Financial Management (13th Edition) Edit edition. Solutions to Questions and Problems 2. The curve may reflect a general expectation for an economic recovery due to inflation coming under control and a stimulating impact on the economy from the lower rates. 8. Remember, even though there are no coupon payments, the periods are semiannual to stay consistent with coupon bond payments. Example 8.2 What will be the expected rate of return on AAPL stock with a beta of 1.49 if the risk-free rate of interest is 2% and if the market risk premium, which is the difference between expected return on the market portfolio and the risk-free rate of return is estimated to be 8%? LG 1: Yield curve . The price of a pure discount (zero coupon) bond is the present value of the par value. The yield curve is slightly downward sloping, reflecting lower expected future rates of interest. A portfolio comprises two securities and the expected return on them is 12% and 16% respectively. Hazlett, Inc. has a beta of 1.2. The expected return is simply the weighted average of possible outcomes, where the weights are the relative chances of occurrence. Note that kD is below the risk-free rate. a) 12.4% b) 13.4% c) 14.4% d) 15.4% View Answer / Hide Answer Problem 3: If you deposit Rs. Over the long haul, there is an expected upward drift in stock prices based on their fair expected rates of return. For example, assume that the risk-free rate is 6%, and the market risk premium is 5%. This Solution for Financial Institutions Management: A Risk Management Approach 8th Edition Chapter 23, Problem 57 by Anthony Saunders and Marcia Cornett 1443 Solutions 26 Chapters 46453 Studied ISBN: 9780078034800 Finance 5 (1) Companies pay to have their bonds rated simply because unrated bonds can be difficult to sell; many large investors are prohibited from investing in unrated issues. Using these data, the formulas for the Using this info, along with the current YTM of 8%, the par value of 1,000, and the coupon payment of 90, we can solve for the bond price as follows: N= I/Y= PMT= FV= 1000 Solve for PV = -1,033.12 : So the current price of the bond is $1,033. 8-8 According to the Security Market Line (SML) equation, an increase in beta will increase a company's expected return by an amount equal to the market risk premium times the change in beta. 8.4 ROR Case – Unique i* (B-A) •Compose the incremental Cash Flow •Examine that cash flow for sign changes and apply the Norstromtest (from Chapter 7) •If a unique i* (B-A) is indicated –solve for it and compare it to the MARR •If i* (B-A) > MARR, accept the increment else reject P6. The price of a share of preferred stock is the dividend divided by the required return. a. Problem 10: expected inflation this year = 3% and it will be a constant but above 3% in year 2 and thereafter; r* = 2%; if the yield on a 3-year T-bond equals the 1-year T-bond yield plus 2%, what inflation rate is expected after year 1, ... Chapter 8 -- Risk and Rates of Return Chapter 8 Assets Accounting Solution Outline for Problem 8.1 Price-level adjusted historical cost For: • cost is still verifiable since based on historical cost • useful in periods of high inflation Against: • just confuses an already meaningless historical cost figure • more complex than the historical cost method 8. The chapter reviews exchange rate forecasting methods with some specific examples. distribution, we can measure the expected return and risk for the port-folio. Expected return = 0.4(0.05) + 0.6(0.15) = 0.02 + 0.09 = 0.11 or 11% the business cycle, inflation interest rates and exchange rates. Price and yield move in opposite directions; if interest rates rise, the price of the bond will fall. b. Solutions to risk and return practice problems 4 . Assume that the risk adjusted market annual rate of return is 8 percent compounded monthly. The expected return on the portfolio is 10%, given by-8- What is the required return of Hazlett, Inc. stock? Risk and Return Guided Tutorial (CH 7) Flotation Costs (CH10) Table: Correlations, Returns and St. Deviations Across National Equity Markets (CH11) Table: Foreign currency relative to US dollar in 2017 (CH11) Solutions to Chapter Exercises. Problem 4P from Chapter 8: EXPECTED AND REQUIRED RATES OF RETURN Assume that the risk-f... Get solutions Increased potential returns on investment usually go hand-in-hand with increased risk. [Portfolio Expected Rate of Return and Risk Measures] Refer to Problem 5. In this situation, the expected rate of return is as follows: = D1/P0 + g = $1.50/$25 + 4% = 10%. 12. We can also use the YTM to tell us what the current required return is for the market. We solve for this by using the same approach we used to solve for interest rates (or discount rates, rates of return, growth rates) in Chapter Three (Time Value of Money) — by solving for the I/Y with the 5-key approach on our financial calculator. Argaiv Towers has an outstanding issue of preferred stock that pays an $8 dividend annually. Thus, stock A has more Equity risk premium = broad market return – risk free rate These include short-run forecasts, long-run forecasts, and composite forecasts. The fair expected return over any single day is very small (e.g., 12% per year is only about 0.03% per day), so that on any day the price is virtually equally likely to … AAPL expected return = 2% + 1.49*8% = 13.92%. b. general level of interest rates, as reflected in the risk-free rate of return, the maturity risk of the security, the default risk of the security, the business and financial risk of the firm that issues the security, the seniority risk of the security, and the marketability risk of the security. Models for Risk and Return: Chapter 3: Estimating Hurdle Rates : Chapter 4 : Measuring Returns on Investments: Chapters 5,6: Capital Structure Choices: Chapter 7 : Optimal Financing Mix: Chapter 8 : Debt Design and Moving to Optimal : Chapter 9 8. Chapter 5 - Page 1 DETAILED SOLUTIONS ARE AT THE END OF THIS DOCUMENT Required return Answer: d 1. 1,000 in the bank at a nominal interest rate of 6 percent, you will have Rs. EXAMPLE 8.1: Portfolio Risk and Return Let us apply this analysis to the data of the bond and stock funds as presented in Table 8.1. ExxonMobil Corporation (NYSE: XOM) has a beta coefficient of 0.88. Solutions to Problems . The overall stock market has an expected return of 12 percent. We have step-by-step solutions for your textbooks written by Bartleby experts! So, the price of the bond for each YTM is: a. 8-1 CHAPTER 8: INDEX MODELS PROBLEM SETS 1. Estimate its cost of equity if the risk free rate is 4% and return on the broad market index is 8%. The present value of the GNMA pass through bonds is PV = $537,309.18*PVA n=360, k=0.6667% = $73,226,373.05. Solution. The multiple internal rates of return problem occur when at least one future cash inflow of a project is followed by cash outflow. IBM purchased computer chips from NEC, a Japanese electronics concern, and was billed ¥250 million payable in three months. 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