Your stockbroker has called has called you about Netflix, Inc. (NFLX). She tells you that Netflix is selling for $370.00 per share and that she expects the price in one year to be $395.00. The expected return on NFLX has a standard deviation of 20 percent. The market risk premium for the S & P 500 has averaged 6.0 percent. The beta for NFLX is 1.14. The ten-year Treasury bond rate is 3 percent. NFLX does not pay a cash dividend.

Required: a) Determine the probability that you would earn a positive return on an investment in NFLX.

b) Determine the probability that you would earn more than your required rate of return on an investment in NFLX.

c) Explain why you would or would not buy NFLX.

3. Suppose that Amazon.com, Inc. (AMZN) common stock is selling for $2,025.00. Analysts believe that the growth rate for AMZN will be 25% for the next two years, 20% for the following 5 years, and thereafter the growth rate will be 7% indefinitely. Due to its growth, AMZN will not pay a cash dividend until three years from now. At that time, the dividend per share will be $15.00. Thereafter the dividend will grow by the same rate as the company. Stockholders require a return of 15 percent on Amazon's stock.

Required: a) Based on the above assumptions, determine the price of Amazon's common stock.

b) Explain whether an investor should buy the stock.

4. Jasper Inc.'s preferred stock is selling for $125 per share in the market. This preferred stock has a par value of $100 and a dividend rate of 9 percent.

Required: a) What is the current yield on the stock?

b) If an investor has a required rate of return of 7 percent, what is the value of the stock for that investor?

c) Should the investor acquire the stock? Explain.

d) Explain why preferred stock is referred to as a hybrid security.

5. On September 1, 2008, Casper, Inc. sold a $500 million bond issue to finance the purchase of a new manufacturing facility. These bonds were issued in $1,000 denominations with a maturity date of September 1, 2038. The bonds have a coupon rate of 10.00% with interest paid semiannually.

Required: a) Determine the value today, September 1, 2018 of one of these bonds to an investor who requires a 4 percent return on these bonds. Why is the value today different from the par value?

b) Assume that the bonds are selling for $1,215. Determine the current yield and the yield-to-maturity. Explain what these terms mean.

c) Explain what layers or textures of risk play a role in the determination of the required rate of return on Casper's bonds.

Answer rating: 100% (QA)

Answer 1 a To determine the probability of earning a positive return on an investment in NFLX we need to find the zscore of the expected return The formula for the zscore is z Expected Return Required ... View the full answer