Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)
7th Edition
ISBN: 9780357033609
Author: Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher: Cengage Learning
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Textbook Question
Chapter 12, Problem 1FPE
What makes for a good investment? Use the approximate yield formula or a financial calculator to rank the following investments according to their expected returns.
- a. Buy a stock for $30 a share, hold it for three years, and then sell it for $60 a share (the stock pays annual dividends of $2 a share).
- b. Buy a security for $40, hold it for two years, and then sell it for $100 (current income on this security is zero).
- c. Buy a one-year, 5 percent note for $1,000 (assume that the note has a $1,000 par value and that it will be held to maturity).
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Ranking investments by expected returns
What makes for a good investment? Use the approximate yield formula or a financial calculator to rank the following investments according to their expected returns. Round the answers to two decimal places. Do not round intermediate calculations.
Buy a stock for $45 a share, hold it for 3 years, then sell it for $75 a share (the stock pays annual dividends of $3 a share). %
Buy a security for $25, hold it for 2 years, then sell it for $60 (current income on this security is zero). Do not round intermediate calculations. %
Buy a 1-year, 12 percent note for $950 (assume that the note has a $1,000 par value and that it will be held to maturity). Do not round intermediate calculations. %
WINNER plans to invest in one of two stocks, each of which requires the same initial investment. The estimated return (cash flow) of these investments for the next year depends on economic conditions and their respective possibilities.
State of
Economy
Probability
Rate of Return
Stock A
Stock B
Boom
0.15
0.30
0.25
Normal
0.55
0.12
0.08
Recession
0.30
0.01
-0.05
i) Compute expected rate of return for each asset.
ii) Compute variance and standard deviation of rate of return for each asset.
iii) Which asset should they purchase?
An investor has an investment that has produced the following returns: Year 1: 10%, Year 2:
5%, Year 3: -7%, Year 4: -3%, Year 5: 12%. Calculate the arithmetic mean return on this
investment.
O 6.75
O 17.00
3.40
8.50
Chapter 12 Solutions
Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)
Ch. 12 - Describe the various types of risks to which...Ch. 12 - Prob. 2LOCh. 12 - Prob. 3LOCh. 12 - Prob. 4LOCh. 12 - Prob. 5LOCh. 12 - Prob. 6LOCh. 12 - What makes for a good investment? Use the...Ch. 12 - An investor is thinking about buying some shares...Ch. 12 - The price of Outdoor Designs, Inc. is now 85. The...Ch. 12 - The Castle Company recently reported net profits...
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