ESSENTIALS OF INVESTMENTS SELECT CHAPT
17th Edition
ISBN: 9781307126228
Author: Bodie
Publisher: MCG/CREATE
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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 SELECT CHAPT
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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- Dr Z. Mthembu is the owner of Mr Granite, a business in the Western Cape. After more than 28 years of operation, the business is thinking about taking on a new project that would provide a profitable new clientele. With only R1.5 million in resources, the company is now working on two competing projects. The starting costs for Project X and Project Y are R625,000 and R600000, respectively. These projected are estimated for the next 7 years timeframe. According to SARS, the tax rate is 28%, and a discount rate of 11.25% is applied.Projects X Project YProject X Project Y129000 145000154000 145000312000 145000168000 14500098250 14500088750 14500016050 145000arrow_forwardDr Z. Mthembu is the owner of Mr Granite, a business in the Western Cape. After more than 28 years of operation, the business is thinking about taking on a new project that would provide a profitable new clientele. With only R1.5 million in resources, the company is now working on two competing projects. The starting costs for Project X and Project Y are R625,000 and R600000, respectively. These projected are estimated for the next 7 years timeframe. According to SARS, the tax rate is 28%, and a discount rate of 11.25% is applied.Projects X Project YProject X Project Y129000 145000154000 145000312000 145000168000 14500098250 14500088750 14500016050 145000arrow_forwardDr Z. Mthembu is the owner of Mr Granite, a business in the Western Cape. After more than 28 years of operation, the business is thinking about taking on a new project that would provide a profitable new clientele. With only R1.5 million in resources, the company is now working on two competing projects. The starting costs for Project X and Project Y are R625,000 and R600000, respectively. These projected are estimated for the next 7 years timeframe. According to SARS, the tax rate is 28%, and a discount rate of 11.25% is applied.Projects X Project YProject X Project Y129000 145000154000 145000312000 145000168000 14500098250 14500088750 14500016050 145000arrow_forward
- Dr Z. Mthembu is the owner of Mr Granite, a business in the Western Cape. After more than 28 years of operation, the business is thinking about taking on a new project that would provide a profitable new clientele. With only R1.5 million in resources, the company is now working on two competing projects. The starting costs for Project X and Project Y are R625,000 and R600000, respectively. These projected are estimated for the next 7 years timeframe. According to SARS, the tax rate is 28%, and a discount rate of 11.25% is applied.Projects X Project YProject X Project Y129000 145000154000 145000312000 145000168000 14500098250 14500088750 14500016050 145000arrow_forwardAn investor buys 100 shares of a $40 stock that pays an annual cash dividend of $2 a share (a 5 percent dividend yield) and signs up for the DRIP. a. If neither the dividend nor the price changes, how many shares will the investor have at the end of 10 years? How much will the position in the stock be worth? Answer: 5.000 shares purchased in year 1 5.250 shares purchased in year 2 6.078 shares purchased in year 5 62.889 total shares purchased b. If the price of the stock rises by 6 percent annually but the dividend remains at $2 a share, how many shares are purchased each year for the next 10 years? How much is the total position worth at the end of 10 years? Answer: 4.717 shares purchased in year 1 4.592 shares in year 3 3.898 shares in year 10 Value of position: $10,280 c. If the price of the stock rises by 6 percent annually but the dividend rises by only 3 percent annually, how many shares are purchased each year for the next 10 years? How much is the total position worth at the…arrow_forwardDr Z. Mthembu is the owner of Mr Granite, a business in the Western Cape. After more than 28 years of operation, the business is thinking about taking on a new project that would provide a profitable new clientele. With only R1.5 million in resources, the company is now working on two competing projects. The starting costs for Project X and Project Y are R625,000 and R600000, respectively. These projected are estimated for the next 7 years timeframe. According to SARS, the tax rate is 28%, and a discount rate of 11.25% is applied.Projects X Project YProject X Project Y129000 145000154000 145000312000 145000168000 14500098250 14500088750 14500016050 145000 Calculate the IRR for the two proposed Projectsarrow_forward
- Your sibling want to go on a holiday in 7 years. The cost of a similar holiday today is R70,000 and the cost of the holiday increases by 5% per annum.If he/she can earn 11% per annum on a savings account, how much must he/she save per month as from today to have the money ready in 7 years time? Note: savings will be at the beginning of each month.arrow_forwardHow does corporate governance of a not-for-profit business vary from corporate governance of a traditional for profit business?Include references.arrow_forwardGiven the information below for HooYah! Corporation, compute the expected share price at the end of 2026 using price ratio analysis. Assume that the histor (arithmetic) average growth rates will remain the same for 2026. end of Year 2020 2021 2022 2023 2024 2025 Price $ 27.00 $ 63.50 $ 135.00 $ 212.00 $ 102.00 $ 32.50 EPS -7.00 -6.29 -2.30 -0.57 0.05 0.06 CFPS -18.00 -15.50 -3.30 -0.05 0.63 0.08 SPS 24.00 32.50 27.60 31.10 34.60 40.95 What is the expected share price at the end of 2026, using PE ratio? $110.45 $100.45 $120.45 $90.45 22 Multiple Choice Given the information below for HooYah! Corporation, compute the expected share price at the end of 2026 using price ratio analysis. Assume that the histor (arithmetic) average growth rates will remain the same for 2026. end of Year 2020 2021 2022 2023 2024 2025 Price $ 27.00 $ 63.50 $ 135.00 $ 212.00 $ 102.00 $ 32.50 EPS -7.00 -6.29 -2.30 -0.57 0.05 0.06 CFPS -18.00 -15.50 -3.30 -0.05 0.63 0.08 SPS 24.00 32.50 27.60 31.10 34.60 40.95…arrow_forward
- What is finance subject? how can this usefull with corporate finance?arrow_forwardwhat is corporate finance ? how this is added with finance. no aiarrow_forward(Annual percentage yield) Compute the cost of the following trade credit terms using the compounding formula, or effective annual rate. Note: Assume a 30-day month and 360-day year. a. 3/5, net 30 b. 3/15, net 45 c. 4/10, net 75 d. 3/15, net 45 ... a. When payment is made on the net due date, the APR of the credit terms of 3/5, net 30 is decimal places.) %. (Round to twoarrow_forward
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