Instructions

NAME:
To complete the homework assignments in the templates provided:

1. The question is provided for each problem. You may need to refer to your textbook

2. You will enter the required information into the shaded cells.
3. The cells are coded:
a) T requires a text answer. Essay questions require references

b) C requires a calculation, using Excel formulas or functions. You cannot perform

answer in the cell. You will enter the calculation in the cell, and only the final answe
your calculation and correct, if necessary.

c) F requires a number only. In some problems, a Step 1 is added to help you so

d) Formula requires a written formula, not the numbers. For example, the rate of re
(debt) + E (equity) = V (value).

4. Name your assignment file as "lastnamefirstinitial-FINC600-Week#", and submit b

Instructions

ay need to refer to your textbook for additional information in a few cases.

ded cells.

re references; use the textbook.

r functions. You cannot perform the operation on a calculator and then type the
the cell, and only the final answer will show in the cell. I will be able to review

Step 1 is added to help you solve the problem.

bers. For example, the rate of return = [(1 + nominal)/ (1+inflation)]-1, or D

FINC600-Week#", and submit by midnight ET, Day 7.

Problem 7-2
The following table shows the nominal returns on U.S. Stocks and the rate of inflation:

Year

Nominal Return (%)

2004
2005
2006
2007
2008

12.5
6.4
15.8
5.6
-37.2

a)What was the standard deviation of the market returns?

b)Calculate the average real return.

Answers:
a)What was the standard deviation of the market returns?
Find the standard deviation by completing the table with the appropriate formulas
Year

Nominal Return (%)

2004
2005
2006
2007
2008

12.5
6.4
15.8
5.6
-37.2

Total 2004-2008
Average
Std. Deviation

3.1
0.62

b)Calculate the average real return.

Find the average real return by completing the table with the appropriate formulas
Year

Nominal Return (%)

2004
2005
2006
2007

12.5
6.4
15.8
5.6

2008
Average

-37.2

e of inflation:

Inflation (%)
3.3
3.4
2.5
4.1
0.1

he market returns?

e appropriate formulas
Difference from
Average
11.88
5.78
15.18
4.98
-37.82

Squared Difference

TIP: Click on the cell for

directions

141.13
33.41
230.43
24.80
1430.35
1860.12
372.02
19.29

Use SQRT function for this answer only

e appropriate formulas
Inflation (%)

Real Return (%)

3.3
3.4
2.5
4.1

8.9%
2.9%
13.0%
1.4%

TIP: Click on the cell for

directions

0.1

-37.3%
-2.22%

Instructions: Please refer to your book for assistance with your homework. Post your work
in the worksheet. Highlight your final answer.

Problem 7-11

Each of the following statements is dangerous or misleading. Explain why.

a. A long-term United States government bond is always absolutely safe.
b. All investors should prefer stocks to bonds because stocks offer higher long-run rates of return.
c. The best practical forecast of future rates of return on the stock market is a 5- or 10-year average of historical

Answers:

a.

b.

c.

Instructions: Please refer to your book for assistance with your homework. Post your work
in the worksheet. Highlight your final answer.

Instructions: Please refer to your book for assistance with your homework. Post your work
in the worksheet. Highlight your final answer.

of return.
ar average of historical returns.

Instructions: Please refer to your book for assistance with your homework. Post your work
in the worksheet. Highlight your final answer.

Instructions: Please refer to your book for assistance with your homework. Post your work
in the worksheet. Highlight your final answer.
Problem 8-6

Suppose that the Treasury bill rate were 6% rather than 4%. Assume that the expected return on the market stay
in Table 8.2 (p. 193) - also provided below.

a. Calculate the expected return from Dell.

b. Find the highest expected return that is offered by one of these stocks.
c. Find the lowest expected return that is offered by one of these stocks.
d. Would Ford offer a higher or lower expected return if the interest rate were 6% rather than 4%? Assume that th
return stays at 10%.
e. Would Exxon Mobil offer a higher or lower expected return if the interest rate were 8%?

Answers:
Formula
A. Dell's expected return

Rf + (Beta (Rm - Rf))

B./C.
Stock

Beta (B)

Revised T Bill
Risk-Free Rate

Market Return

Amazon

2.16

6%

10%

Ford

1.75

6%

10%

Dell

1.41

6%

10%

Starbucks

1.16

6%

10%

Boeing

1.14

6%

10%

Disney

0.96

6%

10%

Newmont

0.63

6%

10%

Exxon Mobil

0.55

6%

10%

Johnson & Johnson

0.5

6%

10%

Campbell Soup

0.3

6%

10%

B. Highest

Amazon

C. Lowest

Campbell Soup

D. FORD will offer a lower expected return at 6%.

Interest rate

4%

Rate of return

14.50%

6%
13.00%

E. Exxon will offer a higher expected return at 8%.

Interest rate

4%

8%

Rate of return

7.30%

9.10%

Principles of Corporate Finance, Concise, 2nd Edition

Instructions: Please refer to your book for assistance with your homework. Post your work
in the worksheet. Highlight your final answer.

e that the expected return on the market stays at 10%. Use the betas

ocks.
cks.
ate were 6% rather than 4%? Assume that the expected market

nterest rate were 8%?

Calculation
11.64%

Expected
return

14.64%
13.00%
11.64%
10.64%
10.56%
9.84%
8.52%
8.20%
8.00%
7.20%

Higher or lower?

Higher or lower?

Principles of Corporate Finance, Concise, 2nd Edition

Instructions: Please refer to your book for assistance with your homework. Post your work
in the worksheet. Highlight your final answer.
Problem 8-18
Some true or false questions about the APT:
a. The APT factors cannot reflect diversifiable risks.
b. The market rate of return cannot be an APT factor.
c. There is no theory that specifically identifies the APT factors.
not very useful, for example, if the relevant factors change unpredictably.
Respond to each question - true or false - and why.

Answer:
T/F
a.

WHY?

b.

WHY?

c.

WHY?

d. The A

WHY?

Instructions: Please refer to your book for assistance with your homework. Post your work
in the worksheet. Highlight your final answer.

d.

WHY?

Instructions: Please refer to your book for assistance with your homework. Post your work
in the worksheet. Highlight your final answer.

d. The APT model could be true but

Instructions: Please refer to your book for assistance with your homework. Post your work
in the worksheet. Highlight your final answer.