Essentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
10th Edition
ISBN: 9780077835422
Author: Zvi Bodie Professor, Alex Kane, Alan J. Marcus Professor
Publisher: McGraw-Hill Education
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Question
Chapter 7, Problem 20PS
Summary Introduction
(a)
To determine:
The spreadsheet of the given data and estimate the index model for full five-year period and compare the betas of each firm
Introduction:
The net loss or the net gain on any investment over a certain time period which is expressed as the investment's initial cost percentage is the
Expert Solution
Answer to Problem 20PS
The beta is 1.81, 0.86 and 0.71 for Ford, GM and Toyota respectively.
Explanation of Solution
Given Information:
The data is available in the given website for GM, Ford, Toyota, S&P 500 and Treasury bills.
The excel snippet given here shows the calculation of betas of GM, Ford, Toyota and S&P 500.
Here the beta for each of the companies is calculated for the five year period. The beta is obtained as:
For Ford, it is obtained using the formula in Excel SLOPE (G4:G63, $J$4:$J$63)
For GM, it is obtained using the formula in Excel SLOPE (H4:H63, $J$4:$J$63)
For Toyota, it is obtained using the formula in Excel SLOPE (I4:I63, $J$4:$J$63)
| Rates of Return | Excess rates of return | ||||||||
| Month | Ford | GM | Toyota | S&P | T-bills | Ford | GM | Toyota | S&P |
| Jan-04 | -5.44 | 0.56 | 4.11 | 1.28 | 0.07 | -5.51 | 0.49 | 4.04 | 1.21 |
| Feb-04 | -1.28 | 0.00 | 8.34 | -1.38 | 0.06 | -1.34 | -0.06 | 8.28 | -1.44 |
| Mar-04 | 13.92 | -3.19 | -1.74 | -1.98 | 0.09 | 13.83 | -3.28 | -1.83 | -2.07 |
| Apr-04 | -3.34 | 0.00 | -1.17 | 1.62 | 0.08 | -3.42 | -0.08 | -1.25 | 1.54 |
| May-04 | 5.36 | -0.25 | 12.81 | 1.79 | 0.06 | 5.30 | -0.31 | 12.75 | 1.73 |
| Jun-04 | -5.30 | 2.39 | -1.99 | -3.30 | 0.08 | -5.38 | 2.31 | -2.07 | -3.38 |
| Jul-04 | -4.12 | 1.69 | -1.01 | 0.15 | 0.1 | -4.22 | 1.59 | -1.11 | 0.05 |
| Aug-04 | -0.46 | 1.51 | -2.97 | 0.89 | 0.11 | -0.57 | 1.40 | -3.08 | 0.78 |
| Sep-04 | -6.48 | 0.08 | 1.59 | 1.18 | 0.11 | -6.59 | -0.03 | 1.48 | 1.07 |
| Oct-04 | 8.75 | -1.17 | -3.71 | 4.35 | 0.11 | 8.64 | -1.28 | -3.82 | 4.24 |
| Nov-04 | 3.26 | 1.97 | 9.59 | 2.86 | 0.15 | 3.11 | 1.82 | 9.44 | 2.71 |
| Dec-04 | -9.33 | -3.02 | -4.50 | -2.40 | 0.16 | -9.49 | -3.18 | -4.66 | -2.56 |
