FIN 3715 Chapter Notes - Chapter 6: Market Risk, Standard Deviation, Capital Asset

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5 May 2015

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To calculate the holding-period dollar gain, you take the price at the end of the period plus the cash distribution (dividend) and subtract the price at the beginning of the period. If you want to calculate the holding-period rate of return (also called the historical or realized rate of return), you would use the formula below. Investors face daily the risk return trade off of what they expect an investment to earn for them in the future. They are not so concerned with the realized rate of return. When looking at the expected cash flow, you need to remember that it is only the weighted average of the cash flow that is possible. You can expect cash flows from various investments, however you need to remember that there are numerous possible outcomes from the investments that you made. To calculate the expected cash flow, you would use the formula below; adding as many states as needed.

Related Questions

Consider the following mutually exclusive pieces of equipment that perform the same task. The
two alternatives available provide the following set of after-tax net cash flows:

Year	Cash Flow(A)	Cash Flow(B)
0	-$120,000	-$120,000
1	23,000	25,000
2	23,000	25,000
3	23,000	25,000
4	32,000	25,000
5	32,000	25,000
6	32,000	25,000
7		25,000
8		25,000
9		25,000

Equipment A has an expected life of six years, whereas equipment B has an expected life of nine years.
Assume a required rate of return of 8 percent.
a. Calculate each equipmentâs payback period. (2 points)
b. Calculate each equipmentâs discounted payback period. (4 points)
c. Calculate each equipmentâs Net Present Value (NPV). (4 points)
d. Calculate each equipmentâs internal rate of return. (4 points)
e. How would you rank the investments based on the NPV criterion? (1 point)
f. How would you rank the investments based on the IRR criterion? (1 point)
g. The ________ assumes the reinvestment of funds at a rate equal to the equipmentâs
IRR. (1 point)
h. The _______ assumes the reinvestment of funds at the firmâs cost of capital. (1 point)

bronzewoodchuck346

The YTM on a bond is the interest rate you earn on your investment if interest rates donât change. If you actually sell the bond before it matures, your realized return is known as the holding period yield(HPY).

a. Suppose that today you buy an annual coupon bond with a coupon rate of 8.2 percent for $845. The bond has 10 years to maturity and a par value of $1,000. What rate of return do you expect to earn on your investment? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Rate of return 10.75%

Two years from now, the YTM on your bond has declined by 1 percentage point, and you decide to sell.

b. What price will your bond sell for? (Do not round intermediate calculations and round your answer to 2decimal places, e.g., 32.16.)

Price $ 922.5

What is the HPY on your investment? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Holding period yield %

I need the holding period yield. I entered 10.81% and tried 11.81% but they were wrong. Please give me the correct answer. Thanks

You are analyzing Jillianâs Jewelry (JJ) stock for a possible purchase. JJ just paid a dividend of $1.00 yesterday. You expect the dividend to grow at the rate of 7% per year for the next 3 years, if you buy the stock; you plan to hold it for 3 years and then sell it.

A. What dividends do you expect for JJ stock over the next 3 years? In other words, calculate D1, D2 and D3. Note that D0 = $1.00. Round your answers to the nearest cent.

D1 = $

D2 = $

D3 = $

B. JJ's stock has a required return of 12%, and so this is the rate you'll use to discount dividends. Find the present value of the dividend stream; that is, calculate the PV of D1, D2, and D3, and then sum these PVs. Round your answer to the nearest cent. $

C. JJ stock should trade for $26.22 3 years from now (i.e., you expect = $26.22). Discounted at a 12% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $26.22. Round your answer to the nearest cent. $

D. If you plan to buy the stock, hold it for 3 years, and then sell it for $26.22, what is the most you should pay for it? Round your answer to the nearest cent. $

E. Use the constant growth model to calculate the present value of this stock. Assume that g = 7%, and it is constant. Round your answer to the nearest cent. $

F. Is the value of this stock dependent on how long you plan to hold it? In other words, if your planned holding period were 2 years or 5 years rather than 3 years, would this affect the value of the stock today, ? Explain your answer (choices I - V seen below).

I. Yes. The value of the stock is dependent upon the holding period. The value calculated in Parts a through d is the value for a 3-year holding period. It is not equal to the value calculated in Part e. Any other holding period would produce a different value of .

II. Yes. The value of the stock is dependent upon the holding period due to the fact that the value is determined as the present value of all future expected dividends.

III. No. The value of the stock is not dependent upon the holding period unless the growth rate remains constant for the foreseeable future.

IV. No. The value of the stock is not dependent upon the holding period. The value calculated in Parts a through d is the value for a 3-year holding period. It is equal to the value calculated in Part e. Any other holding period would produce the same value of .

V. Yes. The value of the stock is dependent upon the holding period as long as the growth rate remains constant for the foreseeable future.

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FIN 3715 Chapter Notes - Chapter 6: Market Risk, Standard Deviation, Capital Asset

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