Loose-Leaf Essentials of Investments
10th Edition
ISBN: 9781259604966
Author: Kane, Alex, Marcus Professor, Alan J., Bodie Professor, Zvi
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
Loose-Leaf Essentials of Investments
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- Don't used Ai solution and don't used hand raitingarrow_forwardQ1: Blossom is 30 years old. She plans on retiring in 25 years, at the age of 55. She believes she will live until she is 105. In order to live comfortably, she needs a substantial retirement income. She wants to receive a weekly income of $5,000 during retirement. The payments will be made at the beginning of each week during her retirement. Also, Blossom has pledged to make an annual donation to her favorite charity during her retirement. The payments will be made at the end of each year. There will be a total of 50 annual payments to the charity. The first annual payment will be for $20,000. Blossom wants the annual payments to increase by 3% per year. The payments will end when she dies. In addition, she would like to establish a scholarship at Toronto Metropolitan University. The first payment would be $80,000 and would be made 3 years after she retires. Thereafter, the scholarship payments will be made every year. She wants the payments to continue after her death,…arrow_forwardCould you please help explain what is the research assumptions, research limitations, research delimitations and their intent? How the research assumptions, research limitations can shape the study design and scope? How the research delimitations could help focus the study and ensure its feasibility? What are the relationship between biblical principles and research concepts such as reliability and validity?arrow_forward
- What is the concept of the working poor ? Introduction form. Explain.arrow_forwardWhat is the most misunderstanding of the working poor? Explain.arrow_forwardProblem Three (15 marks) You are an analyst in charge of valuing common stocks. You have been asked to value two stocks. The first stock NEWER Inc. just paid a dividend of $6.00. The dividend is expected to increase by 60%, 45%, 30% and 15% per year, respectively, in the next four years. Thereafter, the dividend will increase by 4% per year in perpetuity. Calculate NEWER’s expected dividend for t = 1, 2, 3, 4 and 5. The required rate of return for NEWER stock is 14% compounded annually. What is NEWER’s stock price? The second stock is OLDER Inc. OLDER Inc. will pay its first dividend of $10.00 three (3) years from today. The dividend will increase by 30% per year for the following four (4) years after its first dividend payment. Thereafter, the dividend will increase by 3% per year in perpetuity. Calculate OLDER’s expected dividend for t = 1, 2, 3, 4, 5, 6, 7 and 8. The required rate of return for OLDER stock is 16% compounded annually. What is OLDER’s stock price? Now assume that…arrow_forward
- Problem Three (15 marks) You are an analyst in charge of valuing common stocks. You have been asked to value two stocks. The first stock NEWER Inc. just paid a dividend of $6.00. The dividend is expected to increase by 60%, 45%, 30% and 15% per year, respectively, in the next four years. Thereafter, the dividend will increase by 4% per year in perpetuity. Calculate NEWER’s expected dividend for t = 1, 2, 3, 4 and 5. The required rate of return for NEWER stock is 14% compounded annually. What is NEWER’s stock price? The second stock is OLDER Inc. OLDER Inc. will pay its first dividend of $10.00 three (3) years from today. The dividend will increase by 30% per year for the following four (4) years after its first dividend payment. Thereafter, the dividend will increase by 3% per year in perpetuity. Calculate OLDER’s expected dividend for t = 1, 2, 3, 4, 5, 6, 7 and 8. The required rate of return for OLDER stock is 16% compounded annually. What is OLDER’s stock price? Now assume that…arrow_forwardYour father is 50 years old and will retire in 10 years. He expects to live for 25 years after he retires, until he is 85. He wants a fixed retirement income that has the same purchasing power at the time he retires as $45,000 has today. (The real value of his retirement income will decline annually after he retires.) His retirement income will begin the day he retires, 10 years from today, at which time he will receive 24 additional annual payments. Annual inflation is expected to be 4%. He currently has $240,000 saved, and he expects to earn 8% annually on his savings. Required annuity payments Retirement income today $45,000 Years to retirement 10 Years of retirement 25 Inflation rate 4.00% Savings $240,000 Rate of return 8.00% Calculate value of…arrow_forwardProblem Three (15 marks) You are an analyst in charge of valuing common stocks. You have been asked to value two stocks. The first stock NEWER Inc. just paid a dividend of $6.00. The dividend is expected to increase by 60%, 45%, 30% and 15% per year, respectively, in the next four years. Thereafter, the dividend will increase by 4% per year in perpetuity. Calculate NEWER’s expected dividend for t = 1, 2, 3, 4 and 5. The required rate of return for NEWER stock is 14% compounded annually. What is NEWER’s stock price? The second stock is OLDER Inc. OLDER Inc. will pay its first dividend of $10.00 three (3) years from today. The dividend will increase by 30% per year for the following four (4) years after its first dividend payment. Thereafter, the dividend will increase by 3% per year in perpetuity. Calculate OLDER’s expected dividend for t = 1, 2, 3, 4, 5, 6, 7 and 8. The required rate of return for OLDER stock is 16% compounded annually. What is OLDER’s stock price? Now assume that…arrow_forward
- Problem Three (15 marks) You are an analyst in charge of valuing common stocks. You have been asked to value two stocks. The first stock NEWER Inc. just paid a dividend of $6.00. The dividend is expected to increase by 60%, 45%, 30% and 15% per year, respectively, in the next four years. Thereafter, the dividend will increase by 4% per year in perpetuity. Calculate NEWER’s expected dividend for t = 1, 2, 3, 4 and 5. The required rate of return for NEWER stock is 14% compounded annually. What is NEWER’s stock price? The second stock is OLDER Inc. OLDER Inc. will pay its first dividend of $10.00 three (3) years from today. The dividend will increase by 30% per year for the following four (4) years after its first dividend payment. Thereafter, the dividend will increase by 3% per year in perpetuity. Calculate OLDER’s expected dividend for t = 1, 2, 3, 4, 5, 6, 7 and 8. The required rate of return for OLDER stock is 16% compounded annually. What is OLDER’s stock price? Now assume that…arrow_forwardProblem Three (15 marks) You are an analyst in charge of valuing common stocks. You have been asked to value two stocks. The first stock NEWER Inc. just paid a dividend of $6.00. The dividend is expected to increase by 60%, 45%, 30% and 15% per year, respectively, in the next four years. Thereafter, the dividend will increase by 4% per year in perpetuity. Calculate NEWER’s expected dividend for t = 1, 2, 3, 4 and 5. The required rate of return for NEWER stock is 14% compounded annually. What is NEWER’s stock price? The second stock is OLDER Inc. OLDER Inc. will pay its first dividend of $10.00 three (3) years from today. The dividend will increase by 30% per year for the following four (4) years after its first dividend payment. Thereafter, the dividend will increase by 3% per year in perpetuity. Calculate OLDER’s expected dividend for t = 1, 2, 3, 4, 5, 6, 7 and 8. The required rate of return for OLDER stock is 16% compounded annually. What is OLDER’s stock price? Now…arrow_forwardYou are considering a 10-year, $1,000 par value bond. Its coupon rate is 11%, and interest is paid semiannually. Bond valuation Years to maturity 10 Par value of bond $1,000.00 Coupon rate 11.00% Frequency interest paid per year 2 Effective annual rate 8.78% Calculation of periodic rate: Formulas Nominal annual rate #N/A Periodic rate #N/A Calculation of bond price: Formulas Number of periods #N/A Interest rate per period 0.00% Coupon payment per period #N/A Par value of bond $1,000.00 Price of bond #N/Aarrow_forward
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