The common stock of Leaning Tower of Pita Inc., a restaurant chain, will generat
ID: 3147024 • Letter: T
Question
The common stock of Leaning Tower of Pita Inc., a restaurant chain, will generate payoffs to Investors next year, which depend on the state of the economy, as follows: Stock Dividend Price $ 8 4 $240 90 Boom Normal economy Recession The company goes out of business If a recession hits. Assume for simplicity that the three possible states of the economy are equally likely. The stock Is selling today for $80. a-1. Calculate the rate of return to Leaning Tower of Pita shareholders for each economic state. (Negative amounts should be Indicated by a minus sign. Enter your answers as a percent rounded to 2 decimal places.) Rate of return Boom Normal economy Recession a-2. Calculate the expected rate of return and standard devlation of return to Leaning Tower of Pita shareholders. (Do not round Intermediate calculatlons. Enter your answers as a percent rounded to 2 decimal places.) Expected return Standard deviationExplanation / Answer
a.1 Rate of return to Pita shareholders
(a) For Boom Period:
Total Earings on one stock = Dividend + stock price = 8 + 248 = $ 248
Rate of return = (248 - 80)/80 = 210%
For Normal Period
Earning on one stock = DIvidend + stock price = 4 + 90 = $ 94
Rate of return = (94 - 80)/ 80 = 17.5%
For Recession Period
Rate of return = (0 - 80)/ 80 = -100%
(a-2) Expected return = sum of respective probabilities multplied by expected return
= 1/3 * [210 + 17.5 - 100] = 42.5%
Variance = 1/3 * [ (210 - 42.5)2 + (17.5 - 42.5)2 + (42.5 + 100)2 ]
= 16329.16667
Standard deviation = $ 127.79