# FIN515 Week 5 Problem set

**Prof. Frank**

**Week 5 Problem Set**

**Answer the following questions and solve the following problems in the space provided. When you are done, save the file in the format flastname_Week_5_Problem_Set.docx, where flastname is your first initial and you last name, and submit it to the appropriate dropbox.**

**Chapter 10 (pages 345–348):**

**4.**

You bought a stock one year ago for $50 per share and sold it today for $55 per share. It paid a $1 per share dividend today.

a. What was your realized return?

b. How much of the return came from dividend yield and how much came from capital gain?

** **

**20.**

Consider two local banks. Bank A has 100 loans outstanding, each for $1 million, that it expects will be repaid today. Each loan has a 5% probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $100 million outstanding, which it also expects will be repaid today. It also has a 5% probability of not being repaid. Explain the difference between the type of risk each bank faces. Which bank faces less risk? Why?

**22.**

Consider the following two, completely separate, economies. The expected return and volatility of all stocks in both economies is the same. In the first economy, all stocks move together—in good times all prices rise together and in bad times they all fall together. In the second economy, stock returns are independent—one stock increasing in price has no effect on the prices of other stocks. Assuming you are risk-averse and you could choose one of the two economies in which to invest, which one would you choose? Explain.

**30.**

What does the beta of a stock measure?

**35.**

Suppose the market risk premium is 5% and the risk-free interest rate is 4%. Using the data in Table 10.6 (also shown above), calculate the expected return of investing in

a. Starbucks’ stock.

b. Hershey’s stock.

c. Autodesk’s stock.

**Chapter 11 (pages 390–396):**

** **

**2.**

You own three stocks: 600 shares of Apple Computer, 10,000 shares of Cisco Systems, and 5,000 shares of Colgate-Palmolive. The current share prices and expected returns of Apple, Cisco, and Colgate-Palmolive are, respectively, $500, $20, $100 and 12%, 10%, 8%.

a. What are the portfolio weights of the three stocks in your portfolio?

b. What is the expected return of your portfolio?

c. Suppose the price of Apple stock goes up by $25, Cisco rises by $5, and Colgate-Palmolive falls by $13. What are the new portfolio weights?

d. Assuming the stocks’ expected returns remain the same, what is the expected return of the portfolio at the new prices?

**50.**

Suppose Autodesk stock has a beta of 2.16, whereas Costco stock has a beta of 0.69. If the risk-free interest rate is 4% and the expected return of the market portfolio is 10%, what is the expected return of a portfolio that consists of 60% Autodesk stock and 40% Costco stock, according to the CAPM?

** **

**Chapter 12 (page 431):**

**26.**

Unida Systems has 40 million shares outstanding trading for $10 per share. In addition, Unida has $100 million in outstanding debt. Suppose Unida’s equity cost of capital is 15%, its debt cost of capital is 8%, and the corporate tax rate is 40%.

· a. What is Unida’s unlevered cost of capital?

· b. What is Unida’s after-tax debt cost of capital?

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

** **

**27.**

You would like to estimate the weighted average cost of capital for a new airline business. Based on its industry asset beta, you have already estimated an unlevered cost of capital for the firm of 9%. However, the new business will be 25% debt financed, and you anticipate its debt cost of capital will be 6%. If its corporate tax rate is 40%, what is your estimate of its WACC?

- 6 years ago

**FIN515 Week 5 Problem set**

Purchase the answer to view it

- fin515_w5_problem_set.docx

### FIN515 - Problem set - Week - 5 - Graded - 25/25

NOT RATED**Week 5 Problem Set****Answer the following questions and solve the following problems in the space provided. When you are done, save the file in the format flastname_Week_5_Problem_Set.docx, where …**6 years ago### FIN515 - Week 5 - Problem Set

NOT RATED**Week 5 Problem Set****Answer the following questions and solve the following problems in the space provided. When you are done, save the file in the format flastname_Week_5_Problem_Set.docx, where …**6 years ago### FIN515 - Week 1 - Problem Set

NOT RATED**Week 5 Problem Set****Answer the following questions and solve the following problems in the space provided. When you are done, save the file in the format flastname_Week_5_Problem_Set.docx, where …**6 years ago### FIN515 FIN 515 Week 5 Problem Set

NOT RATEDChapter 10 (pages 345–348):

4. You bought a stock one year ago for $50 per share and sold it today for $55 per share. It paid a $1 per share dividend today.

a. What was your realized return?

b. How much …

5 years ago### MANAGERIAL FINANCE

NOT RATEDI NEED HELP ON MY MANAGERIASL FINANCE HOMEWORK AND A 3 QUESTION QUIZ. WHO CAN DO MANAGERIAL FINANCE AND WHO CAN HELP?

5 years ago### DUE TODAY

NOT RATEDi NEED HELP REALLY BAD AND EVERYTHING IS DUE TODAY. I LSO AHEV A 3 QUESTION QUIZ THAT IS DUE TODAY TOO, MANAGERIAL FINANCE. THE PERSON THAT IS SUPPOSE TO HELP ME IS NOT RESPONDING.

5 years ago