| Jan-05 | -3.97 | -0.24 | -0.53 | 1.93 | 0.16 | -4.13 | -0.40 | -0.69 | 1.77 |
| Feb-05 | -10.38 | -15.28 | -3.74 | -1.99 | 0.16 | -10.54 | -15.44 | -3.90 | -2.15 |
| Mar-05 | -18.74 | -7.84 | -2.25 | -2.08 | 0.21 | -18.95 | -8.05 | -2.46 | -2.29 |
| Apr-05 | 9.50 | 2.25 | -1.37 | 3.01 | 0.21 | 9.29 | 2.04 | -1.58 | 2.80 |
| May-05 | 2.65 | 4.91 | -0.31 | -0.09 | 0.24 | 2.41 | 4.67 | -0.55 | -0.33 |
| Jun-05 | 5.77 | 5.44 | 6.12 | 3.59 | 0.23 | 5.54 | 5.21 | 5.89 | 3.36 |
| Jul-05 | -7.12 | -8.88 | 8.07 | -1.17 | 0.24 | -7.36 | -9.12 | 7.83 | -1.41 |
| Aug-05 | -1.15 | -5.37 | 13.59 | 0.50 | 0.3 | -1.45 | -5.67 | 13.29 | 0.20 |
| Sep-05 | -14.54 | -7.77 | 0.48 | -2.65 | 0.29 | -14.83 | -8.06 | 0.19 | -2.94 |
| Oct-05 | -2.24 | -7.52 | 4.25 | 4.12 | 0.27 | -2.51 | -7.79 | 3.98 | 3.85 |
| Nov-05 | -5.08 | -4.31 | 8.13 | -0.50 | 0.31 | -5.39 | -4.62 | 7.82 | -0.81 |
| Dec-05 | 12.45 | 12.61 | -0.87 | 2.09 | 0.32 | 12.13 | 12.29 | -1.19 | 1.77 |
| Jan-06 | -7.14 | -3.43 | 3.05 | 0.22 | 0.35 | -7.49 | -3.78 | 2.70 | -0.13 |
| Feb-06 | -0.13 | 6.04 | 1.90 | 1.31 | 0.34 | -0.47 | 5.70 | 1.56 | 0.97 |
| Mar-06 | -11.42 | 1.23 | 7.56 | 0.89 | 0.37 | -11.79 | 0.86 | 7.19 | 0.52 |
| Apr-06 | 3.04 | 6.39 | -8.32 | -3.37 | 0.36 | 2.68 | 6.03 | -8.68 | -3.73 |
| May-06 | -3.23 | 5.18 | -2.60 | -0.17 | 0.43 | -3.66 | 4.75 | -3.03 | -0.60 |
| Jun-06 | -3.05 | 4.63 | 0.60 | 0.05 | 0.4 | -3.45 | 4.23 | 0.20 | -0.35 |
| Jul-06 | 25.49 | -1.41 | 2.97 | 1.78 | 0.4 | 25.09 | -1.81 | 2.57 | 1.38 |
| Aug-06 | -3.35 | 6.11 | 0.52 | 2.28 | 0.42 | -3.77 | 5.69 | 0.10 | 1.86 |
| Sep-06 | 2.35 | 3.60 | 8.36 | 2.75 | 0.41 | 1.94 | 3.19 | 7.95 | 2.34 |
| Oct-06 | -1.81 | 0.61 | 1.74 | 1.58 | 0.41 | -2.22 | 0.20 | 1.33 | 1.17 |
| Nov-06 | -7.63 | 0.52 | 11.88 | 0.35 | 0.42 | -8.05 | 0.10 | 11.46 | -0.07 |
| Dec-06 | 8.26 | 6.70 | -1.88 | 1.11 | 0.4 | 7.86 | 6.30 | -2.28 | 0.71 |
| Jan-07 | -2.71 | -0.16 | 1.38 | -2.40 | 0.44 | -3.15 | -0.60 | 0.94 | -2.84 |
| Feb-07 | -0.25 | -0.73 | -4.07 | 0.78 | 0.38 | -0.63 | -1.11 | -4.45 | 0.40 |
| Mar-07 | 1.90 | -0.08 | -5.26 | 3.99 | 0.43 | 1.47 | -0.51 | -5.69 | 3.56 |
| Apr-07 | 3.73 | 1.87 | -0.54 | 2.95 | 0.44 | 3.29 | 1.43 | -0.98 | 2.51 |
| May-07 | 12.95 | -0.24 | 4.24 | -1.87 | 0.41 | 12.54 | -0.65 | 3.83 | -2.28 |
| Jun-07 | -9.66 | -6.32 | -4.17 | -3.53 | 0.4 | -10.06 | -6.72 | -4.57 | -3.93 |
