Strayer fin550 week 1 homework

HomeworkoChapter 1: Problems 5(a-d), 7, 9, and 12oChapter 2: Problems 4(a-b), 5(a-b), and 6(a-b Corporate
Investment Analysis, FIN550
Week 1
Homework
Chapter 1:
Problems 5(a-d), 7, 9, and 12
5. During the
past five years, you owned two stocks that had the following annual rates of
return:

Year

Stock T

Stock B

1

0.19

0.08

2

0.08

0.03

3

-0.12

-0.09

4

-0.03

0.02

5

0.15

0.04

a.
Compute the arithmetic mean annual rate of
return for each stock. Which stock is
most desirable by this measure?

b. Compute the
standard deviation of the annual rate of return for each stock. (Use Chapter 1
Appendix if necessary.) By this measure, which is the preferable stock?

c.
Compute the coefficient of variation for each
stock. (Use the Chapter 1 Appendix if necessary.) By this relative measure of
risk, which stock is preferable?

d. Compute the
geometric mean rate of return for each stock.
Discuss the difference between the arithmetic mean return and the
geometric mean return for each stock.
Discuss the differences in the mean returns relative to the standard
deviation of the return for each stock.

7. A
stockbroker calls you and suggests that you invest in the Lauren Computer
Company. After analyzing the firm’s annual
report and other material, you believe that the distribution of expected rates
of return is as follows:

LAUREN COMPUTER CO.

Possible Rate of Return

Probability

-0.60

0.05

-0.30

0.20

-0.10

0.10

0.20

0.30

0.40

0.20

0.80

0.15

Compute the expected return [E(Ri)] on Lauren Computer
stock.

9. During the
past year, you had a portfolio that contained U.S. government T-bills,
long-term government bonds, and common stocks.
The rate of return on each of them were as follows:
U.S.
government T-bills
5.50%
U.S.
government long-term bonds 7.50%
U.S. common
stocks 11.60%
During the year, the consumer price index,
which measures the rate of inflation, when from 160 to 172 (1982 – 1984 =
100). Compute the rate of inflation
during this year. Compute the real rates
of return on each of the investments in your portfolio based on the inflation
rate.

12. Assume that
the consensus required rate of return on common stocks is 14 percent. In addition, you read in Fortune that the
expected rate of inflation is 5 percent and the estimated long-term real growth
rate of the economy is 3 percent. What interest
rate would you expect on U.S. government T-bills? What is the approximate risk premium for
common stocks implied by these data?

Chapter 2:
Problems 4(a-b), 5(a-b), and 6(a-b)
4. Problem:
a. Someone in
the 36 percent tax bracket can earn 9 percent annually on her investments in a
tax-exempt IRA account. What will be the
value of a one-time $10,000 investment in 5 years? 10 years? 20 years?

b. Suppose the
preceding 9 percent return is taxable rather than tax-deferred and the taxes
are paid annually. What will be the
after-tax value of her $10,000 investment after 5, 10, and 20 years?

5. Problem:
a. Someone in
the 15 percent tax bracket can earn 10 percent on his investments in a
tax-exempt IRA account. What will be the
value of a $10,000 investment in 5 years? 10 years? 20 years?

b. Suppose the
preceding 10 percent return is taxable rather than tax-deferred. What will be the after-tax value of his
$10,000 investment after 5, 10, and 20 years?

6. Assume that
the rate of inflation during all these periods was 3 percent a year. Compute the real value of the two
tax-deferred portfolios in problems 4a and 5a.