Question

3-You own a stock that had returns of 11.26 percent, ?7.62 percent, 24.48 percent, and 16.72 percent over the past four years. What was the geometric average return for this stock? 10.55% 9.84% 11.66% 11.21% 12.14%

6-

What range of returns should you expect to see with a 99 percent probability on an asset that has an average return of 10.85 percent and a standard deviation of 24.64 percent?

?26.11% to 47.81%

?38.43% to 60.13%

?63.07% to 84.77%

?13.79% to 7.91%

?13.79% to 35.49%

7-

Lakeside Winery is considering expanding its winemaking operations. The expansion will require new equipment costing $661,000 that would be depreciated on a straight-line basis to zero over the 4-year life of the project. The equipment will have a market value of $174,000 at the end of the project. The project requires $44,000 initially for net working capital, which will be recovered at the end of the project. The operating cash flow will be $198,900 a year. What is the net present value of this project if the relevant discount rate is 14 percent and the tax rate is 34 percent?

–$33,511

?$37,234

?$28,275

?$40,099

?$31,417

8-

Asonia Co. will pay a dividend of $4.40, $8.50, $11.35, and $13.10 per share for each of the next four years, respectively. The company will then close its doors. If investors require a return of 10.2 percent on the company's stock, what is the stock price?

$28.36

$30.72

$34.78

$33.09

$40.18

Answer 1

1) (1 + r)^4 = (1 + r1) x (1 + r2) x (1 + r3) x (1 + r4), where r - geometric average return

=> r = [(1 + 11.26%) x (1 - 7.62%) x (1 + 24.48%) x (1 + 16.72%)]^(1/4) - 1 = 10.55%

2) Range of return = R +/- z-score x SD, z-score for 99% probability = 3

= 10.85% + / - 24.64%

= -63.07% to 84.77%

3) Forecast the cash flows for the project

Cash Flows = Investment + NWC + OCF + Salvage x (1 - tax)

0	-705000
1	198900
2	198900
3	198900
4	357740
NPV	-$31,417

NPV can be calculated using NPV function in excel or calculator or using formulas with 14% discount rate.

4) Price = D1 / (1 + r) + D2 / (1 + r)^2 + D3 / (1 + r)^3 + D4 / (1 + r)^4

= 4.4 / 1.102 + 8.5 / 1.102^2 + 11.35 / 1.102^3 + 13.1 / 1.102^4

= $28.36