| Jul-07 | -8.23 | -4.78 | -4.10 | 0.88 | 0.4 | -8.63 | -5.18 | -4.50 | 0.48 |
| Aug-07 | 8.71 | 8.79 | 1.02 | 3.46 | 0.42 | 8.29 | 8.37 | 0.60 | 3.04 |
| Sep-07 | 4.48 | -0.25 | -2.07 | 1.03 | 0.32 | 4.16 | -0.57 | -2.39 | 0.71 |
| Oct-07 | -15.33 | -6.86 | -1.74 | -4.19 | 0.32 | -15.65 | -7.18 | -2.06 | -4.51 |
| Nov-07 | -10.39 | -5.59 | -5.58 | -1.47 | 0.34 | -10.73 | -5.93 | -5.92 | -1.81 |
| Dec-07 | -1.34 | 11.18 | 2.03 | -6.31 | 0.27 | -1.61 | 10.91 | 1.76 | -6.58 |
| Jan-08 | -1.66 | -3.13 | 0.21 | -2.79 | 0.21 | -1.87 | -3.34 | 0.00 | -3.00 |
| Feb-08 | -12.40 | -9.60 | -7.06 | -1.03 | 0.13 | -12.53 | -9.73 | -7.19 | -1.16 |
| Mar-08 | 44.41 | 8.78 | 0.60 | 4.60 | 0.17 | 44.24 | 8.61 | 0.43 | 4.43 |
| Apr-08 | -17.68 | -6.48 | 0.54 | 1.34 | 0.17 | -17.85 | -6.65 | 0.37 | 1.17 |
| May-08 | -29.26 | -15.56 | -7.89 | -8.52 | 0.17 | -29.43 | -15.73 | -8.06 | -8.69 |
| Jun-08 | -0.21 | -11.01 | -8.46 | -1.07 | 0.17 | -0.38 | -11.18 | -8.63 | -1.24 |
| Jul-08 | -7.08 | -4.92 | 4.11 | 1.40 | 0.15 | -7.23 | -5.07 | 3.96 | 1.25 |
| Aug-08 | 16.59 | -29.61 | -4.23 | -9.54 | 0.12 | 16.47 | -29.73 | -4.35 | -9.66 |
| Sep-08 | -57.88 | -13.77 | -11.32 | -16.67 | 0.15 | -58.03 | -13.92 | -11.47 | -16.82 |
| Oct-08 | 22.83 | -26.04 | -17.07 | -7.04 | 0.08 | 22.75 | -26.12 | -17.15 | -7.12 |
| Nov-08 | -14.87 | -25.44 | 3.71 | 0.97 | 0.02 | -14.89 | -25.46 | 3.69 | 0.95 |
| Dec-08 | -18.34 | 23.02 | -2.95 | -8.31 | 0.09 | -18.43 | 22.93 | -3.04 | -8.40 |
| Ford | GM | Toyota | S&P | ||||||
| Beta for 5 years | 1.81 | 0.86 | 0.71 | 1.00 |
Summary Introduction
(b)
Requirement 2 To Determine:
The betas for the firms for the first two years and for the last two years and to see how stable the betas obtained for these shorter subperiods are.
Introduction:
The net loss or the net gain on any investment over a certain time period which is expressed as the investment's initial cost percentage is the rate of return or ROR.
Expert Solution
Answer to Problem 20PS
The betas for first 2 years is 2.01, 1.05 and 0.47 for Ford, GM and Toyota respectively.
Explanation of Solution
Given Information:
The data is available in the given website for GM, Ford, Toyota, S&P 500 and Treasury bills.
The excel snippet given here shows the calculation of betas of GM, Ford, Toyota and S&P 500.
