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Sheet1

he following table shows the nominal returns on U.S.

s and the rate of inflation:

2.5

alculate the average real return.

a)     What was the standard deviation of the market returns?

ind the standard deviation by completing the table with the appropriate formulas

Year Nominal Return (%)

2004

C C

2005 6.4 C C
2006 15.8 C C
2007 5.6 C C
2008 -37.2 C C

C C

Average C C

C

Year Nominal Return (%) Inflation (%)

TIP: Click on the cell for directions

2004 12.5 3.3 C
2005 6.4 3.4 C
2006 15.8 2.5 C
2007 5.6 4.1 C
2008 -37.2 0.1 C
Average C

																																																																																																																																																									Problem 7-2
				T	Stock
		Year			Nominal Return (%)		Inflation (%)
		2004	1		2.5		3.3
		2005			6.4		3.4
		2006			15.8
		2007			5.6		4.1
		2008			-37.2		0.1
	a)     What was the standard deviation of the market returns?
b)																																											C
			Answers:
																							F
Difference from		Average	Squared Difference		TIP: Click on the cell for directions
	12.5
Total 2004-2008
Std. Deviation	Use SQRT function for this answer only
b)     Calculate the average real return.
Find the average real return by completing the table with the appropriate formulas
Real Return (%)

Sheet2

rather than

. Assume that the expected return on the market stays at

. Use the betas in Table 8.2 (p. 193) – also provided below.

Calculate the expected return from

.

Find the highest expected return that is offered by one of these stocks.
c. Find the lowest expected return that is offered by one of these stocks.
d. Would

offer a higher or lower expected return if the interest rate were 6% rather than 4%? Assume that the expected market return stays at 10%.
e. Would

offer a higher or lower expected return if the interest rate were

?

Answers:

(Rm – Rf))

C

Stock

F F C

Ford

F F C

Dell

F F C

F F C

F F C

F F C

F F C

Exxon Mobil

5

F F C

0.5 F F C

F F C

T

T

4% 6%

C C

Higher or lower?

Interest rate 4% 8%

Rate of return C C

Problem 8-6
Suppose that the Treasury bill rate were	6%		4%	10%
		a.	Dell		b.	Ford	Exxon Mobil		8%
Formula			Calculation
A. Dell’s expected return	Rf + (	Beta
B./C.
Beta (B)	Revised T Bill Risk-Free Rate	Market Return	Expected return
Amazon	2.16
1.75
1.41
Starbucks	1.16
Boeing	1.14
Disney	0.96
Newmont	0.63
		0.5
Johnson & Johnson
Campbell Soup	0.3
B. Highest
C. Lowest
D. FORD will offer a ________ expected return at 6%.		Higher or lower?
	Interest rate
	Rate of return
E. Exxon will offer a _______ expected return at 8%.

Sheet3

financed by risk-free debt. The interest rate is 10%, the expected market risk premium is 8%, and the beta of the company’s common stock is .5.

Beta

40% 10% 8% 0.5

, assuming that the company pays tax at a 35% rate?

Answers:

F

C

C

C

a.

Calculation

T C

b. WACC T C

Problem 9-2
A company is	40%
Risk Free Debt	Interest Rate	Market Risk Premium	Taxes
35%
a.      What is the company cost of capital?
b.      What is the after-tax	WACC
Step 1:
r(d)=
r(e)=
D/V	TIP: D + E = V
E/V
Step 2:
Formula (in words)
Cost of Capital

Sheet4

Answers:

Calculation

a.

F C

b. 1+(Fixed cost + depreciation)/ operating profit F C

Problem 10-14
Suppose that the expected variable costs of Otobai’s project are ¥33 billion a year and that fixed costs are zero. a. How does this change the degree of operating leverage (DOL)? b. Now recompute the operating leverage assuming that the entire ¥33 billion of costs are fixed.
See page 243, Table 10.1, of textbook for additional information. Copy is also provided below.
DOL Formula	Fixed Costs
	1+(Fixed cost + depreciation)/ operating profit