FINANCE QUESTIONS

Please show all work and complete in excel.

 

1. From the information below, compute the average annual return,
the variance, standard deviation, and coeffi cient of variation for each
asset.
ASSET ANNUAL RETURNS
A 5%, 10%, 15%, 4%
B 2 6%, 20%, 2%, 2 5%, 10%
C 12%, 15%, 17%
D 10%, 2 10%, 20%, 2 15%, 8%, 2 7%

2. Based upon your answers to question 1, which asset appears riskiest
based on standard deviation? Based on coeffi cient of variation?

 

7. Find the real return, nominal after-tax return, and real after-tax
return on the following:
STOCK NOMINAL RETURN INFLATION TAX RATE
X 13.5% 5% 15%
Y 8.7% 4.7% 25%
Z 5.2% 2.5% 28%

 

9. Using the information below, compute the percentage returns for
the following securities:

SECURITY PRICE PRICE ONE DIVIDENDS INTEREST
TODAY YEAR AGO RECEIVED RECEIVED
RoadRunner $20.05 $18.67 $0.50
stock
Wiley Coyote $33.42 $45.79 $1.10
stock
Acme longterm
bonds $1,015.38 $991.78 $100.00
Acme shortterm
bonds $996.63 $989.84 $45.75
Xlingshot $5.43 $3.45 $0.02
stock

10. Given her evaluation of current economic conditions, Ima Nutt
believes there is a 20 percent probability of recession, a 50 percent
chance of continued steady growth, and a 30 percent probability of
infl ationary growth. For each possibility, Ima has developed an interest
rate forecast for long-term Treasury bond interest rates:
ECONOMIC INTEREST RATE
FORECAST FORECAST
Recession 6 percent
Constant growth 9 percent
Infl ation 14 percent
a. What is the expected interest rate under Ima’s forecast?
b. What is the variance and standard deviation of Ima’s interest
rate forecast?
c. What is the coeffi cient of variation of Ima’s interest rate forecast?
d. If the current long-term Treasury bond interest rate is 8
percent, should Ima consider purchasing a Treasury bond?
Why or why not?

11. Ima is considering a purchase of Wallnut Company stock. Using
the same scenarios and probabilities as in problem 10, she estimates
Wallnut’s return is 2 5 percent in a recession, 20 percent in constant
growth, and 10 percent in infl ation.
a. What is Ima’s expected return forecast for Wallnut stock?
b. What is the standard deviation of the forecast?
c. If Wallnut’s current price is $20 per share and Wallnut is
expected to pay a dividend of $0.80 per share next year, what
price will Ima expect Wallnut to sell for in one year?

12. Ima’s sister, Uma, has completed her own analysis of the economy
and Wallnut’s stock. Uma used recession, constant growth,
and infl ation scenarios, but with different probabilities and expected
stock returns. Uma believes the probability of recession is 60
percent, and that in a recession, Wallnut’s stock return will be 2 20
percent. Uma believes the scenarios of constant growth and infl ation
are equally likely and that Wallnut’s returns will be 15 percent
in the constant growth scenario and 10 percent under the infl ation
scenario.
a. What is Uma’s expected return forecast for Wallnut stock?
b. What is the standard deviation of the forecast?
c. If Wallnut’s current price is $20.00 per share and is expected to
pay a dividend of $0.80 per share next year, what price does
Uma expect Wallnut to sell for in one year?

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