FINANCE-Calculate the price of a stock that has a one-period horizon

1. (10 points)

Calculate the price of a stock that has a one-period horizon, is expected to pay a dividend of $.20 per share for the period, with the following prices and associated probabilities forecast at the end of the period:

Probability	0.3	0.1	0.2	0.3	0.1
Price	$40	$45	$55	$62	$70

The return on comparable stocks is 8%.

2. (15 points)

JetBlue Airways Corporation (JBLU) reports the following in its latest quarterly report:

Authorized shares 500,000,000

Shares issued 317,391,718

Shares outstanding 290,305,387

a. (5 points)

How many shares are in the treasury stock?

b. (5 points)

If the float is 280,700,408 shares, find the number of restricted shares.

c. (5 points)

Recently, JBLU closed at $5.51 per share. Based on this price, find the market capitalization of the company.

To answer questions 3 and 4, refer to the articles by Malkiel and Shleifer available on the course web site, in addition to what we covered in class.

3. (15 points)

a. (5 points)

Why do Malkiel, and those who think like him, believe in efficient market theory?

b. (5 points)

What are three attacks on EMH that Malkiel attributes to the behavioralists?

c. (5 points)

What does Malkiel believe about the market patterns the behavioralists claim to have discovered?

4. (20 points)

a. (5 points)

How does Shleifer define arbitrage? How does he use the concept to argue

against market efficiency?

b. (5 points)

Why would the market value of Royal Dutch equal 1.5 times the market value of Shell if efficient market theory is correct?

c. (5 points)

Why is the Royal Dutch/Shell case something of an embarrassment for EMH?

d. (5 points)

How does the fact that arbitrage is risky argue against EMH?

5. (10 points)

What is the beta of a stock with an expected return E(r_i) = 18%, when the risk-free rate r_F = 6%, and the expected market return E(r_M) = 14%? Show your work.

6. (10 points)

True or false? Explain: Stocks with a beta of zero offer an expected rate of return of zero.

7. (10 points)

Suppose the rate of return on short-term government securities (perceived to be risk-free) is 5%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 12%. According to the CAPM:

a. (5 points)

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

b. (5 points)

What would be the expected rate of return on a stock with β = 0?

8. (10 points)

Describe the two kinds of contracts that an underwriter can negotiate with a firm wishing to do an IPO. Discuss which is more “costly” to the issuing firm, and why.