5 Problems Business Finance Course

1. From the information below, compute the average annual return,

the variance, standard deviation, and coefficient of variation for each

asset.

ASSET ANNUAL RETURNS

A 5%, 10%, 15%, 4%

B 2 6%, 20%, 2%, 2 5%, 10%

C 12%, 15%, 17%

D 10%, 2 10%, 20%, 2 15%, 8%, 2 7%

2. Based upon your answers to question 1, which asset appears riskiest

based on standard deviation? Based on coefficient of variation?

7. Find the real return, nominal after-tax return, and real after-tax

return on the following:

STOCK NOMINAL RETURN INFLATION TAX RATE

X 13.5% 5% 15%

Y 8.7% 4.7% 25%

Z 5.2% 2.5% 28%

9. Using the information below, compute the percentage returns for

the following securities:

SECURITY PRICEPRICE ONE DIVIDENDS INTEREST

TODAY YEAR AGO RECEIVED RECEIVED

RoadRunner$20.05 $18.67 $0.50

Stock

Wiley Coyote $33.42$45.79 $1.10

stock

Acme longterm

bonds$1,015.38 $991.78 $100.00

Acme short

termbonds$996.63 $989.84 $45.75

Xlingshot$5.43 $3.45 $0.02

Stock

10. Given her evaluation of current economic conditions, Ima Nutt

believes there is a 20 percent probability of recession, a 50 percent

chance of continued steady growth, and a 30 percent probability of

inflationary growth. For each possibility, Ima has developed an interest

rate forecast for long-term Treasury bond interest rates:

ECONOMIC INTEREST RATE

FORECAST FORECAST

Recession 6 percent

Constant growth 9 percent

Inflation 14 percent

a. What is the expected interest rate under Ima’s forecast?

b. What is the variance and standard deviation of Ima’sinterest

rate forecast?

c. What is the coefficient of variation of Ima’s interest rate forecast?

d. If the current long-term Treasury bond interest rate is 8

percent, should Ima consider purchasing a Treasury bond?

Why or why not?

11. Ima is considering a purchase of Wallnut Company stock. Using

the same scenarios and probabilities as in problem 10, she estimates

Wallnut’s return is 2 5 percent in a recession, 20 percent in constant

growth, and 10 percent in inflation.

a. What is Ima’s expected return forecast for Wallnut stock?

b. What is the standard deviation of the forecast?

c. If Wallnut’s current price is $20 per share and Wallnut is

expected to pay a dividend of $0.80 per share next year, what

price will Ima expect Wallnut to sell for in one year?