Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9780077861759
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 3, Problem 11CQ
Use the following information to answer the next five questions: A small business called The Grandmother Calendar Company began selling personalized photo calendar kits. The kits were a hit, and sales soon sharply exceeded
11. Product Sales Do you think the company would have suffered the same fate if its product had been Jess popular? Why or why not?
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Students have asked these similar questions
220
6-1. (Expected return and risk) Universal Corporation is planning to invest in a secu- LO1 LO2
rity that has several possible rates of return. Given the following probability distribu-
tion of returns, what is the expected rate of return on the investment? Also, compute
the standard deviations of the returns. What do the resulting numbers represent?
PROBABILITY
0.10
0.20
0.30
RETURN
-10%
5%
0.40
10%
25%
6-2. (Average expected return and risk) Given the holding-period returns shown here,
calculate the average returns and the standard deviations for the Kaifu Corporation Myb
and for the market.
MONTH
1
2
3
KAIFU CORP.
4%
6%
0%
2%
MARKET
2%
3%
1%
-1%
6-3. (Expected rate of return and risk) Carter, Inc. is evaluating a security. Calculate the
investment's expected return and its standard deviation.
PROBABILITY
0.15
RETURN
6%
0.30
9%
0.40
10%
0.15
15%
PART 2 The Valuation of Financial Assets
6-4. (Expected rate of return and risk) Summerville, Inc. is considering an investment in
one of…
6-14. (Expected return, standard deviation, and capital asset pricing model) The following LO5
are the end-of-month prices for both the Standard & Poor's 500 Index and Nike's
common stock.
a. Using the data here, calculate the holding-period returns for each of the months.
NIKE
S&P 500 INDEX
2017
January
$52.90
$2,279
February
57.16
2,364
March
55.73
2,363
April
55.41
2,384
May
52.99
2,412
June
59.00
2,423
July
59.05
2,470
August
52.81
2,472
September
51.85
2,519
October
54.99
2,575
November
60.42
2,648
December
62.55
2,674
2018
January
68.22
2,824
b. Calculate the average monthly return and the standard deviation for both the
S&P 500 and Nike.
222
PART 2 • The Valuation of Financial Assets
c. Develop a graph that shows the relationship between the Nike stock returns
and the S&P 500 Index. (Show the Nike returns on the vertical axis and the
S&P 500 Index returns on the horizontal axis as done in Figure 6-5.)
d. From your graph, describe the nature of the relationship between Nike stock…
required rates of return for the three securities?
6-23. (Portfolio beta and security market line) You own a portfolio consisting of the ☑
stocks below:
PERCENTAGE OF
STOCK OR SECURITY
PORTFOLIO
BETA
EXPECTED RETURN
1
20%
1.00
12%
2
30%
0.85
8%
3
15%
1.20
12%
25%
0.60
7%
5
10%
1.60
16%
The risk-free rate is 3 percent. Also, the expected return on the market portfolio is
11 percent.
a. Calculate the expected return of your portfolio. (Hint: The expected return
of a portfolio equals the weighted average of the individual stocks' expected
returns, where the weights are the percentage invested in each stock.)
b. Calculate the portfolio beta.
c. Given the foregoing information, plot the security market line on paper. Plot
the stocks from your portfolio on your graph.
d. From your plot in part (c), which stocks appear to be your winners and which
ones appear to be your losers?
e. Why should you consider your conclusion in part (d) to be less than certain?
6-24. (Portfolio beta) Assume you…
Chapter 3 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 3 - Financial Ratio Analysis A financial ratio by...Ch. 3 - Industry-Specific Ratios So-called same-store...Ch. 3 - Sales Forecast Why do you think most long-term...Ch. 3 - Sustainable Growth In the chapter, we used...Ch. 3 - EFN and Growth Rate Broslofski Co. maintains a...Ch. 3 - Common-Size Financials One tool of financial...Ch. 3 - Asset Utilization and EFN One of the implicit...Ch. 3 - Comparing ROE and ROA Both ROA and ROE measure...Ch. 3 - Ratio Analysis Consider the ratio EBITD/Assets....Ch. 3 - Return on Investment A ratio that is becoming more...
Ch. 3 - Use the following information to answer the next...Ch. 3 - Prob. 12CQCh. 3 - Use the following information to answer the next...Ch. 3 - Use the following information to answer the next...Ch. 3 - Use the following information to answer the next...Ch. 3 - DuPont Identity If Wilkinson, Inc., has an equity...Ch. 3 - Equity Multiplier and Return on Equity Synovec...Ch. 3 - Using the DuPont Identity Y3K, Inc., has sales of...Ch. 3 - EFN The most recent financial statements for...Ch. 3 - Sales and Growth The most recent financial...Ch. 3 - Sustainable Growth If the Hunter Corp. has a ROE...Ch. 3 - Sustainable Growth Assuming the following ratios...Ch. 3 - Calculating EFN The most recent financial...Ch. 3 - External Funds Needed Dahlia Colby, CFO of...Ch. 3 - Sustainable Growth Rate The Wintergrass Company...Ch. 3 - Return on Equity Firm A and Firm B have debt-total...Ch. 3 - Ratios and Foreign Companies Prince Albert Canning...Ch. 3 - External Funds Needed The Optical Scam Company has...Ch. 3 - Days Sales in Receivables A company has net income...Ch. 3 - Ratios and Fixed Assets The Whisenhunt Company has...Ch. 3 - Calculating the Cash Coverage Ratio Panda Inc.s...Ch. 3 - Prob. 17QPCh. 3 - Prob. 18QPCh. 3 - Prob. 19QPCh. 3 - Fixed Assets and Capacity Usage For the company in...Ch. 3 - Calculating EFN The most recent financial...Ch. 3 - Prob. 22QPCh. 3 - Prob. 23QPCh. 3 - EFN and Internal Growth Redo Problem 21 using sale...Ch. 3 - Prob. 25QPCh. 3 - Prob. 26QPCh. 3 - Prob. 27QPCh. 3 - Sustainable Growth Rate Based on the results in...Ch. 3 - Prob. 29QPCh. 3 - Prob. 30QPCh. 3 - Prob. 1MCCh. 3 - Prob. 2MCCh. 3 - Prob. 3MCCh. 3 - Prob. 4MCCh. 3 - Prob. 5MC
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