Here the beta for each of the companies is calculated for the first 2 year period. The beta is obtained as:
For Ford, it is obtained using the formula in excel SLOPE (G4:G27, $J$4:$J$27)
For GM, it is obtained using the formula in excel SLOPE (H4:H27, $J$4:$J$27)
For Toyota, it is obtained using the formula in excel SLOPE (I4:I27, $J$4:$J$27)
For the last two year period, the beta of the stocks is calculated as:
For Ford, it is obtained using the formula in excel SLOPE (G40:G63, $J$40:$J$63)
For GM, it is obtained using the formula in excel SLOPE (H40:H63, $J$40:$J$63)
For Toyota, it is obtained using the formula in excel SLOPE (I40:I63, $J$40:$J$63)
| Rates of Return | Excess rates of return | ||||||||
| Month | Ford | GM | Toyota | S&P | T-bills | Ford | GM | Toyota | S&P |
| Jan-04 | -5.44 | 0.56 | 4.11 | 1.28 | 0.07 | -5.51 | 0.49 | 4.04 | 1.21 |
| Feb-04 | -1.28 | 0.00 | 8.34 | -1.38 | 0.06 | -1.34 | -0.06 | 8.28 | -1.44 |
| Mar-04 | 13.92 | -3.19 | -1.74 | -1.98 | 0.09 | 13.83 | -3.28 | -1.83 | -2.07 |
| Apr-04 | -3.34 | 0.00 | -1.17 | 1.62 | 0.08 | -3.42 | -0.08 | -1.25 | 1.54 |
| May-04 | 5.36 | -0.25 | 12.81 | 1.79 | 0.06 | 5.30 | -0.31 | 12.75 | 1.73 |
| Jun-04 | -5.30 | 2.39 | -1.99 | -3.30 | 0.08 | -5.38 | 2.31 | -2.07 | -3.38 |
| Jul-04 | -4.12 | 1.69 | -1.01 | 0.15 | 0.1 | -4.22 | 1.59 | -1.11 | 0.05 |
| Aug-04 | -0.46 | 1.51 | -2.97 | 0.89 | 0.11 | -0.57 | 1.40 | -3.08 | 0.78 |
| Sep-04 | -6.48 | 0.08 | 1.59 | 1.18 | 0.11 | -6.59 | -0.03 | 1.48 | 1.07 |
| Oct-04 | 8.75 | -1.17 | -3.71 | 4.35 | 0.11 | 8.64 | -1.28 | -3.82 | 4.24 |
| Nov-04 | 3.26 | 1.97 | 9.59 | 2.86 | 0.15 | 3.11 | 1.82 | 9.44 | 2.71 |
| Dec-04 | -9.33 | -3.02 | -4.50 | -2.40 | 0.16 | -9.49 | -3.18 | -4.66 | -2.56 |
| Jan-05 | -3.97 | -0.24 | -0.53 | 1.93 | 0.16 | -4.13 | -0.40 | -0.69 | 1.77 |
| Feb-05 | -10.38 | -15.28 | -3.74 | -1.99 | 0.16 | -10.54 | -15.44 | -3.90 | -2.15 |
| Mar-05 | -18.74 | -7.84 | -2.25 | -2.08 | 0.21 | -18.95 | -8.05 | -2.46 | -2.29 |
| Apr-05 | 9.50 | 2.25 | -1.37 | 3.01 | 0.21 | 9.29 | 2.04 | -1.58 | 2.80 |
| May-05 | 2.65 | 4.91 | -0.31 | -0.09 | 0.24 | 2.41 | 4.67 | -0.55 | -0.33 |
| Jun-05 | 5.77 | 5.44 | 6.12 | 3.59 | 0.23 | 5.54 | 5.21 | 5.89 | 3.36 |
| Jul-05 | -7.12 | -8.88 | 8.07 | -1.17 | 0.24 | -7.36 | -9.12 | 7.83 | -1.41 |
| Aug-05 | -1.15 | -5.37 | 13.59 | 0.50 | 0.3 | -1.45 | -5.67 | 13.29 | 0.20 |
| Sep-05 | -14.54 | -7.77 | 0.48 | -2.65 | 0.29 | -14.83 | -8.06 | 0.19 | -2.94 |
| Oct-05 | -2.24 | -7.52 | 4.25 | 4.12 | 0.27 | -2.51 | -7.79 | 3.98 | 3.85 |
| Nov-05 | -5.08 | -4.31 | 8.13 | -0.50 | 0.31 | -5.39 | -4.62 | 7.82 | -0.81 |
| Dec-05 | 12.45 | 12.61 | -0.87 | 2.09 | 0.32 | 12.13 | 12.29 | -1.19 | 1.77 |
| Jan-06 | -7.14 | -3.43 | 3.05 | 0.22 | 0.35 | -7.49 | -3.78 | 2.70 | -0.13 |
| Feb-06 | -0.13 | 6.04 | 1.90 | 1.31 | 0.34 | -0.47 | 5.70 | 1.56 | 0.97 |
| Mar-06 | -11.42 | 1.23 | 7.56 | 0.89 | 0.37 | -11.79 | 0.86 | 7.19 | 0.52 |
| Apr-06 | 3.04 | 6.39 | -8.32 | -3.37 | 0.36 | 2.68 | 6.03 | -8.68 | -3.73 |
