Chapter 8
RISK and RETURNS
Market.Risk.Prem. = (rM rRF) Additional return over the risk-free rate needed to compensate investors for assuming an average
amount of risk. Its magnitude depends on the stocks beta (b), the expected market return and the expec
Practice-Time Value of Money
Assume all interest rates are 10%!
1. What is the value today of receiving $100 in 7 years?
2. If you deposit $100 in an account today it will be worth how much in 4 years?
3. What is the value today of receiving $100 per year
Practice-Stock Valuation
1. Johnson Foods Inc. just paid a dividend of $10 (i.e., D 0 = 10.00). Its
dividends are expected to grow at a 4% annual rate forever. If you require
a 15% rate of return on investments of this risk level, what is Johnson
Foods' c
Practice-Review Session (Chapter 10, 11, 12, 14, 15)
1. A stock analyst has obtained the following information about J-Mart, a large retail
chain:
The company has non-callable bonds with 20 years maturity remaining and a
face value of $1,000. The bonds ha
Comprehensive/Spreadsheet Problem
Parker Products manufactures a variety of household products. The company is
considering introducing a new detergent. The companys CFO Brain Parker has
collected the following information about the proposed product.
The p
Practice-Cash Flow Estimation
You are given the responsibility of conducting the project selection analysis in your firm.
You have to calculate the NPV of a given project. The appropriate cost of capital is 12%
and the firm is in the 30 percent tax bracke
Practice-Capital Structure
1. An increase in the debt ratio will generally have no effect on which of these items?
a.
b.
c.
d.
e.
Business risk.
Total risk.
Financial risk.
Market risk.
The firm's beta.
2. Which of the following statements is CORRECT?
a.
CHAPTER Fifteen MULTIPLE REGRESSION
MULTIPLE CHOICE QUESTIONS In the following multiple choice questions, circle the correct answer. 1. A multiple regression model has the form Y = 5 + 6X + 7W As X increases by 1 unit (holding W constant), Y is expected t
Formula
x x=
n
s=
2
(x x ) 2
n 1 Variance =
CV =
s x
100
Mean= E(x) =
X P( x) =
(x )
2
p ( x) = 2
= np
2 = np ( 1- p )
z=
x
x z= Z test P p-value > , dont reject h n t= b1 1 sb1
t=
x s T test p-value > , dont reject H 0 n
95% confidence int erval f
PracticeWeightedAverageCostofCapital
Q1:Whichofthefollowingstatementsiscorrect?
A. TheWACCasusedincapitalbudgetingisanestimateofacompanysbeforetaxcostof
capital.
B. AchangeinacompanystargetcapitalstructurecannotaffectitsWACC.
C. Flotationcostsassociatedwi