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assignment1 - Assignment 1 Corporate Finance II(ACTSC372...

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1 Assignment 1 Corporate Finance II (ACTSC372) Due date: Feb 4, 5:00pm. Outside MC 6016 _______________________________________________________________________ 1. Consider the following two stocks: Beta Expected Return Murck Pharmaceutical 1.4 30% Pizer Drug Corp 0.7 19% Assume that capital asset pricing model holds. Based on the CAPM, what is the risk-free rate? What is the expected return on the market portfolio? 2. You have access to the following data concerning the Durham Company and the market portfolio: Variance of returns on the market portfolio = 0.04326 Covariance between the returns on Durham and the market portfolio = 0.0635. The expected market risk premium is 9.4 percent and the expected return on Treasury bills is 4.9 percent. (a). Write the equation of the security market line. (b). What is the required return on Durham Company’s stock? 3. You own stock in the Lewis-Striden Drug Company. Suppose you had expected the following events to occur last month. (a). The government would announce that real GNP would have grown 1.4 percent during the previous quarter. The return of Lewis-Striden are positively related to real GNP. (b). The government would announce that inflation over the previous quarter was 3.8 percent. The returns of Lewis-Striden are negatively related to inflation.
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2 (c). Interest rates would rise 2.6 percentage points. The returns of Lewis- Striden are negatively related to interest rates. (d). The president of the firm would announce his retirement. The retirement would be effective six months from announcement day. The president is well liked, and in general he is considered an asset of the firm. (e). Research data would conclusively prove the efficacy of an experimental drug. Completion of the efficacy testing means the drug will be on the market soon. Suppose the following events actually occurred. (a). The government announce that real GNP grew 2.4 percent during the previous quarter.
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This note was uploaded on 01/17/2011 for the course MATH 372 taught by Professor 372 during the Spring '08 term at Waterloo.

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assignment1 - Assignment 1 Corporate Finance II(ACTSC372...

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