| May-06 | -3.23 | 5.18 | -2.60 | -0.17 | 0.43 | -3.66 | 4.75 | -3.03 | -0.60 |
| Jun-06 | -3.05 | 4.63 | 0.60 | 0.05 | 0.4 | -3.45 | 4.23 | 0.20 | -0.35 |
| Jul-06 | 25.49 | -1.41 | 2.97 | 1.78 | 0.4 | 25.09 | -1.81 | 2.57 | 1.38 |
| Aug-06 | -3.35 | 6.11 | 0.52 | 2.28 | 0.42 | -3.77 | 5.69 | 0.10 | 1.86 |
| Sep-06 | 2.35 | 3.60 | 8.36 | 2.75 | 0.41 | 1.94 | 3.19 | 7.95 | 2.34 |
| Oct-06 | -1.81 | 0.61 | 1.74 | 1.58 | 0.41 | -2.22 | 0.20 | 1.33 | 1.17 |
| Nov-06 | -7.63 | 0.52 | 11.88 | 0.35 | 0.42 | -8.05 | 0.10 | 11.46 | -0.07 |
| Dec-06 | 8.26 | 6.70 | -1.88 | 1.11 | 0.4 | 7.86 | 6.30 | -2.28 | 0.71 |
| Jan-07 | -2.71 | -0.16 | 1.38 | -2.40 | 0.44 | -3.15 | -0.60 | 0.94 | -2.84 |
| Feb-07 | -0.25 | -0.73 | -4.07 | 0.78 | 0.38 | -0.63 | -1.11 | -4.45 | 0.40 |
| Mar-07 | 1.90 | -0.08 | -5.26 | 3.99 | 0.43 | 1.47 | -0.51 | -5.69 | 3.56 |
| Apr-07 | 3.73 | 1.87 | -0.54 | 2.95 | 0.44 | 3.29 | 1.43 | -0.98 | 2.51 |
| May-07 | 12.95 | -0.24 | 4.24 | -1.87 | 0.41 | 12.54 | -0.65 | 3.83 | -2.28 |
| Jun-07 | -9.66 | -6.32 | -4.17 | -3.53 | 0.4 | -10.06 | -6.72 | -4.57 | -3.93 |
| Jul-07 | -8.23 | -4.78 | -4.10 | 0.88 | 0.4 | -8.63 | -5.18 | -4.50 | 0.48 |
| Aug-07 | 8.71 | 8.79 | 1.02 | 3.46 | 0.42 | 8.29 | 8.37 | 0.60 | 3.04 |
| Sep-07 | 4.48 | -0.25 | -2.07 | 1.03 | 0.32 | 4.16 | -0.57 | -2.39 | 0.71 |
| Oct-07 | -15.33 | -6.86 | -1.74 | -4.19 | 0.32 | -15.65 | -7.18 | -2.06 | -4.51 |
| Nov-07 | -10.39 | -5.59 | -5.58 | -1.47 | 0.34 | -10.73 | -5.93 | -5.92 | -1.81 |
| Dec-07 | -1.34 | 11.18 | 2.03 | -6.31 | 0.27 | -1.61 | 10.91 | 1.76 | -6.58 |
| Jan-08 | -1.66 | -3.13 | 0.21 | -2.79 | 0.21 | -1.87 | -3.34 | 0.00 | -3.00 |
| Feb-08 | -12.40 | -9.60 | -7.06 | -1.03 | 0.13 | -12.53 | -9.73 | -7.19 | -1.16 |
| Mar-08 | 44.41 | 8.78 | 0.60 | 4.60 | 0.17 | 44.24 | 8.61 | 0.43 | 4.43 |
| Apr-08 | -17.68 | -6.48 | 0.54 | 1.34 | 0.17 | -17.85 | -6.65 | 0.37 | 1.17 |
| May-08 | -29.26 | -15.56 | -7.89 | -8.52 | 0.17 | -29.43 | -15.73 | -8.06 | -8.69 |
| Jun-08 | -0.21 | -11.01 | -8.46 | -1.07 | 0.17 | -0.38 | -11.18 | -8.63 | -1.24 |
| Jul-08 | -7.08 | -4.92 | 4.11 | 1.40 | 0.15 | -7.23 | -5.07 | 3.96 | 1.25 |
| Aug-08 | 16.59 | -29.61 | -4.23 | -9.54 | 0.12 | 16.47 | -29.73 | -4.35 | -9.66 |
| Sep-08 | -57.88 | -13.77 | -11.32 | -16.67 | 0.15 | -58.03 | -13.92 | -11.47 | -16.82 |
| Oct-08 | 22.83 | -26.04 | -17.07 | -7.04 | 0.08 | 22.75 | -26.12 | -17.15 | -7.12 |
| Nov-08 | -14.87 | -25.44 | 3.71 | 0.97 | 0.02 | -14.89 | -25.46 | 3.69 | 0.95 |
| Dec-08 | -18.34 | 23.02 | -2.95 | -8.31 | 0.09 | -18.43 | 22.93 | -3.04 | -8.40 |
| Ford | GM | Toyota | S&P | |
| Beta for 5 years | 1.81 | 0.86 | 0.71 | 1.00 |
| Beta for frst 2 years | 2.01 | 1.05 | 0.47 | |
| Beta for last 2 years | 1.97 | 0.69 | 0.49 | |
| SE of residual | 12.01 | 8.34 | 5.14 | |
| SE beta 5 years | 0.42 | 0.29 | 0.18 | |
| Intercept 5 years | -0.93 | -1.44 | 0.45 | |
| Intercept 2 years | -2.37 | -1.82 | 1.8 | |
