# September 2023 Problem 1 16 points Consider the following information Stock A Stock B T bills Beta

2024 Finance Questions Assignment Help

Problem 1 16 points Consider the following information Stock A Stock B T bills Beta 2023

Problem 1 (16 points) _____ Consider the following information: Stock A Stock B T-bills Beta 0.6 1.2 0.0 Expected return, % 5.0 8.0 2.0 (a) Assuming that all stocks are priced correctly according to the CAPM, compute the expected return on the market portfolio. (4 points) (b) Stocks are generally regarded as being risky investments. According to the CAPM, is it possible for a stock to have an expected return that is less than the risk-free rate? Explain. (4 points) (c) Is it possible for a stock to have a negative standard deviation in returns? Explain. (4 points) (d) Consider two separate stocks: the returns on the stock of AppleCo have a standard deviation of 32% and a beta of 0.9; the returns on the stock of BananaCo have a standard deviation of 20% and a beta of 1.2. Which company’s stock should provide a greater return to investors? Why? (4 points) Problem 2 (12 points) _____ Consider the financial statements below for Media Motors. The firm’s cost of capital is 10%. The firm is stable, and the long-term growth rate for all items is expected to be 4%. Their CEO’s name is Ray Charles. Use the information below to estimate the fair market value of MM’s equity as of year-end 2013. 2013 Income Statement Sales 500 Cost of goods sold 250 SG&A expense 50 EBIT 200 Interest expense 40 Taxable income 160 Taxes 64 Net Income 96 2012 Balance Sheet Cash 50 Accounts payable 70 Accounts receivable 100 Total current liab. 70 Inventory 200 Total current assets 350 Long-term debt 400 Gross fixed assets 1,000 Common stock 200 Accumulated depreciation 200 Retained earnings 480 Net fixed assets 800 Total equity 680 Total 1,150 Total 1,150 2013 Balance Sheet Cash 70 Accounts payable 100 Accounts receivable 130 Total current liab. 100 Inventory 220 Total current assets 420 Long-term debt 450 Gross fixed assets 1,120 Common stock 250 Accumulated depreciation 270 Retained earnings 470 Net fixed assets 850 Total equity 720 Total 1,270 Total 1,270 Problem 3 (12 points) _____ (a) Arbitrage Financial is offering an investment with the following cash flows: Year 1 2 3 4 Cash flow $200 $400 – $100 $500 (note that the cash flows in Years 1, 2, and 4 are positive, and the cash flow in Year 3 is negative.) You observe the following prices of pure discount (i.e., zero-coupon) bonds, which pay a single cash flow of $100 at maturity: Price, $ Maturity, years 95.24 1 89.85 2 83.96 3 77.73 4 What is a fair price (to the nearest dollar) for the investment from Arbitrage Financial? (6 points) price of investment: (b) Arbitrage Financial offers another product called a “mystery coupon” bond. This bond has a face value of $1,000 and a maturity of five years. The bond pays an annual coupon, but the amount of the coupon is unknown. However, you know that the price of the bond is $1,052.30, and bonds of similar risk and maturity currently have a yield to maturity of 6.25%. What is the annual coupon payment (to the nearest dollar) on this bond? (6 points) Problem 4 (10 points) __________ The American Movie Company has the following sources of financing reported on its balance sheet: Liabilities & Equity Book Value Debt (13% coupon bonds, $1000 face value) $4,000,000 Common stock, 100,000 shares $6,000,000 Total $10,000,000 The bonds are currently selling for $900, and have a yield-to-maturity of 15%. The common stock is currently priced at $70 per share, and has an estimated beta of 1.5. The current risk-free rate is 6%, and the expected return on the market portfolio is 16%. The company pays taxes at the rate of 40%. Compute the firm’s weighted average cost of capital. Where calculations are required, please show them in the table below. Cost of Estimated weight of Debt: Debt: Common stock: Common stock: WACC =