #6 key c) the 5-year holding period return expressed as an effective rate per year. Effective annual R = (1.77434565) 1/5 – 1 = 12.152161% d) which of the above returns best indicates how a 5 year investment in CPI performed. Both b) and c). c) is probably preferred since it is an annual rate as opposed to b) which is a 5-year effective rate. e) the variance of the sample of yearly returns. 15835 . 0 4 6334 . 0 1 5 ) 18 . 0 44 . 0 ( ) 18 . 0 13 . 0 ( ) 18 . 0 27 . 0 ( ) 18 . 0 32 . 0 ( ) 18 . 0 64 . 0 ( 1 n ) R R ( ) R R ( ) R R ( ) R R ( ) R R ( iance var 2 2 2 2 2 2 5 2 4 2 3 2 2 2 1 = = - - + - - + - + - - + - = - - + - + - + - + - = f) the standard deviation of the sample of yearly returns. % 793216 . 39 39793216 . 0 15835 . 0 = = = σ 3. Suppose market returns on Canadian stock and Canadian T-bill returns over the most recent 6-year period are as follows: Year Canadian Common Stock Canadian T-bills 1 -1.43% 6.65% 2 -8.61% 5.31% 3 10.81% 3.44% 4 22.18% 3.18% 5 19.47% 4.09% 6 26.58% 4.33% Current T-bill rates are 3%. Common shares for Mercury Aerospace Limited trade on the TSE, and, because of the risk inherent in the space technology sector, investors expect a 21% return. Determine
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Fin 2200 – CORPORATION FINANCE Page 3 of 13 Term 2 2006/2007 Professors A. Dua, J. Falk, A. Paseka, R. Scott Assignment #6 key a) the historical market risk premium. % 5 . 4 6 % 33 . 4 % 09 . 4 % 18 . 3 % 44 . 3 % 31 . 5 % 65 . 6 R % 5 . 11 6 % 58 . 26 % 47 . 19 % 18 . 22 % 81 . 10 % 61 . 8 % 43 . 1 R bills T stocks = + + + + + = = + + + + - - = - Historical risk premium = average stock return – average T-bill return = 11.5% - 4.5% = 7% b) the β of Mercury’s stock. 57
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This note was uploaded on 04/06/2010 for the course ECON 2342 taught by Professor James during the Three '09 term at ADFA.

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S07Assg6soln - Fin 2200 CORPORATION FINANCE Sum 2007...

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