Week $2$ Homework Assignment

Problem $1$:

Suppose the risk$-$free rate $($rfr$)=5\%,$ average market return $($rm$)=10\%,$ and the required or expected rate of return E$($r$)=12\%$ for TNG stock.

$($a$)$ Calculate the Beta $()$ for TNG$.$

$($b$)$ If TNG$$s Beta $()=2\mathrm{.}0,$ what would be TNG$$s new required or expected rate of return $($r$)?$

Answer:

$($a$)$ Calculate the Beta $()$ for TNG$.$

Problem $2$:

An investor desires to own a stock whose price moves no greater than $50\%$ versus the overall market. Given that ABC stock has a required or expected rate of return of $15\%,$ the average market return is $11\%$ and the interest yield on $10-$year US Treasury Bonds is $4\%,$ should the investor purchase ABC? Show your work to explain why or why not.

Answer:

Problem $3$:

Select any publicly traded company of your choice, construct or set up an equation to calculate the expected or required rate of return for the company using the APT model. You may use hypothetical or estimated numbers to complete this conceptual problem. HINT: The goal here is for you to assess the relative significance of each of the factors that will affect the required or expected rate of return specific to your company and demonstrate you understand how this equation is actually used for investment analysis. This is not an exercise in precision but accuracy in terms of how$-$to set$-$up the problem!

Answers:

Problem $4$:

If a company$$s total assets are financed $55\%$ by debt, this indicates a high level of financial risk.$$ Briefly evaluate the validity of this statement.

Answer:

Problem $5$:

A company with a low profit margin $[$net income as a percent of total sales$]$ can still translate this into a high return on assets within its peer group.$$ Briefly evaluate the validity of this statement.

Answers: