Chapter 5 Question 6

What is the basic approach that is used to value any asset, including bonds and common stocks?

There are 3 main approaches to valuing assets: book or cost as assets are recorded at actual acquisition cost on the books; the market approach which looks at what the shareholders equity or stock is really worth; and income approach which indicates how much money a business might generate in the future.

Chapter 5 Problem A1

(Bond valuation) A $1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bond’s coupon rate is 7.4%. What is the fair value of this bond?

$897.32

Chapter 5 Problem A16

(Growth rate) Suppose Toshiba has a payout ratio of 55% and an expected return on its future investments of 15%. What is Toshiba’s expected growth rate?

.55-.15=.40x100=40

Chapter 6 Problem B5 (please see attached excel spreadsheet)

(Expected return and risk) General Eclectic Corporation is considering three possible capital investment projects. The projected returns depend on the future state of the economy as given here.

a. Calculate each project’s expected return, variance, and standard deviation.

b. Rank the projects on the basis of (1) expected return and (2) risk. Which project would you choose?

Investment 1 has weighted average return based on the state of Economy and probability of occurrence to achieve the highest weighted rate of return of 15% so I would choose Investment 1.

State of the Economy | Probability of Occurrence | Projected Return |

| | 1 | 2 | 3 |

Recession | 0.20 | 10% | 8% | 12% |

Stable | 0.60 | 15 | 13 | 10 |

Boom | 0.20 | 21 | 25 | 8 |

Chapter 7 Problem C1 (please see attached excel spreadsheet)

(Beta and required return) The riskless return is currently 6%, and Chicago Gear has estimated the contingent returns given here.

a. Calculate the expected returns on the stock market and on Chicago Gear stock.

b. What is Chicago Gear’s beta?...

What is the basic approach that is used to value any asset, including bonds and common stocks?

There are 3 main approaches to valuing assets: book or cost as assets are recorded at actual acquisition cost on the books; the market approach which looks at what the shareholders equity or stock is really worth; and income approach which indicates how much money a business might generate in the future.

Chapter 5 Problem A1

(Bond valuation) A $1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bond’s coupon rate is 7.4%. What is the fair value of this bond?

$897.32

Chapter 5 Problem A16

(Growth rate) Suppose Toshiba has a payout ratio of 55% and an expected return on its future investments of 15%. What is Toshiba’s expected growth rate?

.55-.15=.40x100=40

Chapter 6 Problem B5 (please see attached excel spreadsheet)

(Expected return and risk) General Eclectic Corporation is considering three possible capital investment projects. The projected returns depend on the future state of the economy as given here.

a. Calculate each project’s expected return, variance, and standard deviation.

b. Rank the projects on the basis of (1) expected return and (2) risk. Which project would you choose?

Investment 1 has weighted average return based on the state of Economy and probability of occurrence to achieve the highest weighted rate of return of 15% so I would choose Investment 1.

State of the Economy | Probability of Occurrence | Projected Return |

| | 1 | 2 | 3 |

Recession | 0.20 | 10% | 8% | 12% |

Stable | 0.60 | 15 | 13 | 10 |

Boom | 0.20 | 21 | 25 | 8 |

Chapter 7 Problem C1 (please see attached excel spreadsheet)

(Beta and required return) The riskless return is currently 6%, and Chicago Gear has estimated the contingent returns given here.

a. Calculate the expected returns on the stock market and on Chicago Gear stock.

b. What is Chicago Gear’s beta?...