Security A has a 9% expected return, 65% standard deviation. Security B has a 7%
ID: 2773071 • Letter: S
Question
Security A has a 9% expected return, 65% standard deviation. Security B has a 7% return, 50% standard deviation.
a Using standard deviation data alone, which security is considered more risky?
b Using co-efficient of variation as your sole analysis, which is the best choice of Security?
c How would you explain co-efficient of variation?
You are looking at investing in SML Industries stock. Risk free rate is 2%, rm is 11%, Beta is 1.2. Growth is 4%. Do is $3.00. Current price is $75
a Using CAPM, what is the required return?
b Using constant growth valuation, what is the expected return?
c Should I buy this stock?
You have been asked to analyze the following potential project. The expected cash flow stream is $20,000 for year 1 with an expected 4% growth rate per year for the next 3 years.
a If your cost of capital is 10%, how much would you be willing to invest in this 4 year project?
b if the upfront cost of the project was $70,000, should you say yes to the project?
Explanation / Answer
I don’t know Question 1. Also As per Chegg Guidelines we answer one question per post. I have answered more than 1 question. Kindly post remaining questions in separate post to get the best answers As per CAPM Risk free rate, Rf 2% Return on market, Rm 11% Beta, B 1.20 ke= Rf +B(rm-rf) ke= 2% + 1.2(11%-2%) ke = 2% + 10.8% ke= 12.8% As per constat Growth Growth g 4% D0 3.00 Price 75.00 ke = D1/P0 + g ke = 3.12/75 + 4% ke = 8.16% Statemnet showing Cash flows Particulars Time PVf@10% Amount PV Cash inflows 1.00 0.9091 20,000.00 18,181.82 Cash inflows 2.00 0.8264 20,800.00 17,190.08 Cash inflows 3.00 0.7513 21,632.00 16,252.44 Cash inflows 4.00 0.6830 22,497.28 15,365.94 PV of Cash Inflows 66,990.29 Maximum investment would be $66,990.29 No we would not invest if upfornt cost is 70,000 since NPV would be negative 3,009.71 (70,000-66,990.29)