| Table 1 Estimated Total Returns | |||||
| State of the Economy | Probability | T-Bond | SETX | Golden | S&P 500 |
| Recession | 5% | 5% | -19% | 20% | -14% |
| Below Average | 15% | 5% | 2% | 13% | 3% |
| Average | 45% | 5% | 9% | 10% | 11% |
| Above Average | 25% | 5% | 34% | 5% | 22% |
| Boom | 10% | 5% | 25% | -5% | 33% |
SETX's A-Rated bonds yield 7.35%. What is the required return on SETX's stock using the bond risk premium method? (Assume 6% premium)
According to the Bond Risk Premium Method;
Required Return = Bond Yield + Risk Premium = 7.35% + 6% = 13.35%
Table 1 Estimated Total Returns State of the Economy Probability T-Bond SETX Golden S&P 500 Recession 5% 5% -19% 20% -14% Below Average 15% 5% 2% 13% 3% Average 45% 5% 9% 10% 11% Above Average 25% 5% 34% 5% 22% Boom 10% 5% 25% -5% 33% Golden's AA-Rated bonds yield 5.95%. What is the required return on Golden's stock using the bond risk premium method? (Assume 6% premium)
Table 1 Estimated Total Returns State of the Economy Probability T-Bond SETX Golden S&P 500 Recession 5% 5% -19% 20% -14% Below Average 15% 5% 2% 13% 3% Average 45% 5% 9% 10% 11% Above Average 25% 5% 34% 5% 22% Boom 10% 5% 25% -5% 33% Why is the T-bond return in table 1 shown to be independent of the state of the economy? Is the return on a 1-year T-bond risk-free?
Table 1 Estimated Total Returns State of the Economy Probability T-Bond SETX Golden S&P 500 Recession 5% 5% -19% 20% -14% Below Average 15% 5% 2% 13% 3% Average 45% 5% 9% 10% 11% Above Average 25% 5% 34% 5% 22% Boom 10% 5% 25% -5% 33% SETX expects to have $2.72 in earnings next year. SETX had $1.95 in earnings 4 years ago. What should SETX sell for? If it sells for $25, should you buy?
Table 1 Estimated Total Returns State of the Economy Probability T-Bond SETX Golden S&P 500 Recession 5% 5% -19% 20% -14% Below Average 15% 5% 2% 13% 3% Average 45% 5% 9% 10% 11% Above Average 25% 5% 34% 5% 22% Boom 10% 5% 25% -5% 33% Golden expects to have $1.45 in earnings next year. Golden had $1.30 in earnings 3 years ago. What should Golden sell for?
Table 1 Estimated Total Returns State of the Economy Probability T-Bond SETX Golden S&P 500 Recession 5% 5% -19% 20% -14% Below Average 15% 5% 2% 13% 3% Average 45% 5% 9% 10% 11% Above Average 25% 5% 34% 5% 22% Boom 10% 5% 25% -5% 33% Calculate the standard deviations and coefficients of variation of returns for the four alternatives. What type of risk do these statistics measure? Is the standard deviation or the coefficient of variation the better...
Table 1 Estimated Total Returns State of the Economy Probability T-Bond SETX Golden S&P 500 Recession 5% 5% -19% 20% -14% Below Average 15% 5% 2% 13% 3% Average 45% 5% 9% 10% 11% Above Average 25% 5% 34% 5% 22% Boom 10% 5% 25% -5% 33% Golden expects to pay $0.85 in dividends next year. Golden paid $0.67 in dividends 5 years ago. What should Golden sell for? If it sells for $14, should you buy? If Value Line...
Table 1 Estimated Total Returns State of the Economy Probability T-Bond SETX Golden S&P 500 Recession 5% 5% -19% 20% -14% Below Average 15% 5% 2% 13% 3% Average 45% 5% 9% 10% 11% Above Average 25% 5% 34% 5% 22% Boom 10% 5% 25% -5% 33% Notwithstanding the Value Line report, suppose SETX's long-term debt ratio (Long-term debt/Total assets) decreased during the period 2002 through 2012. Further, suppose this ratio was projected to continue decreasing in 2013 and beyond....
Table 1 Estimated Total Returns State of the Economy Probability T-Bond SETX Golden S&P 500 Recession 5% 5% -19% 20% -14% Below Average 15% 5% 2% 13% 3% Average 45% 5% 9% 10% 11% Above Average 25% 5% 34% 5% 22% Boom 10% 5% 25% -5% 33% Value Line indicates that non-utility businesses will account for much of SETX's earnings growth. Suppose Value Line specified that an increasing portion of SETX's assets would be devoted to non-regulated businesses in the...
Table 1 Estimated Total Returns State of the Economy Probability T-Bond SETX Golden S&P 500 Recession 5% 5% -19% 20% -14% Below Average 15% 5% 2% 13% 3% Average 45% 5% 9% 10% 11% Above Average 25% 5% 34% 5% 22% Boom 10% 5% 25% -5% 33% Calculate the expected rate of return on each of the four alternatives listed in Table 1. Based solely on expected returns, which of the potential investments appears best? Based on the coefficient of...
Stock A has the following returns for various states of the economy: State of the Economy Probability Stock A's Return Recession 5% 15% Below Average 25% -2% Average 40% 9% Above Average 25% 14% Boom 5% 30% Stock A's expected return is: 8.85% 6.60% 7.35% 8.35%