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finance_week_3_1.xlsx

Instructions

2.	You will enter the required information into the shaded cells.
3.	The cells are coded:
	a.	T requires a text answer.
	b.	C requires a calculation. You cannot perform the operation on a calculator and then type the answer in the cell. You will enter the calculation in the cell, and only the final answer will show in the cell. I will be able to review your calculation and correct, if necessary.
	c.	F requires a number only. In some problems, a “Step 1” is added to help you solve the problem.

&16Instructions

Principles of Corporate Finance, Concise, 2nd Edition

Problem 7-2
The following table shows the nominal returns on U.S. Stocks and the rate of inflation:
		Year	Nominal Return (%)	Inflation (%)
		2004	12.5	3.3
		2005	6.4	3.4
		2006	15.8	2.5
		2007	5.6	4.1
		2008	-37.2	0.1
	a) What was the standard deviation of the market returns?
	b) Calculate the average real return.
Answers:
a) What was the standard deviation of the market returns?
	Find the standard deviation by completing the table with the appropriate formulas
		Year	Nominal Return (%)	Difference from Average	Squared Difference
		2004	12.5	C	C
		2005	6.4	C	C
		2006	15.8	C	C
		2007	5.6	C	C
		2008	-37.2	C	C
		Total	C		C
		Average	C		C
		Std. Deviation			C	Use SQRT function
b) Calculate the average real return.
	Find the average real return by completing the table with the appropriate formulas
	TIP: formula for real return can be found in the Classroom Course Tools, Resources, Financial Formulas
		Year	Nominal Return (%)	Inflation (%)	Real Return (%)
		2004	12.5	3.3	C
		2005	6.4	3.4	C
		2006	15.8	2.5	C
		2007	5.6	4.1	C
		2008	-37.2	0.1	C
		Average			C

Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.

Principles of Corporate Finance, Concise, 2nd Edition

Problem 7-11
Each of the following statements is dangerous or misleading. Explain why. a. A long-term United States government bond is always absolutely safe. b. All investors should prefer stocks to bonds because stocks offer higher long-run rates of return. c. The best practical forecast of future rates of return on the stock market is a 5- or 10-year average of historical returns.
Answers:
a.	T
b.	T
c.	T

Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.

Problem 8-6
Suppose that the Treasury bill rate were 6% rather than 4%. Assume that the expected return on the market stays at 10%. Use the betas in Table 8.2 (p. 193) - also provided below.
a. Calculate the expected return from Dell. b. Find the highest expected return that is offered by one of these stocks. c. Find the lowest expected return that is offered by one of these stocks. d. Would Ford offer a higher or lower expected return if the interest rate were 6% rather than 4%? Assume that the expected market return stays at 10%. e. Would Exxon Mobil offer a higher or lower expected return if the interest rate were 8%?
Answers:
		Formula		Calculation
A. Dell's expected return		T		C	TIP: Formula in Table 8.2 in textbook.
B./C.
Stock	Beta (B)	Revised T Bill Risk-Free Rate	Market Return	Expected return
Amazon	2.16	F	F	C
Ford	1.75	F	F	C
Dell	1.41	F	F	C
Starbucks	1.16	F	F	C
Boeing	1.14	F	F	C
Disney	0.96	F	F	C
Newmont	0.63	F	F	C
Exxon Mobil	0.55	F	F	C
Johnson & Johnson	0.5	F	F	C
Campbell Soup	0.3	F	F	C
B. Highest	T
C. Lowest	T
D. FORD will offer a ________ expected return at 6%.				Higher or lower?
Interest rate	4%	6%
Rate of return	C	C
E. Exxon will offer a _______ expected return at 8%.				Higher or lower?
Interest rate	4%	8%
Rate of return	C	C

Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.

Principles of Corporate Finance, Concise, 2nd Edition

Problem 8-18
Some true or false questions about the APT: a. The APT factors cannot reflect diversifiable risks. b. The market rate of return cannot be an APT factor. c. There is no theory that specifically identifies the APT factors. d. The APT model could be true but not very useful, for example, if the relevant factors change unpredictably. Respond to each question - true or false - and why.
Answer:
a.	T
b.	T
c.	T
d.	T

Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.