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Unformatted text preview: ght ed average cost of capital? .09 = [We × .11] + [(1  We) × .05) = .11We + .05  .05We; .04 = .06We; We = 66.67%; Wd = 1  We = 10 You just sold 200 shares of Langley, Inc. stock at a price of $38.75 a share. Last year you paid $41.50 a share to buy this stock. Over the course of the year, you received dividends totaling $1.64 per share. What is your capital gain on this investment? Capital gain = ($38.75  $41.50) × 200 = $550 (capital loss) What are the arithmetic and geometric average returns for a stock with annual returns of 4%, 9%, 6%, and 18%? b. 6.25%; 5.89% Arithmetic average = (.04 + .09  .06 + .18) ÷ 4 = 6.25%; Geometric return = (1.04 × 1.09 × .94 × 1.18).25  1 = 5.89% A stock with an actual return that lies above the security market line: has yielded a higher return than expected for the level of risk assumed. You have a $1,000 portfolio which is invested in stocks A and B plus a riskfree asset. $400 is invested in stock A. Stock A has a beta of 1.3 and stock B has a beta of .7 How much needs to be invested in stock B if you want a portfolio beta of .90? Beta Portfolio = .90 = ($400 ÷ $1,000 × 1.3) + ($x ÷ $1,000 × .7) + (($600  x) ÷ $1,000 × 0) = .52 + .0007x + 0; .0007x = .38; x = $542.86 = $543 You have a portfolio of two risky stocks which turns out to have no diversification benefit. The reason you have no diversification is the returns: d. move perfectly with one another. Which one of the following stocks is correctly priced if the riskfree rate of return is 3.6% and the market rate of return is 10.5%? E(r) A = .036 + [.85 × (.105  .036)] = .095 E(r) B = .036 + [1.08 × (.105  .036)] = .111 E(r) C = .036 + [1.69 × (.105  .036)] = .153 Stock C is correctly priced. E(r) D = .036 + [.71 × (.105  .036)] = .085 E(r) E = .036 + [1.45 × (.105  .036)] = .136 Stock Beta Expected Return: A .85 9.2% B 1.08 11.8% C 1.69 15.3% D .71 7.8% E 1.45 12.3% Zelo, Inc. stock has a beta of 1.23. The riskfree rate of return is 4.5% and the market rate of return is 10%. What is the amount of the risk premium on Zelo stock? Risk premium = 1.23 × (.10  .045) = .06765 = 6.77% The stock of Martin Industries has a beta of 1.43. The riskfree rate of return is 3.6% and the market risk premium is 9%. What is the expected rate ofThe stock of Martin Industries has a beta of 1....
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 Spring '11
 Zhu
 Finance, Debt, Weighted average cost of capital, fi rm

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