Final Question Paper: Corporate Finance

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/MiddSuppose that in the coming year, you expect Exxon-Mobil stick to have a volatility of 42% and a beta of 0.9, and Merck's stock to have a volatility of 24% and a beta of 1.1. The risk free interest rate is 4% and the markets expected return is 12%.

The cost of capital for a project with the same beta as Merck's stock is closest to: . | d. 12.8% | E[R] = Rf + Beta × Risk Premium = .04 + 1.1 × (.12 - .04) = .128 | Which stock has the highest total risk?

| c. Exxon-Mobil since it has a higher volatility | |
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If a stock pays dividends at the end of each quarter, with realized returns of R1, R2, R3, and R4 each quarter, then the annual realized return is calculated as Choose one answer. | c. Rannual = (1 + R1)(1 + R2)(1 + R3)(1 + R4) - 1 | | -------------------------------------------------

Consider the following realized annual returns:
Year End| S&P 500 Realized Return| IBM Realized Return| 1996| 23.6%| 46.3%|
1997| 24.7%| 26.7%|
1998| 30.5%| 86.9%|
1999| 9.0%| 23.1%|
2000| -2.0%| 0.2%|
2001| -17.3%| -3.2%|
2002| -24.3%| -27.0%|
2003| 32.2%| 27.9%|
2004| 4.4%| -5.1%|
2005| 7.4%| -11.3%|

The standard deviation of the returns on IBM from 1996 to 2005 is closest to: | d. 33.2% | Rannual = = = 16.45% Year End| IBM Realized Return| (R - R)| (R - R)2| 1996| 46.3%| 29.85%| 0.0891023|

1997| 26.7%| 10.25%| 0.0105063|
1998| 86.9%| 70.45%| 0.4963203|
1999| 23.1%| 6.65%| 0.0044223|
2000| 0.2%| -16.25%| 0.0264063|
2001| -3.2%| -19.65%| 0.0386123|
2002| -27.0%| -43.45%| 0.1887903|
2003| 27.9%| 11.45%| 0.0131103|
2004| -5.1%| -21.55%| 0.0464403|
2005| -11.3%| -27.75%| 0.0770063|
Variance = SUM of( R - R)2 / T - 1 = 0.9907165 / 9 = 0.1100796 Standard deviation = = = 0.3317825 |

The variance of the returns on the S&P 500 from 1996 to 2005 is closest to: Choose one answer.
| a. .0375 | Rannual = = = = 8.8% Year End| S&P 500 Realized Return| (R - R)| (R - R)2| 1996| 23.6%| 14.78%| 0.0218448|
1997| 24.7%| 15.88%| 0.0252174|
1998| 30.5%| 21.68%| 0.0470022|
1999| 9.0%| 0.18%| 3.24E-06|
2000| -2.0%| -10.82%| 0.0117072|
2001| -17.3%| -26.12%| 0.0682254|
2002| -24.3%| -33.12%| 0.1096934|
2003| 32.2%| 23.38%| 0.0546624|
2004| 4.4%| -4.42%| 0.0019536|
2005| 7.4%| -1.42%| 0.0002016|

Variance = SUM of (R - R)2 / T - 1 = 0.3405116 / 9 = 0.0378346 | The average annual return on the S&P 500 from 1996 to 2005 is closest to: Choose one answer.
| b. 8.75% | Rannual = = = = 8.82% |
Suppose that you want to use the 10 year historical average return on the S&P 500 to forecast the expected future return on the S&P 500. The standard error of your estimate of the expect return is closest to: Choose one answer.

| c. 1.95% | Rannual = = = = 8.8% Year End| S&P 500 Realized Return| (R - R)| (R - R)2| 1996| 23.6%| 14.78%| 0.0218448|
1997| 24.7%| 15.88%| 0.0252174|
1998| 30.5%| 21.68%| 0.0470022|
1999| 9.0%| 0.18%| 3.24E-06|
2000| -2.0%| -10.82%| 0.0117072|
2001| -17.3%| -26.12%| 0.0682254|
2002| -24.3%| -33.12%| 0.1096934|
2003| 32.2%| 23.38%| 0.0546624|
2004| 4.4%| -4.42%| 0.0019536|
2005| 7.4%| -1.42%| 0.0002016|

Variance = SUM of (R - R)2 / T - 1 = 0.3405116 / 9 = 0.0378346 Standard deviation = = = 0.1945112
Standard error = Standard Deviation / T = 0.1945112 / 10 = .01945 or 1.95% | -------------------------------------------------

Consider the following stock price and shares outstanding data: Stock Name| Price per Share| Shares Outstanding (Billions)| Lowes| $28.80| 1.53|
Wal-Mart| $47.90 | 4.17|
Intel| $19.60 | 5.77|
Boeing| $75.00 | 0.79|

Assume that you have $100,000 to invest and you are interested in creating a value-weighted portfolio of these four...
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