PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 7, Problem 3PS
Arithmetic average and compound returns* Integrated Potato Chips (IPC) does not pay a dividend. Its current stock price is $150 and there is an equal probability that the return over the coming year will be –10%, +20%, or +50%.
- a) What is the expected price at year-end?
- b) If the probabilities of future returns remain unchanged and you could observe the returns of IPC over a large number of years, what would be the (arithmetic) average return?
- c) If you were to discount IPG’s expected price at year-end from part (a) by this number, would you underestimate, overestimate, or correctly estimate the stock’s
present value ? - d) If you could observe the returns of IPC over a large number of years, what would be the compound (geometric average)
rate of return ? - e) If you were to discount IPC's expected price at year-end from part (a) by this number, would you underestimate, overestimate, or correctly estimate the stock’s present value?
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Chapter 7 Solutions
PRIN.OF CORPORATE FINANCE
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