| Intercept last 2 years | 0.81 | -3.41 | -1.91 |
It is clear from the above table that there is a deviation in the sub-period approximation from the overall estimate. This deviation is more than 2 standard deviations. It is clearly evident in the case of Toyota where for the first two years; the intercept shows a positive value of 1.8 while for the last two years it is a negative value.
The results of Toyota are surprising as the negative performance is beyond the expectation from the index. This shows that 0.5 beta is more trustworthy.
The explanation of the behavior for GM and Ford are also on the same lines.
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Chapter 7 Solutions
Essentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 7 - Prob. 1PSCh. 7 - Consider the statement: “If we can identify a...Ch. 7 - Are the following true or false? Explain. (LO 7-5)...Ch. 7 - Here are data on two companies. The T-bill rate is...Ch. 7 - Characterize each company in the previous problem...Ch. 7 - What is the expected rate of return for a stock...Ch. 7 - Kaskin, Inc., stock has a beta of 1.2 and Quinn,...Ch. 7 - Prob. 8PSCh. 7 - What must be the beta of a portfolio with E(rf)) =...Ch. 7 - The market price of a security is $40. Its...
Ch. 7 - You arc a consultant to a large manufacturing...Ch. 7 - Consider the following table, which gives a...Ch. 7 - Prob. 13PSCh. 7 - Prob. 14PSCh. 7 - If the simple CAPM is valid, which of the...Ch. 7 - Prob. 16PSCh. 7 - If the simple CAPM is valid, which of the...Ch. 7 - Prob. 18PSCh. 7 - Prob. 19PSCh. 7 - Prob. 20PSCh. 7 - In problem 2123 below, assume the risk-free rate...Ch. 7 - Prob. 22PSCh. 7 - In problem 2123 below, assume the risk-free rate...Ch. 7 - Two investment advisers are comparing performance....Ch. 7 - Suppose the yield on short-term government...Ch. 7 - Based on current dividend yields and expected...Ch. 7 - Consider the following data for a single index...Ch. 7 - Assume both portfolios A and B are well...Ch. 7 - Prob. 29PSCh. 7 - Prob. 30PSCh. 7 - Et
Ch. 7 - Suppose two factors are identified for the U.S....Ch. 7 - Suppose there are two independent economic...Ch. 7 - As a finance intern at Pork Products, Jennifer...Ch. 7 - Suppose the market can be described by the...Ch. 7 - Which of the following statements about the...Ch. 7 - Kay, a portfolio n1anacr at Collins Asset...Ch. 7 - Prob. 3CPCh. 7 - Jeffrey Bruner, CFA, uses the capital asset...Ch. 7 - Prob. 5CPCh. 7 - According to CAPM, the expected rate of a return...Ch. 7 - Prob. 7CPCh. 7 - Prob. 8CPCh. 7 - 9. Briefly explain whether investors should expect...Ch. 7 - Assume that both X and Y are well-diversified port...Ch. 7 - Prob. 11CPCh. 7 - 12. A zero-investment, well-diversified portfolio...Ch. 7 - 13. An investor takes as large a position as...Ch. 7 - In contrast to the capital asset pricing model,...Ch. 7 - Prob. 1WMCh. 7 - Prob. 2WMCh. 7 - Prob. 3WMCh. 7 - a. Which of the stocks would you classify as...
