Lab Finance Solutions 7-13 Explain the linkages among financial decisions, return, risk, and stock value. 7-14 Assuming that all other variables remain unchanged, what effect would each of the following have on stock price? (a) The firm's risk premium increases. (b) The firm's required return decreases. (c) The dividend expected next year decreases. (d) The growth rate of dividends is expected to increase.

Lab Finance Solutions 7-13 Explain the linkages among financial decisions, return, risk, and stock value. 7-14 Assuming that all other variables remain unchanged, what effect would each of the following have on stock price? (a) The firm's risk premium increases. (b) The firm's required return decreases. (c) The dividend expected next year decreases. (d) The growth rate of dividends is expected to increase.

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter5: Risk Analysis

Section: Chapter Questions

Problem 11QE: Market equity beta measures the covariability of a firms returns with all shares traded on the...

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An investment analyst estimates the following probabilities of return depending on the state of the economy. Business conditions Boom Good Normal Recession Poor Probability 0.05 0.25 0.40 0.25 0.05Petronas share return % 12 10 4 -2 -7Maxis share return % 26 12 8 -6 -22Berjaya share return % 41 23 12 -27 -55Compute the Expected risk of the above shares?
The dividend yield (i.e. D1/P0) is a good measure of the expected return on a common stock under which of the following circumstances? g = 0 g > 0 g < 0 g is expected to remain constant over time under no circumstances
Over time, the unexpected return on a company's stock is expected to equal Multiple Choice the company's average rate of return. the average return on the overall market. zero, the risk-free rate. the market risk premium.
An investment analyst estimates the following probabilities of return depending on the state of the economy. Business conditions Boom Good Normal Recession Poor Probability 0.05 0.25 0.40 0.25 0.05 Petronas share return % 12 10 4 -2 -7 Maxis share return % 26 12 8 -6 -22 Berjaya share return % 41 23 12 -27 -55 Compute the expected rate of return and Expected risk of the above shares What are their Shape Ratios?
Problem 2 . Suppose your expectations regarding the stock price are as follows: State of the Market Probability Ending Price Boom 0.35 Normal growth 0.30 Recession 0.35 $140 110 80 HPR (including dividends) 44.5% 14.0 -16.5 Use Equations 5.11 and 5.12 to compute the mean and standard deviation of the HPR on stocks.
Market equity beta measures the covariability of a firms returns with all shares traded on the market (in excess of the risk-free interest rate). We refer to the degree of covariability as systematic risk. The market prices securities so that the expected returns should compensate the investor for the systematic risk of a particular stock. Stocks carrying a market equity beta of 1.20 should generate a higher return than stocks carrying a market equity beta of 0.90. Nonsystematic risk is any source of risk that does not affect the covariability of a firms returns with the market. Some writers refer to nonsystematic risk as firm-specific risk. Why is the characterization of nonsystematic risk as firm-specific risk a misnomer?
Suppose your expectations regarding the stock price are as follows: State of the Market Probability Ending Price HPR (includingdividends) Boom 0.30 $ 140 53.5 % Normal growth 0.28 110 17.5 Recession 0.42 80 −12.0 Use the equations E(r)=Σsp(s)r(s)E(r)=Σsp(s)r(s) and σ2=Σsp(s) [r(s)−E(r)]2σ2=Σsp(s) [r(s)−E(r)]2 to compute the mean and standard deviation of the HPR on stocks. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
1. The rate at which a stock's price is expected to appreciate (or depreciate) is called the yield. A. current B. total C. dividend D. capital gains 2. The underlying assumption of the dividend growth model is that a stock is worth: A. the present value of the future income that the stock generates. B. the same amount to every investor regardless of his desired rate of return. C. an amount computed as the next annual dividend divided by the market rate of retum. D. an amount computed as the next annual dividend divided by the required rate of return. 3. The total rate of return earned on a stock is composed of which two of the following? 1. current yield II. yield to maturity III. dividend yield IV. capital gains yield A. I and II only B. I and IV only C. II and III only D. III and IV only 4. Which one of the following correctly defines the constant dividend growth model? A. R = (D₁ Po) + g B. Po = (D₁R) + g C. R=(Po Do) + g D. Po = Do ] (R-g) 5. How much are you willing to pay for one…
The broad stock market's P/E ratio (the inverse of its earnings yield) tends to rise as treasury yields O rise O remain stable O no relationship O fall
Which one is correct answer please confirm? Studies analyzing the historical returns earned by common stock investors have found that the returns from average risk common stock investments over very long time periods have averaged approximately ____ percentage points ____ than holding period returns on corporate debt issues. a. 5.7; higher b. 5.7; lower c. 7.5; higher d. 7.5; lower
13. Changes to the security market line The following graph plots the current security market line (SML) and indicates the return that investors require from holding stock from Happy Corp. (HC). Based on the graph, complete the table that follows. REQUIRED RATE OF RETURN (Percent) REQUIRED RATE OF RETURN (Percent) 20.0 16.0 20 12.0 16 8.0 12 4.0 0 0 CAPM Elements Risk-free rate (TRF) Market risk premium (RPM) Happy Corp. stock's betal Required rate of return on Happy Corp. stock 0 Happy Corp.'s new required rate of return is F 0.6, 7.6 HC's Stock ☐ 0.5 An analyst believes that inflation is going to increase by 2.0% over the next year, while the market risk premium will be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM). The following graph plots the current SML. Calculate Happy Corp.'s new required return. Then, on the graph, use the green points (rectangle symbols) to plot the new SML suggested by this analyst's prediction. 0 1.0 RISK (Beta) Tool tip: Mouse over the…
An investment analyst estimates the following probabilities of return depending on the state of the economy. Business conditions Boom Good Normal Recession Poor Probability 0.05 0.25 0.40 0.25 0.05 Petronas share return % 12 10 4 -2 -7 Maxis share return % 26 12 8 -6 -22 Berjaya share return % 41 23 12 -27 -55 Expected risk of the above shares