Chapter 13 Return, Risk, And the Security Market Line
Expected Returns: the return on a risky asset expected in the future (weighted against
probability of future economy)
Projected Risk Premium = Expected Return Risk free rate
Variance = Sum ([return dev
1.
Stock
Golden Seas
Jacobs and Jacobs
MAG
PDJB
Golden Seas
Jacobs and Jacobs
MAG
PDJB
2.
Market Excess return
Beta
Beta b
a.
Stock excess return
Price/ShareNumber of shares outstanding (millions)
#of shares
13
1.47
19.11
24
1.59
38.16
46
25.06 1152.76
7
1.
F return
L return
F portfolio
L portfolio
Expected return
2.
total investment
GF
MH
VA
New
GF
MH
VA
a.
# of shares
GF
MH
VA
P=
b.
Return=
c.
Pw for GF
Pw for MH
Pw for VA
3.
total investment
16%
22%
44%
56%
19.3600%
400000
68%
18%
14%
1
2
3
16
83
8
w2
Finance
Funding Request:
The funding needed to launch our project is approximately $597,000, which includes our
$500,000 build out cost, $15,000 worth of marketing expense, $45,000 of information system
expenses, $10,000 of cash reserves and $27,000 of ca
Risk and Return in Capital Markets (Chapter 11)
Computing historical returns
o Realized returns
o Individual investment realized returns
Realized return from your investment in the stock from t to t+1
is:
R t1
D i v t1 P t1 P t D i v t1 P t1 P t
Pt
Pt
P
Basic Additional Practice Problems
FE 323 Final Exam
1. FedEx stock ended the previous year at $103.39 per share. It paid a $0.35 dividend last year. It
ended last year at $106.69. If you owned 300 shares of Fed Ex, what was your percent return?
3.53%
2.
FE 323 FINAL EXAM FORMULAS
Returns
Single Period Return1 =
2015
Div1 P1 P0
P0
P0
Annualized Return (4 quarters) = (1 R1 )(1 R2 )(1 R3 )(1 R4 ) 1
Average Return (T years) =
Variance and standard deviation of Returns (R)
Note: T is # of periods
Standard Dev
Basic Additional Practice Problems
FE 323 Final Exam
1. FedEx stock ended the previous year at $103.39 per share. It paid a $0.35 dividend last year. It
ended last year at $106.69. If you owned 300 shares of Fed Ex, what was your percent return?
2. The pa
FE 323 Midterm Formula Sheet 2016
Stock Valuation
Dividend yield
Dividend yield t = Dt+1 / Pt
Capital gain yield
Capital gain yield t = (Pt+1 Pt)/Pt
One year valuation model Price0 = (Div1 + Price1) / (1 + r)
Constant Growth Model
Stock price
Pt = Dt+1 /
Chapter 8: Investment Decision Rules
I.
Study NPV
Profile,
figure 8.1
II.
III.
IV.
V.
NPV Decision Rule
a. Most firms measure values in terms of Net Present Valuethat is, in terms
of cash today.
i. NPV=PV(Benefits) PV(Costs)
b. Logic of the Rule:
i. When
FE 323
Additional Midterm
Practice Questions
1. Monica is analyzing a project that currently has a projected NPV of zero.
Which of the following changes that she is considering will help that project
produce a positive NPV instead? Consider each change in
1.
net income =
ending essets=
payout ratio =
SH Equity=
liability =
account payable increase by
48400
501800
9.50%
296800
120200
9600
additions to equity =
Ending SH Equity =
ending total liability =
ending total liability and equity =
Net financing =
43
Chapter 12 Some Lessons From Capital Market History
Returns: gain/loss from investment
-income component: cash received directly from investment
-capital gain/loss: change in value of assets from when one buys investment to one sells
-capital gains should
Chapter 10: Making Capital Investment Decisions
Relevant Cash Flows
The cash flows that should be included in a capital budgeting analysis are those that will only occur if the
project is accepted
Incremental Cash Flows
The stand-alone principal allows
Chapter 9: Net Present Value and Other Investment Criteria
NPV Decision Rule
If the NPV is positive, accept the project
Positive NPV means that the project is expected to add value to the firm and will therefore
increase the wealth of the owners
Our go
Chapter 8: Stock Valuation
Constant Dividend
No growth
The firm will pay a constant dividend forever
The price is computed using the perpetuity formula
Price decreases when the rate of return increases
Example: Preferred Stock
D
P=
R
Constant Dividen
Chapter 7: Interest Rates and Bond Valuation
Bond an interest-only loan
Par Value the principal amount of a bond that is repaid at the end of the term
Face Value
Coupon Rate the annual coupon divided by the face value of a bond
Coupon Payment the stated
A.
0
1
2 Years
$100 Cash Flow
0
1
2
$100
$100
0
1
2
($50)
$100
$75
3 Years
$100 Cash Flow
3 Years
$50 Cash Flow
b. 1.
FV3
$133.10
b.2.
PV
($75.13)
c.
RATE
8%
d.
Years
3.8017840169
e.
This is an ordinary annuity. To be an annuity due the each payment shoul
A.
Production Opportunities
Time Preference for consumption
Risk
Inflation
B.
Real risk free rate is
the rate that would exist on a riskless security in a world where no
inflation was ex
Nominal risk free rate is the real risk free rate (r*) plus the infl
Assignment 3
a.
b.
Par Value
Coupon Rate
Years for the maturity
Called provisions
Defualt Risk
Issue Date
A call provision that gives the issuer the right to call the bonds for redemption. The call provision generally state
issuer must pay the bondholders
Assignment 4
a.1.
T Bill does not depend on the state of the economy. T-Bills is considered risk-free because it is guaranteed by the
default. T-Bills are not guaranteed to have a the risk free rate. Risk fee rate equals real risk free rate + inflation. S
Assignment 5
a
b.
Common stock holders have the capacity to elect directors for the company
Common stock holders can purchase additional stocks sold by the company
P D1 D 2 D3 . D
0
(1 rs )1 (1 rs ) 2 (1 rs ) 3
(1 rs )
Constant growth stocks are the stoc