ACC311 homework 7 2015

Burklin, Inc., has earnings of $18 million and is projected to grow at a constant rate of 5 percent forever because of the benefits gained from the learning curve. Currently, all earnings are paid out as dividends. The company plans to launch a new project two years from now that would be completely internally funded and require 30 percent of the earnings that year. The project would start generating revenues one year after the launch of the project and the earnings from the new project in any year are estimated to be constant at $6.5 million. The company has 7.5 million shares of stock outstanding.

Estimate the value of the stock. The discount rate is 10 percent. (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

Value of the stock

$

Consider the following information about three stocks:

Rate of Return if State Occurs

State of

Probability of

Economy

State of Economy

Stock A

Stock B

Stock C

Boom

.30

.20

.25

.60

Normal

.45

.15

.11

.05

Bust

.25

.01

− .15

− .50

a-1.

If your portfolio is invested 40 percent each in A and B and 20 percent in C , what is the portfolio expected return? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

Portfolio expected return

%

a-2.

What is the variance? (Do not round intermediate calculations and round your final answer to 5 decimal places. (e.g., 32.16161))

Variance

a-3.

What is the standard deviation? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Standard deviation

%

b.

If the expected T-bill rate is 3.80 percent, what is the expected risk premium on the portfolio? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Expected risk premium

%

c-1.

If the expected inflation rate is 3.50 percent, what are the approximate and exact expected real returns on the portfolio? (Do not round intermediate calculations and round your answers to 2 decimal places. (e.g., 32.16))

Approximate expected real return

%

Exact expected real return

%

c-2.

What are the approximate and exact expected real risk premiums on the portfolio? (Do not round intermediate calculations and round your answers to 2 decimal places. (e.g., 32.16))

Approximate expected real risk premium

%

Exact expected real risk premium

%

Suppose the risk-free rate is 4.2 percent and the market portfolio has an expected return of 10.9 percent. The market portfolio has a variance of .0382. Portfolio Z has a correlation coefficient with the market of .28 and a variance of .3285.

According to the capital asset pricing model, what is the expected return on Portfolio Z? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Expected return

%

Juggernaut Satellite Corporation earned $18 million for the fiscal year ending yesterday. The firm also paid out 30 percent of its earnings as dividends yesterday. The firm will continue to pay out 30 percent of its earnings as annual, end-of-year dividends. The remaining 70 percent of earnings is retained by the company for use in projects. The company has 2 million shares of common stock outstanding. The current stock price is $93. The historical return on equity (ROE) of 13 percent is expected to continue in the future.

What is the required rate of return on the stock? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

Rate of return

%