DEVRY FIN 515 Week 5 Problem Set

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DEVRY FIN 515 Week 5 Problem Set 

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• FIN 515 Week 5 Problem Set
• Chapter 10 (pages 345348) 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
  togetherin good times all prices rise together
  and in bad times they all

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• fall together. In the second economy, stock
  returns are independentone 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 ina. Starbucks
  stock.b. Hersheys stock.c. Autodesks
  stock. Chapter 11 (pages 390396) 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 Unidas equity cost of capital is
  15, its debt cost of capital is 8, and the
  corporate tax rate is 40.a. What is Unidas
  unlevered cost of capital?b. What is Unidas
  after-tax debt cost of capital?c. What is
  Unidas 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?