7 financial management questions on the attached document, thank you.
question_7.docx
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Question 6-4
If investors’ aversion to risk are increased, would the risk premium on a high-beta stock increase by
more or less that that on a law-beta stock? Explain.
Question 6-5
If a company’s beta were to double, would its expected return double?
Question 7-3
A bond that pays interest forever and has no maturity date is a perpetual bond, also called a perpetuity
or a consol. In what respect is a perpetual bond similar to (1) a no growth common stock and (2) a share
preferred stock?
Problem 6-3
Suppose the risk free rate is 5% and that the market risk premium is 7%. What is the required return on
(1) the market, (2) a stock with a beta of 1.0, and (3) a stock with a beta of 1.7? Assume that the riskfree rate is 5% and that the market risk premium is 7%.
Problem 6-5
A stock’s return has the following distribution:
Demand for the
Company’s Product
Probability of this
Demand Occurring
Rate of Return if this
Demand Occurs (%)
Weak
0.1
-50%
Below Average
0.2
-5
Average
0.4
16
Above Average
0.2
25
Strong
0.1
60
1.0
Calculate the stock’s expected return and standard deviation.
Problem 7-4
Nick’s enchiladas Inc. has preferred stock outstanding that pays a dividend of $5 at the end of each year,
the preferred sells for $50 a share. What is the stock’s required rate of return (assume the market is in
equilibrium with the required return equal to the expected return)?
Problem7-9
Crisp Cookware’s common stock is expected to pay a dividend of $3 a share at the end of this year (D=
$3.00); its beta is 0.8; the risk free rate is 5.2%; and the market risk premium is 6%. The dividend is
expected to grow at some constant rate g, and the stock currently sells for $40 a share. Assuming the
market is in equilibrium, what does the market believe will be the stock’s price at the end of 3 years (i.e.,
what is p3)?
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