The management of Ark Industries wants to analyze the performance of the company's stock in the stock
Question:
The management of Ark Industries wants to analyze the performance of the company's stock in the stock market. They want to compare the stock performance with Apex Inc, a strong competitor in the industry, and the market index. The following data is available for managerial finance analysis.
Year |
Ark Industries |
|
Apex Incorporated | Market Index | |||
Capital gain/loss |
Dividend | Purchased Price | Capital gain/loss |
Dividend | Purchased price | Rate of Return | |
2020 | $6.79 | $2.23 | $23.53 | $5.80 | $3.52 | $79.32 | 51.8% |
2019 | -$5.08 | $2.65 | $28.61 | $5.00 | $3.65 | $74.32 | 1.30% |
2018 | $13.40 | $2.73 | $15.21 | -$12.80 | $3.45 | $87.12 | 11.90% |
2017 | $2.58 | $2.57 | $12.63 | -$8.00 | $3.47 | $95.12 | 13.90% |
2016 | -$0.58 | $2.23 | $13.21 | $10.88 | $3.55 | $84.25 | 15.80% |
*Capital gain = difference between ending price and beginning price
- Use the data given to calculate the annual returns for Ark Industries, and Apex Inc during the 5-year period.
- Calculate the historical average returns for Ark Industries, Apex Inc., and the market index during the 5-year period.
- Calculate the standard deviation of the returns for Ark Industries.
- An individual investor, James Bond needs an extra return of 6.0% before he will take on the stock market's risk to invest in Ark Industries. If the risk-free rate on long-term Treasury bonds is 5.0%. what would be the required return on the market?
- James Bond wants to determine the required rate of return on two stocks (stock A and stock
B) that he just added to his portfolio. The following information is available: Market rate of return = 11.0%
Risk free rate =5.0% Beta for stock A= 0.77 Beta for stock B = 0.99
Use the Security Market Line (SML) equation to calculate the required rate of return for stock A and stock B.
- Richard Morgan, another individual investor wants to purchase four stocks for his portfolio. The expected return, portfolio weights, and the betas of the stocks are given below:
Stocks | Beta | Portfolio weight | Expected return |
Goodman Industries | 0.70 | 30% | 9.20% |
Renfro Inc. | 0.79 | 20% | 9.74% |
Heath Inc. | 1.10 | 30% | 11.60% |
Lincoln Inc. | 1.44 | 20% | 13.64% |
-
- Calculate the portfolio beta.
- Calculate the portfolio's required return.
- Goodman Industries is expected to pay a $4.50 per share dividend at the end of this year (i.e., D1 = $4.50). The dividend is expected to grow at a constant rate of 5% a year. The required rate of return on the stock is, rs, is 9.2%. What is the estimated value per share of Goodman stock?
- Renfro Inc. is expected to have free cash flow (FCF) of $105 million next year and an expected constant growth rate of 5% thereafter. The weighted average cost of capital (WACC) for the company is 9.0%. Using the constant growth model, estimate the value of operations for Renfro Inc.
- The most recent free cash flow (FCF) for Heath Inc. was $200 million, and the management expects the free cash flow to begin growing immediately at a 7% constant rate. The cost of capital is 12%.
- Using the constant growth model, determine the value of operations for Heath Inc.
Heath Inc. balance sheet shows that it has $10 million short-term investments, $15 million in notes payable, $60 million in long-term bonds, and $15 million in preferred stock. Heath has 60 million of shares outstanding. Calculate the following:
-
- total intrinsic value for Heath Inc.
-
- intrinsic value of equity for Heath Inc.
-
- intrinsic stock price per share for Heath Inc.
- Distinguish between call option and put option.
The current price of a stock is $50. In 1 year, the price will be either $65 or $35. The annual risk- free rate is 5%. Find the price of a call option on the stock that has an exercise price of $55 and that expires in 1 year. (Hint: Use daily compounding.)
Management Accounting
ISBN: 9780730369387
4th Edition
Authors: Leslie G. Eldenburg, Albie Brooks, Judy Oliver, Gillian Vesty, Rodney Dormer, Vijaya Murthy, Nick Pawsey