Running Head: ASSIGNMENT 3 1

Basic Corporate Finance for Managers

DPS 51076 1701

Assignment 3

Nitika Bansal

3085643

Submitted to: Rosalie Harms and Peter Moreira

September 22, 2017

ASSIGNMENT 3 2

CHAPTER 10.

Question 10.10

a. In case the market is not weak form efficient (Case 1), this information can be used to

earn profit from the increase in stock price. However, in cases 2, 3, and 4, this

information is fully reflected in the present stock price, so it cannot be used to earn any

abnormal profit from this.

b. In case 2, stock can be brought at cheaper price using this information, before anyone

could notice anomalies in the companys inventory and cost control reporting techniques.

Since case 2 is stronger than case1, it implies that a profit earning opportunity exists in

both of these scenarios. However, in cases 3 and 4, this information is fully reflected in

the current stock price and hence cannot be used to earn any profit opportunity.

c. In case 3, this information can be used as profit earning opportunity. The basic reasons

for this activity of senior management (buying a lot of companys stock in the open

market over the past week) are:

I. There can be under-valuation of price or

II. Some announcements are going to happen.

Since cases 1 and 2 are weaker than 3rd, all three shows that there is some profit

opportunity using this information.

There is an assumption that only the senior management is aware of the trading in

market. However, if this insider trading information is public, it will be reflected in the
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current stock price and there will be no profit opportunity. So under case 4, there is no

profit opportunity for traders.

Question 3.

Total Dollar Return= Dividend Income-Capital Loss=$1.40-(83-76)=$-5.6

% Return= Dividend yield + Capital gain yield=Dt+1/Pt + (Pt+1-Pt)/Pt

=(1.4/83) + (76-83)/83=1.69% + (-8.43%)=-6.74%

Question 4.

Dividend =9% of 1000=$90

a) Total dollar return= Dividend Income + Capital Gain=90+(1074-1120)=$44

b) % Return= Dividend yield + Capital gain yield=Dt+1/Pt + (Pt+1-Pt)/Pt

= (90/1120) + (1074-1120)/1120=8.04% - 4.11%=3.93%

c) Fishers effect= (1+R)=(1+r) * (1+h)

Where r is real rate of interest

R is nominal rate

h is inflation rate

(1+0.0393)=(1+r) * (1+0.03)

1.0393=(1+r) * 1.03

(1+r)=1.0393/1.03=1.00903

r=0.00903=0.903%
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CHAPTER 11.

Question 11.1

The unsystematic (diversifiable) risks are unique to individual assets, which tend to wash out in a

large portfolio by diversification, but systematic (non-diversifiable) risks, which affect all of the

assets in a portfolio to some extent do not wash out. Since, unsystematic risk can be freely

eliminated by diversification, an investor can control the level of unsystematic risk in a portfolio,

but not the level of systematic risk.

Question 11.4

a.) It might cause stocks in general (affecting large number of assets) to change price, because of

unexpected occurrence (surprised announcement).

b.) It might cause Big Widget Corp.s stock to remain same, because the report is as per the general

expectations by analysts.

c.) It might cause stocks in general (affecting large number of assets) to remain same, because the

report is as per the most economists forecasts.

d.) It might cause Big Widget Corp.s stock to change, because it is a sudden accident for this

company (surprise).

e.) It might cause stocks in general (affecting large number of assets) to remain same, because the

issue has been in debate since the past six months. It is not a surprise for people.

Question11.
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Portfolio Beta, p=(0.20)(0.73) + (0.20)(0.86) + (0.10)(1.25) +

(0.50)(1.84)=0.146+0.172+0.125+0.92=1.363

Question 12.

Let beta for other stock be x

Beta for risk free asset is 0.

1=(1/3)(1.9) + (1/3)(x) + (1/3)(0)

1=(1.9 + x)/3

x=1.1

Beta for other stock must be 1.10.

Question 13.

Beta=1.2, risk free rate=5%, expected return on market=13%

Expected return on stock=E(Ri) = Rf + [E(RM) Rf] i

=5% + [(13%-5%)*1.2]=5%+9.6%=14.6%