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##### FIN 540 week 6

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Question;FIN 540 ? Homework Chapter 25;? 2013 Strayer University. All Rights;Reserved. This document contains Strayer University Confidential and;Proprietary information;and may not be copied, further distributed;or otherwise disclosed in whole or in part, without the expressed written;permission of;Strayer University.;FIN 540 Homework Chapter 25! Page 1 of 2!;Directions: Answer the following five;questions on a separate document. Explain how you reached the;answer or show your work if a mathematical;calculation is needed, or both. Submit your assignment using;the assignment link in the course shell.;Each question is worth five points apiece for a total of 25 points;for this homework assignment.;1. For markets to be in equilibrium (that;is, for there to be no strong pressure for prices to depart;from their current levels);a. The past realized rate of return must be;equal to the expected rate of return, that is,.;b. The required rate of return must equal;the realized rate of return, that is, r =.;c. All companies must pay dividends.;d. No companies can be in danger of;declaring bankruptcy.;e. The expected rate of return must be;equal to the required rate of return, that is, = r.;2. In a portfolio of three different;stocks, which of the following could NOT be true?;a. The riskiness of the portfolio is;greater than the riskiness of one or two of the stocks.;b. The beta of the portfolio is less than;the betas of each of the individual stocks.;c. The beta of the portfolio is greater;than the beta of one or two of the individual stocks;betas.;d. The beta of the portfolio cannot be;equal to 1.;e. The riskiness of the portfolio is less;than the riskiness of each of the stocks if they were;held in isolation.;3. You have the following data on (1) the;average annual returns of the market for the past 5 years;and (2) similar information on Stocks A and;B. Which of the possible answers best describes the;historical betas for A and B?;Years Market Stock A Stock B;1 0.03 0.16 0.05;2?0.05 0.20 0.05;3 0.01 0.18 0.05;4?0.10 0.25 0.05;5 0.06 0.14 0.05;a. bA > +1, bB = 0.;b. bA = 0, bB =?1.;c. bA < 0, bB = 0.;d. bA 0, bB = 1.;FIN;540 ? Homework Chapter 25;? 2013 Strayer University. All Rights;Reserved. This document contains Strayer University Confidential and;Proprietary information;and may not be copied, further distributed;or otherwise disclosed in whole or in part, without the expressed written;permission of;Strayer University.;FIN 540 Homework Chapter 25! Page 2 of 2!;4. Which of the following statements is;CORRECT?;a. The typical R2;for;a stock is about 0.94 and the typical R2;for;a portfolio is about 0.6.;b. The typical R2;for;a stock is about 0.3 and the typical R2;for;a large portfolio is about 0.94.;c. The typical R2;for;a stock is about 0.94 and the typical R2;for;a portfolio is also about;0.94.;d. The typical R2;for;a stock is about 0.6 and the typical R2;for;a portfolio is also about 0.6.;e. The typical R2;for;a stock is about 0.3 and the typical R2;for;a portfolio is also about 0.3.;5. Which of the following statements is;CORRECT?;a. The characteristic line is the;regression line that results from plotting the returns on a;particular stock versus the returns on a;stock from a different industry.;b. The slope of the characteristic line is;the stock's standard deviation.;c. The distance of the plot points from the;characteristic line is a measure of the stock's;market risk.;d. The distance of the plot points from the;characteristic line is a measure of the stock's;diversifiable risk.;e. "Characteristic line" is;another name for the Security Market Line.;FIN 540 ? Homework Chapter 26;? 2013 Strayer University. All Rights;Reserved. This document contains Strayer University Confidential and;Proprietary information;and may not be copied, further distributed;or otherwise disclosed in whole or in part, without the expressed written;permission of;Strayer University.;FIN 540 Homework Chapter 26! Page 1 of 2!;Directions: Answer the following five;questions on a separate document. Explain how you reached the;answer or show your work if a mathematical;calculation is needed, or both. Submit your assignment using;the assignment link in the course shell.;Each question is worth five points apiece for a total of 25 points;for this homework assignment.;1. Which of the following is NOT a real;option?;a. The option to buy shares of stock if its;price goes up.;b. The option to expand into a new;geographic region.;c. The option to abandon a project.;d. The option to switch the type of fuel;used in an industrial furnace.;e. The option to expand production if the;product is successful.;2. Which of the following will NOT increase;the value of a real option?;a. An increase in the volatility of the;underlying source of risk.;b. An increase in the risk-free rate.;c. An increase in the cost of obtaining the;real option.;d. A decrease in the probability that a;competitor will enter the market of the project in;question.;e. Lengthening the time in which a real;option must be exercised.;3. Which of the following is most CORRECT?;a. Real options change the risk, but not;the size, of projects' expected cash flows.;b. Real options are likely to reduce the;cost of capital that should be used to discount a;project's expected cash flows.;c. Very few projects actually have real;options.;d. Real options are less valuable when;there is a lot of uncertainty about the true values;future sales and costs.;e. Real options change the size, but not;the risk, of projects' expected cash flows.;4. Ashgate Enterprises uses the NPV method;for selecting projects, and it does a reasonably good;job of estimating projects' sales and;costs. However, it never considers real options that might be;associated with projects. Which of the;following statements is most likely to describe its situation?;a. Its estimated capital budget is probably;too large due to its failure to consider;abandonment and growth options.;b. Failing to consider abandonment and;flexibility options probably makes the optimal;capital budget too large, but failing to;consider growth and timing options probably makes;the optimal capital budget too small, so it;is unclear what impact not considering real;options has on the overall capital budget.;c. Failing to consider abandonment and;flexibility options probably makes the optimal;capital budget too small, but failing to;consider growth and timing options probably makes;the optimal capital budget too large, so it;is unclear what impact not considering real;options has on the overall capital budget.;d. Real options should not have any effect;on the size of the optimal capital budget.;e. Its estimated capital budget is probably;too small, because projects' NPVs are often;larger when real options are taken into;account.;FIN;540 ? Homework Chapter 26;? 2013 Strayer University. All Rights;Reserved. This document contains Strayer University Confidential and;Proprietary information;and may not be copied, further distributed;or otherwise disclosed in whole or in part, without the expressed written;permission of;Strayer University.;FIN 540 Homework Chapter 26! Page 2 of 2!;5. Refer to Exhibit 26.1. Since the project;is considered to be quite risky, a 20% cost of capital is;used. What is the project's expected NPV;in thousands of dollars?;a. $336.15;b. $373.50;c. $415.00;d. $461.11;e. $507.22

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