as372f08a4 - Actsc 372 Fall 2008 Assignment 4 Due: Nov. 14,...

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Actsc 372 – Fall 2008 Assignment 4 Due: Nov. 14, 2008 1. Suppose a factor model is appropriate to describe the returns on a stock. The current expected return on the stock is 10.5 percent. Information about those factors is presented in the following chart: Factor Beta of Factor Expected Value Actual Value Growth in GNP 2.04 3.5% 4.8% Inflation -1.90 7.1% 7.8% a. What is the systematic risk of the stock return? b. The firm announced that its market share had unexpectedly increased from 23 percent to 27 percent. Investors know from past experience that the stock return will increase by 0.36 percent for every one percent increase in its market share. What is the unsystematic risk of the stock? c. What is the total return on this stock? 2. Furniture Depot Inc. is an all-equity firm with a beta of 1.6. The market risk premium is 9 percent and the risk-free rate is 5 percent. The company is considering a project that will generate annual after-tax cash flows of $510,000 at year-end for five years. The project requires an immediate investment of $1.45 million. If the project has the same risk as the firm as a whole, should Furniture
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as372f08a4 - Actsc 372 Fall 2008 Assignment 4 Due: Nov. 14,...

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