FIN 380 Exam 2 Supplemental Homework Problems

Topics: Capital asset pricing model, Stock market, Arithmetic mean Pages: 9 (1352 words) Published: April 21, 2015
Chapter 8
Supplemental Homework/Practice Problems
Solutions may be found on the FIN 380 site of i-Tunes U near the bottom of the file list under "Supplemental Homework - Chapter 8"

8-1. AEH, Inc. just paid a $1.00 dividend and is expected to pay a $1.06 dividend next year. What is AEH’s capital gains yield (growth rate, “g”)?

8-2. XYZ, Inc. stock sells for $50.00 and is expected to sell for $54.50 next year. What is XYZ’s capital gains yield (Hint: the percentage change in stock price is the same as the growth rate, “g”)?

8-3. PDQ, Inc. stock current sells for $15.00 per share. The company is expected to pay a $1.50 dividend and sell for $17.25 one year from now.

a. What is PDQ’s dividend yield?

b. What is PDQ’s capital gains yield?

c. What is PDQ’s total expected rate of return?

8-4. AMB, Inc.’s common stock is expected to pay a $2.60 dividend in the coming year. If investors require a 14% return and the growth rate in dividends is expected to be 9%, what is the price of common stock?

8-5 A share of preferred stock pays a $2 annual dividend. It is priced at $40 per share. What is the required rate of return on the preferred stock?

8-6 What is the price of preferred stock paying a $4 annual dividend if investors require a 14% rate of return on the stock? Chapter 14
Supplemental Homework/Practice Problems
Solutions may be found on the FIN 380 site of i-Tunes U near the bottom of the file list under "Supplemental Homework - Chapter 14"

14-1. ABC, Inc. has a pre-tax cost of debt of 6.4 percent, a cost of common equity of 12.4 percent, and a cost of preferred stock of 9.2 percent. The company has 1,800 bonds outstanding that are selling for $950 each. The company also has 16,000 shares of common stock outstanding that are priced at $45 a share. There are 24,000 shares of preferred stock outstanding priced at $25 a share. ABC, Inc.’s tax rate is 34 percent.

a. Compute the weights.

b. Compute ABC’s after-tax cost of debt.

c. What is ABC’s weighted average cost of capital?

14-2. Kay PR, Inc., a well-known public relations firm, has provided you with the following information concerning its financial situation:

Kay PR has 10,000 bonds outstanding. Each bond has a market price of $1,050, with a $1,000 face value, 9% annual coupon rate, and 5 years to maturity.

Kay PR has 20,000 shares of preferred stock outstanding, with a market price of $100 per share. The preferred dividend equals 8% of the stock’s $100 par value.

Kay PR has 150,000 shares of common stock outstanding. The market price per share is $50. The next dividend on the stock is expected to be $5, while the dividend growth rate will be 4%.

What is Kay PR’s weighted average cost of capital, assuming a tax rate of 40%? Chapter 12
Supplemental Homework/Practice Problems
Solutions may be found on the FIN 380 site of i-Tunes U near the bottom of the file list under "Supplemental Homework - Chapter 12"

12-1. You observe the following returns over the past five years:

20X112%
20X217%
20X3-8%
20X4 3%
20X5-6%

a. Compute the arithmetic average return for this five-year period

b. Compute the geometric average return for this five-year period

12-2 An asset has a mean return of 10% and a standard deviation of 5%. What is the probability that the asset’s return will fall between:

12-2a. 5% and 15%?

12-2b. 0% and 20%

12-3. The Efficient Markets Hypothesis

12-3a. An investor earns abnormal returns by reading articles about a company in the newspaper. The market is at best __________-form efficient.

12-3b. An investor earns abnormal profits by using inside information they have about their employer. The market is at best ____________-form efficient.

12-3c. An investor is unable to earn abnormal profits using inside information they have about...
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