Given the following probable states of the economy and the expected return on a security in each state: State of Economy Probability Return of Stock A Return of Stock B Recession 0.50 20% 18% Normal 0.40 45% 35% Boom 0.20 30% 40% i. Compute the expected returns for Stock A and Stock B;
Given the following probable states of the economy and the expected return on a security in each state: State of Economy Probability Return of Stock A Return of Stock B Recession 0.50 20% 18% Normal 0.40 45% 35% Boom 0.20 30% 40% i. Compute the expected returns for Stock A and Stock B;
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Financial Statement
Transcribed Image Text:Questions 2
Given the following probable states of the economy and the expected return on a security in each state:
State of Economy Probability Return of Stock A
Return of Stock B
Recession
0.50
20%
18%
Normal
0.40
45%
35%
Boom
0.20
30%
40%
i.
Compute the expected returns for Stock A and Stock B;
ii.
Compute the standard deviation for Stock A and Stock B;
ii.
Compute the coefficient of variation for Stock A and B; and
iv.
Which of the stocks do you consider to be of greater risk?
Discuss your reasoning
Transcribed Image Text:STRUCTURED
ANSWERS
Question 1
Daniel, an investor is considering purchasing shares in either Garth Ltd & James Ltd. Both
companies are in the same line of business and their accounts are summarized below:
Statement of financial Position as at December 1* 2016
Assets
Garth Ltd
James Ltd.
S'000
840
Non Current Assets
S'000
0
S'000
S'000
At Cost
2 140
Accumulated Depreciation
(226)
614
(280)
1 852
Current Assets
Inventory
276
334
Receivables
138
196
Bank and Cash
192
606
18
548
1 220
2 400
Equity and Liabilities
Capital
740
1 800
340
1 080
Retained Eamings
138
1938
Non-Current Liabilities
10% loan Note
160
Current Liabilities
Trade payables
Interest payable
120
240
2
Income tax
20
140
60
1 220
302
240
income Statement ior tne year Endea JI Decemper 2010
Garth Ltd.
James Ltd.
$'000
$'000
$'000
S'000
1 192
1 356
(1 052)
Sales revenue
Cost of Sales
(788)
Gross Profit
404
304
Expenses:
Administrative
72
90
Selling $ Dist.
106
112
Depreciation
Loan note interest
28
38
(206)
16
(256)
Net Profit
198
48
a. Compute the following rati os:
i.
Accounts Receivable Turnover ratio;
11.
Accounts Payable Tumover ratio;
Average CollectionPeriod;
111.
iv.
Aver age Payable Period;
Quick Ratio;
V.
Gross Profit Margin
Vi.
Net Profit Margin
Debt ratio
b. Explain briefly what is factoring?
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