If the correlation between gold and stocks is sufficiently low, gold will be held as a component in a portfolio, specifically, the optimal tangency portfolio. Efficient frontier Efficient frontier b. Given the data above, re-answer part (a) with the additional assumption that the correlation coefficient between gold and stocks equals 1.0. Draw a graph illustrating why one would or would not hold gold in one’s portfolio. Could this set of assumptions for expected returns, standard deviations, and correlation coefficients represent an equilibrium for the financial markets?
The cost of capital for average-risk projects would be the firm’s cost of capital, 10%. A somewhat higher cost would be used for more risky projects, and a lower cost would be used for less risky ones. For example, we might use 12% for more risky projects and 9% for less risky projects. These choices are arbitrary. 13- Sapp Trucking’s balance sheet shows a total of noncallable $45 million long-term debt with a coupon rate of 7.00% and a yield to maturity of 6.00%.
The stock valuation model, P0 = D1/ (i - g), can be used for firms which have negative growth rates. 4. Company J and Company K each recently reported the same earnings per share (EPS). Company J’s stock, however, trades at a higher price. Which of the following statements is most correct?
Cash flow analysis Incremental cash flows Substitutionary analysis Pro forma analysis Which of these is the term for portfolios with the highest return possible for each risk level? Total portfolios Efficient portfolios Modern portfolios Optimal portfolios Which financial statement shows the total revenues that a firm earns and the total expenses the firm incurs to generate those revenues over a specific period of time — generally one year? Statement of
The mean of the complete portfolio as a function of the proportion invested in the risky portfolio (y) is: E(rC) = (l - y)rf + yE(rP) = rf + y[E(rP) - rf] = 5.5 + y(12.88 - 5.5) Setting E(rC) = 12% ==> y = 0.8808 (88.08% in the risky portfolio) 1 - y = 0.1192 (11.92% in T-bills) From the composition of the optimal risky portfolio: Proportion of stocks in complete portfolio = 0.8808 × 0.6466 = 0.5695 Proportion of bonds in complete portfolio = 0.8808 × 0.3534 = 0.3113 12. 1. Using only the stock and bond funds to achieve a mean of 12% we solve: 12 = 15wS + 9(1 - wS) = 9 + 6wS Þ wS = 0.5 Investing 50% in stocks and 50% in bonds yields a mean of 12% and standard deviation of: sP = [(0.502 × 1024) + (0.502 × 529) + (2 × 0.50 × 0.50 × 110.4)] 1/2 =
I would make an investment in the company’s 5% convertible bonds. Sepracor’s ROA and ROE is above the average and showing that it is profitable; however, the company’s debt to asset ratio is above 1, which means that most of its assets are financed through debt instead of equity. Sepracor would be in trouble if its creditors were to start demanding repayment. C.) To make valid comparisons between Sepracor and Bayer, you would have to compare the rules for fair value under the U.S GAAP and iGAAP. Under IFRS, convertible bonds are separately recorded as liabilities and stockholder’s equities.
Current Ratio 2011 = Current Assets / Current liabilities Gaps Current Ratio = 4,309 / 2,128 = 2.0249 This means that The Gap Inc. is capable of paying its short-term liabilities two times by selling its current assets. What was the current ratio for 2010? How did the current ratio change? Current Ratio 2010 = 3,926 / 2,095 = 1.8739 The current Ratio for The Gap Inc. Increase from 1.8739 to 2.0249 What is the implication of that change? The current ratio increased because there was a considerable increase in Cash and other current assets.
Explain. c. Should the nominal cost of debt or the effective annual rate be used? Explain. d. How valid is an estimate of the cost of debt based on the yield to maturity of Ace’s debt (ignore the call provision in 3 years) if the firm plans to issue 20-year long-term debt? e. What other methods could be used to estimate the cost of debt if, for example, Ace’s outstanding debt had not been traded recently?
17% b. 12% c. 19.5% d. 24.5% ANS: A E(R) = 5% + 1.5(13%-5%) = 17% DIF: E REF: 7.3 The Security Market Line and the CAPM 4. The risk-free rate is 5% and the expected return on the market portfolio is 13%. A stock has a beta of 1.0, what is its expected return? a.
By contrast, the price elasticity of demand tells you “how much” quantity demanded changes when price changes. It shows the responsiveness of a change in quantity demanded to a change in price. [text: E p. 114; MI p. 114] 2. Why do economists use percentages rather than absolute amounts in measuring the responsiveness of consumers to changes in price? There are two basic reasons.