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- Please don't use Ai solutionarrow_forward· What does a degree of financial leverage (DFL) of 2.0 indicate? O For every 1 percent change in its EBIT, the firm's EPS will change by 2 percent. O For every 1 percent change in its EBIT, the firm's sales will change by 2 percent. For every 1 percent change in its sales, the firm's EBIT will change by 2 percent. For every 1 percent change in its EPS, the firm's EBIT will change by 0.5 percent. ○ For every 1 percent change in its EPS, the firm's sales will change by 0.5 percent.arrow_forwardDon't used Ai solutionarrow_forward
- Dani Corporation has 3.4 million shares of common stock outstanding. The current share price is $84.50, and the book value per share is $8.75. The company also has two bond issues outstanding. The first bond issue has a face value of $71 million, a coupon rate of 5.1 percent, and sells for 95.5 percent of par. The second issue has a face value of $43 million, a coupon rate of 5.7 percent and sells for 104.5 percent of par. The first issue matures in 21 years, the second in 9 years. The most recent dividend was $3.98 a the dividend growth rate is 4.1 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 21 percent. What is the company's cost of equity? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. Cost of equity % What is the company's aftertax cost of debt? Note: Do not round intermediate…arrow_forwardGateway Tours is choosing between two bus models. One is more expensive to purchase and maintain but lasts much longer than the other. Gateway's discount rate is 10.9%. The company plans to continue with one of the two models for the foreseeable future. Based on the costs of each shown here, which should it choose? (Note: dollar amounts are in thousands.) Based on the costs of each model, which should it choose? (Select the best choice below.) OA. Gateway Tours should choose Short and Sweet because the NPV of its costs is smaller. OB. Gateway Tours should choose Old Reliable because it lasts longer. C. Gateway Tours should choose Short and Sweet because the equivalent annual annuity of its costs is smaller. OD. Gateway Tours should choose Old Reliable because the equivalent annual annuity of its costs is smaller. Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Model Year 0 Year 1 Year 2 Year 3 Old Reliable - $201 - $3.9 - $3.9 -$3.9 Year 4 -…arrow_forwardFabulous Fabricators needs to decide how to allocate space in its production facility this year. It is considering the following contracts: a. What are the profitability indexes of the projects? b. What should Fabulous Fabricators do? Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Contract A NPV $1.98 million Use of Facility 100% B $1.01 million 57% C $1.49 million 43% Print Done - X ☑arrow_forward
- Explain the difference between operating gearing and financial gearing. Identify one likely implication to a company with a high level of gearing.arrow_forwardYou need a particular piece of equipment for your production process. An equipment-leasing company has offered to lease the equipment to you for $10,100 per year if you sign a guaranteed 5-year lease (the lease is paid at the end of each year). The company would also maintain the equipment for you as part of the lease. Alternatively, you could buy and maintain the equipment yourself. The cash flows from doing so are listed here: (the equipment has an economic life of 5 years). If your discount rate is 6.5%, what should you do? Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Year 0 -$40,600 Year 1 -$2,100 Year 2 - $2,100 Year 3 Year 4 Year 5 - $2,100 - $2,100 - $2,100 Print Donearrow_forwardOrchid Biotech Company is evaluating several different development projects for experimental drugs. Although the cash flows are difficult to forecast, the company has come up with the following estimates of the initial capital requirements and NPVs for the projects: Given a wide variety of staffing needs, the company has also estimated the number of research scientists required for each development project (all cost values are given in millions of dollars). a. Suppose that Orchid has a total capital budget of $60 million. How should it prioritize these projects? b. Suppose that Orchid currently has 12 research scientists and does not anticipate being able to hire more in the near future. How should Orchid prioritize these projects? Data table D (Click on the following icon in order to copy its contents into a spreadsheet.) Project Number Initial Capital ($) Number of Research NPV ($) Scientists 10 15 15 IV 20 2343 10.1 19.0 22.0 25.0 V 30 12 60.2 Print Done Xarrow_forward
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