1,153
19
Essay, 2 pages (450 words)

Homework for chapter 6 and 7

Homework for Chapter 6 and 7 Homework for Chapter 6 and 7 Chapter 6 Question B: If you were restricted to investing in publicly traded common stocks, yet you wanted to minimize the riskiness of your portfolio as measured by its beta, then according to the CAPM theory you should invest an equal amount of money in each stock in the market. That is, if there were 10, 000 traded stocks in the world, the least risky possible portfolio would include some shares of each one.
2
D: If the two portfolios have the same beta, their required returns will be the same, but Janes portfolio will have less market risk than Dicks.
3
B: The required return on Portfolio P is equal to the market risk premium (rM − rRF).
Beta
Stock X 0. 7
Stock Y1. 3
Average Beta(0. 7+1. 3)/2
Therefore, the return is equal to the risk premium based on the following
Return = Beta * (rM-rRF)
Return = 1 * (rM-rRF)
4
D: The SML relates a stocks required return to its market risk. The slope and intercept of this line cannot be controlled by the firms managers, but managers can influence their firms positions on the line by such actions as changing the firms capital structure or the type of assets it employs.
5
B: If investors become more risk averse but rRF does not change, then the required rate of return on high-beta stocks will rise and the required return on low-beta stocks will decline, but the required return on an average-risk stock will not change.
Chapter 7
Question
1
E: The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.
2
A: Stock As expected dividend at t = 1 is only half that of Stock B.
Constant Growth (Gordon) Model Formula
Current Dividend = Current Price * (k-g)/(1+g)
Current Pricekg
Stock A2515%10%
Stock B2515%5%
Stock AStock B
Current Dividend = 1. 14 2. 38
3
C: The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock.
4
C: $29. 05
d01. 25
g25%
k10%

D1 1. 56
D2 1. 95
D3 2. 44
D4 3. 05
D5 3. 05

Discount Factor
10. 912409
20. 83249
30. 759571
40. 693039

Price
P0 29. 05
5
D: 12. 97%
Estimated rs
12. 97%
Actual Market Price, P0:
15
Rapid Growth
Normal Growth
Year
0
1
2
3
4
5
Dividend Growth Rate
10%
10%
10%
5%
5%
Calculated Dividends (D0 had been Paid)
1
1. 1
1. 21
1. 331
1. 39755
1. 467428
TV3 = P3 = D4/(rs-g4)
17. 53513
Total CFs
1. 10
1. 21
18. 87
PVs of CFs when discounted at Estimated rs
0. 97
0. 95
13. 09
Calculated Price = P0 = Sum of PVs =
15

Thank's for Your Vote!
Homework for chapter 6 and 7. Page 1
Homework for chapter 6 and 7. Page 2
Homework for chapter 6 and 7. Page 3
Homework for chapter 6 and 7. Page 4
Homework for chapter 6 and 7. Page 5
Homework for chapter 6 and 7. Page 6

This work, titled "Homework for chapter 6 and 7" was written and willingly shared by a fellow student. This sample can be utilized as a research and reference resource to aid in the writing of your own work. Any use of the work that does not include an appropriate citation is banned.

If you are the owner of this work and don’t want it to be published on AssignBuster, request its removal.

Request Removal
Cite this Essay

References

AssignBuster. (2022) 'Homework for chapter 6 and 7'. 27 September.

Reference

AssignBuster. (2022, September 27). Homework for chapter 6 and 7. Retrieved from https://assignbuster.com/homework-for-chapter-6-and-7/

References

AssignBuster. 2022. "Homework for chapter 6 and 7." September 27, 2022. https://assignbuster.com/homework-for-chapter-6-and-7/.

1. AssignBuster. "Homework for chapter 6 and 7." September 27, 2022. https://assignbuster.com/homework-for-chapter-6-and-7/.


Bibliography


AssignBuster. "Homework for chapter 6 and 7." September 27, 2022. https://assignbuster.com/homework-for-chapter-6-and-7/.

Work Cited

"Homework for chapter 6 and 7." AssignBuster, 27 Sept. 2022, assignbuster.com/homework-for-chapter-6-and-7/.

Get in Touch

Please, let us know if you have any ideas on improving Homework for chapter 6 and 7, or our service. We will be happy to hear what you think: [email protected]