Assignment Questions

Use a Cover Sheet, and. Upload to LiveText. Week 1 Assignment consists of four (4) questions from Chapter 2.

Chapter 9 Questions

Question 1

You are a consultant to a large manufacturing corporation that is considering a project (beta of 1.8) with the following net after-tax cash flows:

Years from Now After-Tax Cash Flow

0 -40

1-10 15

Assume the risk-free rate is 8% and the market-rate is 16%. What is the NPV of then project? What is the highest possible beta before the NPV becomes negative?

Question 2

Suppose the rate of return on short-term government securities (considered risk-free) is 5%. The expected rate of return for a portfolio with a beta of 1.0 is 12%. According to the CAPM:

What is the expected rate of return on the market portfolio?

What would be the expected return on a stock with a beta = 0?

You are thinking of buying a stock at $40.00, and it is expected to pay a $3.00 dividend next year, and sell for $41.00. The stock risk is beta = -.5. Is the stock over- or under-priced?

Chapter 11 Questions

Question 1

Which of the following phenomena would either be consistent with or a violation of the EMH? Explain briefly.

Nearly half of all professionally managed mutual funds are able to outperform the S&P 500 in a typical year.

Money managers that outperform the market (on a risk-adjusted basis) in one year are likely to outperform in the following year.

Stock prices tend to be predictably more volatile in January than other months.

Stock prices of companies that announce increased earnings in January tend to outperform the market in February.

Stocks that perform well in one week perform poorly in the following week.

Question 2

We know that the market should respond positively to good news and that good-news events such as the coming end of a recession can be predicted with at least some accuracy. Why, then, can we not predict that the market will go up as the economy recovers?

Question 3

You know that firm XYZ is very poorly run. On a scale of 1 (worst) to 10 (best), you would give it a score of 3. The market consensus evaluation is that the management score is only 2. Should you buy or sell the stock? Explain briefly.