Final Question Paper: Corporate Finance

/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 | |
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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