8-1 Expected return A stock’s returns have the following distribution:

Demand for the Probability of this Rate of Return If This

Company’s Production Demand Occurring Demand Occurs

Weak 0.1 (50%)

Below average 0.2 (5)

Average 0.4 16

Above average 0.2 25

Strong 0.1 60

1.0

Calculate the stock’s expected return, standard deviation, and coefficient of variation.

8-3 Required rate of return Assume that the risk-free rate is 6 percent and the expected return on the market is 13 percent. What is the required rate of return on a stock with a beta of 0.7?

8-5 Beta and required rate of return A stock has a required return of 11 percent; the risk-free rate is 7 percent; and the market risk premium is 4 percent.

A) What is the stock’s beta?

B) If the market risk premium increased to 6 percent, what would happen to the stock’s required rate of return? Assume the risk-free rate and beta remain unchanged.

8-7 Portfolio required return Suppose you are the money manager of a $4 million investment fund. The fund consists of 4 stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 (0.50)

C 1,000,000 1.25

D 2,000,000 0.75

If the market’s required rate of return is 14 percent and the risk-free rate is 6 percent, what is the fund’s required rate of return?

9-1 It is frequently stated that the one purpose of the preemptive right is to allow individuals to maintain their share of ownership and control of a corporation.

A) How important do you suppose control is for the average stockholder of a firm whose shares are traded on the New York Stock Exchange?

B) Is the control issue likely to be of more importance to stockholders of publicly owned or closely held (private) firms? Explain.

9-3 If you bought a share of common stock, you would probably expect to receive dividends plus an eventual capital gain. Would the distribution between the dividends yield and the capital gain yield be influenced by the firm’s decision to pay more dividends rather than to retain and reinvest more of its earnings? Explain.

9-9 Preferred stock return Bruner Aeronautics has perpetual stock outstanding with a par value of $100. The stock pays quarterly dividend of $2, and its current price is $80.

A) What is its nominal annual rate of return?

B) What is its effective annual rate of return?

Demand for the Probability of this Rate of Return If This

Company’s Production Demand Occurring Demand Occurs

Weak 0.1 (50%)

Below average 0.2 (5)

Average 0.4 16

Above average 0.2 25

Strong 0.1 60

1.0

Calculate the stock’s expected return, standard deviation, and coefficient of variation.

8-3 Required rate of return Assume that the risk-free rate is 6 percent and the expected return on the market is 13 percent. What is the required rate of return on a stock with a beta of 0.7?

8-5 Beta and required rate of return A stock has a required return of 11 percent; the risk-free rate is 7 percent; and the market risk premium is 4 percent.

A) What is the stock’s beta?

B) If the market risk premium increased to 6 percent, what would happen to the stock’s required rate of return? Assume the risk-free rate and beta remain unchanged.

8-7 Portfolio required return Suppose you are the money manager of a $4 million investment fund. The fund consists of 4 stocks with the following investments and betas:

Stock Investment Beta

A $400,000 1.50

B 600,000 (0.50)

C 1,000,000 1.25

D 2,000,000 0.75

If the market’s required rate of return is 14 percent and the risk-free rate is 6 percent, what is the fund’s required rate of return?

9-1 It is frequently stated that the one purpose of the preemptive right is to allow individuals to maintain their share of ownership and control of a corporation.

A) How important do you suppose control is for the average stockholder of a firm whose shares are traded on the New York Stock Exchange?

B) Is the control issue likely to be of more importance to stockholders of publicly owned or closely held (private) firms? Explain.

9-3 If you bought a share of common stock, you would probably expect to receive dividends plus an eventual capital gain. Would the distribution between the dividends yield and the capital gain yield be influenced by the firm’s decision to pay more dividends rather than to retain and reinvest more of its earnings? Explain.

9-9 Preferred stock return Bruner Aeronautics has perpetual stock outstanding with a par value of $100. The stock pays quarterly dividend of $2, and its current price is $80.

A) What is its nominal annual rate of return?

B) What is its effective annual rate of return?

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