Question: Consider the following securities, which are assumed to be risk-free with an opportunity cost of capital (or discount rate) of 10 percent: (1) A one-year zero-coupon bond paying $550. (2) A perpetuity paying $50 per year. (3) A stock offering a $25 dividend at the end of this year and a 5% annual rate...

Question: Present and Future Values A. You will receive $100 from a savings bond in 3 years. The nominal interest rate is 8 percent. (i) What is the present value of the proceeds from the bond? (ii) If the annual inflation rate over the next 3 years is expected to be 5 percent, what will...

Question: Bungi Jump Inc. is in a declining industry. Earnings and dividends per share are falling at a rate of 10 percent per year. A. If the discount rate (r) is 15 percent and DIV1 = $3 , what is the market price of a share? B. What price do you forecast for the stock...

Question: The president of Boss Enterprises has to make a choice between two mutually exclusive investment projects. Either machine A and or B may be purchased, with associated cash flows as shown in the table below. Suppose that the discount rate is 10 percent. A. A new employee does not understand the concept of internal...

Question: Suppose a particular stock yields a rate of return of either –20 percent or +40 percent. A. If both returns are equally likely (i.e., both have probabilities .5 of occurring), compute the stock’s expected return and the standard deviation of its return. B. If an investor wants a portfolio risk of .1, then what...

Question: Asset A has an expected return of .20 and a standard deviation of .10 while asset B has an expected return of .30 and standard deviation of .15. In view of asset A’s lower individual risk, why would the risk of a portfolio composed of the two assets generally not be minimized by holding...

Question: Next year Excon Corporation is expected to have earnings per share of $4 and to continue to plow back 60 percent of its earnings into investment projects with an average rate of return on equity of 20 percent. Its capitalization rate is estimated to be 16 percent. Assuming an infinite investment horizon, please find...

Question: Go to a financial Web site, such as finance.yahoo.com, http://www.google.com/finance, or moneycentral.msn.com. Obtain information on the yields and maturity for: ? U.S. treasuries ? Municipal bonds ? Corporate bonds Discuss what the pure expectations theory would imply about the yield curve. Compare and contrast the yields and maturities for each of the securities. Discuss...