FINE 2000 Chapter Notes - Chapter 11: Dow Jones Industrial Average, Opportunity Cost, Weighted Arithmetic Mean

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amethystmuskrat63

6 Nov 2014

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Chapter 11: intro to risk, return and the opportunity cost of capital. Return on a stock comes from: (1) a dividend/interest payment, (2) a capital gain/loss. Percentage return : [(capital gain + dividend)/initial share price] or, [dividend yield + % capital gain] = [(dividend/initial price) + (capital gain/initial price)] To compare percentage returns over different time periods, you calculate the effective annual interest rate (ear). Convert return to monthly return and then to the annual rate: monthly rate = (1 + period rate)1/n 1, ear = (1 + monthly rate)12 - 1. Nominal rate of return measures how much more money you"ll have at the end of the year if you invest today. The real rate tells you how much more you"ll be able to buy with your money at the end of the year. Nominal real rate: (1 + real) = (1 + nominal)/(1 + inflation) Capital gain = 1,050 1020 = 30.

Related Questions

Question 6. (13 points) You have $100,000 to invest and you are choosing between investing in two funds: Slow and Somewhat Steady (SASS) and Wild Ride (WR). Each year, the return on SASS is either 0% or 10% with returning 0% or 10% being equally likely. Wild Ride either returns 90% or -47% every year with returning 90% or -47% being equally likely. The return varies each year and is not affected by what happened last year. You will invest for 2 years and whichever investment you choose is the one in which you will invest for both years.

a) If you invest in SASS and it go well both years, how much money will you have at the end?

b) If you invest in SASS and it goes poorly both years, how much money will you have at the end?

c) If you invest in SASS and it goes well in one year and poorly in the other, how much money will you have at the end?

d) If you invest in SASS, how much money would you expect to have in two years?

e) Using you result from part d, what annual rate of return would you expect to make by investing in SASS over two years? How does this compare to SASSâ reported 5% average yearly returns?

f) If you invest in WR and it go well both years, how much money will you have at the end?

g) If you invest in WR and it goes poorly both years, how much money will you have at the end?

h) If you invest in WR and it goes well in one year and poorly in the other, how much money will you have at the end?

i) If you invest in WR, how much money would you expect to have in two years?

j) Using you result from part i, what annual rate of return would you expect to make by investing in WR over two years? How does this compare to WRâs reported 21.5% average yearly returns?

k) Would you choose to invest in SASS or WR? Why?

mauvealligator848

I Just have no idea where to start with this problem. Can someone just give me a run down or more?

Assume that it is now January 1, 2015. Wayne-Martin Electric
Inc. (WME) has developed a solar panel capable of generating 200% more electricity than
any other solar panel currently on the market. As a result, WME is expected to experience a
15% annual growth rate for the next 5 years. Other firms will have developed comparable
technology at the end of 5 years, and WMEâs growth rate will slow to 5% per year
indefinitely. Stockholders require a return of 12% on WMEâs stock. The most recent annual
dividend D0 , which was paid yesterday, was $1 75 per share.
a. Calculate WMEâs expected dividends for 2015, 2016, 2017, 2018, and 2019.
b. Calculate the value of the stock today, Proceed by finding the present value of the
dividends expected at the end of 2015, 2016, 2017, 2018, and 2019 plus the present
value of the stock price that should exist at the end of 2019. The year-end 2019 stock
price can be found by using the constant growth equation. Notice that to find
the December 31, 2019, price, you must use the dividend expected in 2020, which is
5% greater than the 2019 dividend.

c. Calculate the expected dividend yield (D1/P0) , capital gains yield, and total return
(dividend yield plus capital gains yield) expected for 2015. (Assume that P0 = P0 and
recognize that the capital gains yield is equal to the total return minus the dividend
yield.) Then calculate these same three yields for 2020.

d. How might an investorâs tax situation affect his or her decision to purchase stocks of
companies in the early stages of their lives, when they are growing rapidly, versus
stocks of older, more mature firms? When does WMEâs stock becomeâmatureâfor
purposes of this question?

e. Suppose your boss tells you she believes that WMEâs annual growth rate will be only
12% during the next 5 years and that the firmâs long-run growth rate will be only 4%.
Without doing any calculations, what general effect would these growth rate changes
have on the price of WMEâs stock?

f. Suppose your boss also tells you that she regards WME as being quite risky and that
she believes the required rate of return should be 14%, not 12%. Without doing any
calculations, determine how the higher required rate of return would affect the price of
the stock, the capital gains yield, and the dividend yield. Again, assume that the longrun growth rate is 4%

chocolateduck289

Use a calculator to solve all quantitative problems, and be sure to show calculator format!!!

(n, I, pmt, pv, fv CFo,I,CF1, CF2â¦.)

8) Three years ago a company had sales of $300,000. Now sales are $1,000,000. At what rate have

sales been growing?

9) Define each of the following:

a) Quoted rate (APR)

b) Periodic rate

c) Effective annual rate (EAR)

10) What are the following Effective Annual Rates (EAR) for 12%:

a) Compounded semiannually?

b) Compounded quarterly?

c) Compounded daily?

11) What would the value of $500 be after 4 years, assuming a return of 8% per year:

a) with semiannual compounding?

b) with quarterly compounding?

12)A. You plan to invest in a preferred stock issue that pays a $60 dividend at the end of each year. Based

on market conditions, you want to get a 5% return. What are you willing to pay for this security?

12)A You want to buy a car today!! The used car you are looking at costs $21,500. The car dealer will

charge you 5% interest on the three year car loan you need. You will be borrowing the whole $21,500. What will your car payment be, if you will make monthly payments?

13. Your company has invested $2500 in a vending machine today. You expect the machine to last 10 years and to produce the following after tax cash flows per year:

Year 1 $100

Year2 $250

Year 3 $250

Year 4 $300

Year 5 $300

Year 6 $300

Year 7 $300

Year 8 $300

Year 9 $350

Year 10 $350

If you have a required return on your investment of 7%, did you pay too much for the vending machine?

FINE 2000 Chapter Notes - Chapter 11: Dow Jones Industrial Average, Opportunity Cost, Weighted Arithmetic Mean

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