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Winter 2011 - Week 9

# Winter 2011 - Week 9 - MINIQUIZ /returnsofthestocks...

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MINI-QUIZ Rank the approximate average risk/returns of the stocks: Treasury Bills Small Cap Stocks Corporate Bonds Large Cap Stocks Inflation Describe the distinction between systematic/unsystematic risk State the CAPM Formula and all it's components. Define beta.  ---------------------------------------------------------------------------------------------------------------------------------------------------- MEGA CASE STUDY Suppose I have the following balance sheet: Assets   - 100 Liabilities - 75 Equity - 25 And the following known information: Risk free return rate is 3%, Market return rate is 8%. Company beta is 8. Tax rate of  company is 30%. The interest rate of my loan is 5%. Calculate the PV of a cash flow of 1 million dollars at year 5.  Now, suppose that the company has competitors with betas of 3.8, 3.9, and 3.7. Discuss the present value of the stock in  relation to the competitors. What assumptions did you make in your calculations? What might be an alternative  way to handle the problem?

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