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7 Cards in this Set
- Front
- Back
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How do you calculate the payback period?
Based on this: Baker's Supply imposes a payback cutoff of 3.5 years for its international investment projects. |
3 + [(Year 0 + Year 1 + Year 2 + Year 3)/ Year 4)
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How do you set this up:
You are considering purchasing a stock. You know that the rate on T-bills is 3.5% and the market return is 13% (i.e. the market risk premium is 9.5%). The beta of the stock you are considering is 0.6. What is the expected return (required return) on the stock? |
E(R) = 0.35 + 0.6(.13 -0.0.35)
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How do you solve this:
You would like to invest $18,000 and have a portfolio expected return of 12.3 percent. You are considering two securities, A and B. Stock A has an expected return of 15.6 percent and B has an expected return of 10.3 percent. How much should you invest in stock A if you invest the balance in stock B? |
Wb= (1- Wa)
0.123 = Wa(.056) + (1-Wa)(0.103) 0.123 = Wa(.053) + (1-Wa)(0.103) Wa= 0.3774 Wb= (1- Wa) Wb= (1-0.3774) Wb=.6626 A= 18,000 * (0.3774) A= $6,793 Invest $6,793 into stock A |
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Currently, you own a portfolio comprised of the following three securities. What is your portfolio beta?
STOCK: A >>> B >>> C Value: 16,400 >>> 20,500, >>> 18,200 Beta: 1.06 >>> 1.32 >>> 0.98 |
1. Add all the values together
2. Find Wa, Wb, and Wc example (Wa) Wa= (Stock A Value / Total Portfolio Value) 3. Wa * Ba + Wb * Bb + Wc * Bc = Bp Bp= Beta Portfolio |
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A company paid a $2 per share dividend yesterday (Div0). You expect the dividend to grow steadily at a rate of 3% per year forever.
a. What is the expected dividend in each of the next three years? b. If the discount rate for the stock is 9%, what is the stock’s current price? c. What is the expected price of the stock in year 3? |
1.
a. DIVo = 2 DIV= DIVo*(1+g)^1 b. Po = DIV1/ (r-g) c. P3= [DIVo*(1-g)]/ (r-g) |
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What is the value today of a stock that pays a dividend of $5.00 every year and has an expected rate of return of 10%?
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Po = DIV/r
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New Gadgets is growing at a very fast pace. As a result, the company expects to pay annual dividends of $0.55, 0.80, and $1.10 per share over the next three years, respectively. After that, the dividend is projected to increase by 5 percent annually. The last annual dividend the firm paid was $0.40 a share. What is the current value of this stock if the required return is 16 percent?
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First.
P3= [DIVo*(1-g)]/ (r-g) Po= DIVn/(1+r)^1 + DIVn/(1+r)^2 + (DIVn + P3)/(1+r)^3 |
