(a) The following information describes the expected return and risk relationship for two stocks. Expected Return...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
(a) The following information describes the expected return and risk relationship for two stocks. Expected Return Standard Deviation Beta 1.50 0.90 1.00 Stock X 15.0% Stock Y 8.0% Market Index 10.0% Risk-free rate 4.0% 22 15 12 Using only the data shown in the preceding table (i) Calculate the alpha for Stock X? (ii) Calculate the alpha for Stock Y? (iii) State whether the two stocks are undervalued or overvalued? (iv) Assume that the risk-free rate increase to 7 percent and with the other data in the preceding matrix remaining unchanged calculate the alpha for Stock X? (V) Is stock X undervalued or overvalued? (b) How to replicate the payoff of a bond (riskless portfolio) using shares and call options? Based on this conclusion, how does a single-step binomial tree option pricing model work? Use an example to demonstrate your answers. (c) List five steps to calculate the stock value using free cash flow to the firm (FCFF). Using your own words, explain the meaning of FCFF. (a) The following information describes the expected return and risk relationship for two stocks. Expected Return Standard Deviation Beta 1.50 0.90 1.00 Stock X 15.0% Stock Y 8.0% Market Index 10.0% Risk-free rate 4.0% 22 15 12 Using only the data shown in the preceding table (i) Calculate the alpha for Stock X? (ii) Calculate the alpha for Stock Y? (iii) State whether the two stocks are undervalued or overvalued? (iv) Assume that the risk-free rate increase to 7 percent and with the other data in the preceding matrix remaining unchanged calculate the alpha for Stock X? (V) Is stock X undervalued or overvalued? (b) How to replicate the payoff of a bond (riskless portfolio) using shares and call options? Based on this conclusion, how does a single-step binomial tree option pricing model work? Use an example to demonstrate your answers. (c) List five steps to calculate the stock value using free cash flow to the firm (FCFF). Using your own words, explain the meaning of FCFF.
Expert Answer:
Answer rating: 100% (QA)
a i Alpha for Stock X 15 150 10 4 65 ii Alpha for Stock Y 8 090 10 4 12 iii Stock X is undervalued a... View the full answer
Related Book For
Applied Statistics in Business and Economics
ISBN: 978-0073521480
4th edition
Authors: David Doane, Lori Seward
Posted Date:
Students also viewed these finance questions
-
If the payoff of a risky investment has three possible outcomes ($1,000, $2,000, $5,000) with probabilities .60, .30, and .10 respectively, find the expected value. a. $1,500 b. $2,300 c. $1,700
-
Compare the payoff of a call option and the underlying security. Show that the price of a call option must always be less than the value of the underlying security.
-
The binomial option pricing model has several advantages, particularly related to illustrating important concepts and practical applications. Identify and discuss three advantages related to...
-
An arm ABC lying in a horizontal plane and supported at A (see figure) is made of two identical solid steel bars AB and BC welded together at a right angle. Each bar is 20 in. long. Knowing that the...
-
Find the following differences using twos complement arithmetic: a. 111000 -110011 b. 11001100 - 101110 c. 111100001111 -110011110011 d. 11000011 -11101000
-
Express the following numbers in IEEE 32-bit floating-point format: a. -5 b. -6 c. -1.5 d. 384 e. 1/16 f. -1/32
-
Jameson Polymers, Inc. has common stock that is currently selling at $\$ 100$ per share. If Jameson has 100 shares of common stock outstanding, what is its return on total assets (ROA)? Supplementary...
-
1. What target market does Embrace seek to serve and how attractive is that market? 2. What examples of primary research that Embraces founders completed appear in the case? 3. What actions did...
-
Described below are certain transactions of Carla Corporation. The company uses the periodic inventory system. 1. 2. 3. 4. On February 2, the corporation purchased goods from Martin Company for...
-
A project has a first cost of \($180,000,\) an estimated salvage value of \($20,000\) after 6 years, and other economic attributes as detailed in the table below. Unfortunately, as the end of year 4...
-
Particle size distribution curve for Soils B is given in Figure. For Soil B: Liquid limit=36% and Plastic limit=27% Classify this soil using USCS classification chart. Provide your answer in terms of...
-
Eugene and Linda had AGI of $50,000. Addition information is as follows: $2000 Cash contribution to animal shelter $1200 Tuition paid to boarding school $1750 Contribution to a political party $500...
-
What type of account is used to record costs incurred by a company in the process of earning revenue? Explain in details
-
Calculating Percent Change Be sure your answer is a number rounded to one decimal point; do not include percent signs, minus signs, etc. In September 2019, Honda sold 1,541 Insights. In September...
-
What is an appropriate control to have in place to safeguard cash during the cash disbursement .
-
Give six (6) examples of additional or unmet needs that would need to be identified and reported.
-
What are the principles of budgetary control? Discuss common forecasting techniques. What are the principles of double entry bookkeeping? What are the principles of statistical analysis and measures...
-
Describe basic managerial approaches to implementing controls and how these are implemented.
-
If you did not already do so, request leverage statistics. Are any observations influential? Explain.
-
An automaker states that its cars equipped with electronic fuel injection and computerized engine controls will start on the fist try (hot or cold) 99 percent of the time. A survey of 100 new car...
-
Bob owns two stocks. There is an 80 percent probability that stock A will rise in price, while there is a 60 percent chance that stock B will rise in price. There is a 40 percent chance that both...
-
By using the yield to maturity on AT&Ts debt, we found that its pretax cost of debt is 3.65%. If AT&Ts tax rate is 25%, what is its effective cost of debt?
-
You work in Walt Disney Companys corporate finance and treasury department and have been assigned to the team estimating Disneys WACC. You must estimate this WACC in preparation for a team meeting...
-
You are working for Microsoft evaluating the possibility of selling energy drinks. Microsofts WACC is 8.1%. Energy drinks would be a new line of business for Microsoft, however, so the systematic...
Study smarter with the SolutionInn App