Essentials of Corporate Finance

Stephen Ross, Bradford D. Jordan

Chapter 10 Some Lessons from Capital Market History - all with Video Answers

Educators

Chapter Questions

Problem 1

Calculasing fiseturas. Suppose a stock had an initial price of $\$ 78$ per share, paid a dividend of $\$ 1.25$ per share during the year, and had an ending share price of $\$ 87$ Compute the percentage total return.

Amy Monaghan

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06:40

Problem 2

In Problem $1,$ what was the dividend yieid? The capital gains yield?

Ankit Gupta

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00:46

Problem 3

Problems I and 2 assuming the ending share price is $\$ 71$

Heather Zimmers

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02:39

Problem 4

Caiculating Returns. Suppose you bought an 8 percent coupon bond one year
ago for $\$ 1,090 .$ The bond sells for $\$ 1,063$ today.
a. Assuming a $\$ 1,000$ face value, what was your total dollar return on this investment over the past year?
b. What was your total nominal rate of return on this investment over the past year?
c. If the inflation rate last year was 3 percent, what was your total real rate of return on this investment?

Anand Jangid

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01:25

Problem 5

What was the arithmetic average annual return on large-company stock from 1926 through 2006 :
a. In nominal terms?
b. In real terms?

Lucas Finney

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02:55

Problem 6

What is the historical real return on long-term government bonds? On long-term corporate bonds?

Rashmi Sinha

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02:52

Problem 7

Using the following returns, calculate the average returns, the variances, and the standard deviations for $X$ and $Y$

Ivan Kochetkov

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03:05

Problem 8

Refer to Table 10.1 in the text and look at the period from 1973 through 1978
a. Calculate the arithmetic average returns for large-company stocks and T-bills over this time period.
b. Calculate the standard deviation of the retarns for large-company stocks and T-bills over this time period.
c. Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. What was the arithmetic average risk premium over this period? What was the standard deviation of the risk premium over this period?
d. Is it possible for the risk premium to be negative before an investment is undertaken? Can the risk premium be negative after the fact? Explain.

Sheryl Ezze

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01:21

Problem 9

You've observed the following returns on Hacker Corporation's stock over the past five years: -25 percent, 36 percent,
9 percent, 11 percent, and 17 percent.
a. What was the arithmetic average return on the stock over this five-year period?
b. What was the variance of the returns over this period? The standard deviation?

Christopher Stanley

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01:06

Problem 10

Premiams. For Problem 9 , suppose the average inflation rate over this period was 4.2 percent and the average $T$ -bill rate over the period was 5.1 percent.
a. What was the average real return on the stock?
b. What was the average nominal risk premium on the stock?

Cory Kuzinski

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03:27

Problem 11

Calculating Real Rates. Given the information in Problem $10,$ what was the average real risk-free rate over this time period? What was the average real risk premium?

James Kiss

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02:30

Problem 12

Look at Table 10.1 and Figure 10.7 in the text. When were T-bill rates at their highest over the period from 1926 through 2006 ? Why do you think they were so high during this period? What relationship underlies your answer?

Cheyenne Whinham

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01:23

Problem 13

You purchased a zero-coupon bond one year ago for $\$ 162.87$. The market interest rate is now 9 percent. If the bond had 20 years to maturity when you originally purchased it, what was your total return for the past year?

Jennifer Stoner

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04:49

Problem 14

You bought a share of 6 percent preferred stock for $\$ 95.12$ last year. The market price for your stock is now $\$ 93.80 .$ What is your total return for last year?

Oluwadamilola Ameobi

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05:42

Problem 15

You bought a stock three months ago for $\$ 41.05$ per share. The stock paid no dividends. The current share price is $\$ 46.81 .$ What is the APR of your investment? The EAR?

Carson Merrill

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02:09

Problem 16

Refer to Table $10.1 .$ What was the average real return for Treasury bills from 1926 through $1932 ?$

Kaylee Mcclellan

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01:08

Problem 17

Refer back to Figure $10.10 .$ What range of returns would you expect to see 68 percent of the time for long-term corporate bonds? What about 95 percent of the time?

Monica Miller

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Problem 18

Refer back to Figure $10.10 .$ What range of returns would you expect to see 68 percent of the time for large-company stocks? What about 95 percent of the time?

Rashmi Sinha

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03:27

Problem 19

You find a certain stock that had returns of 13 percent, -18 percent, 9 percent, and 36 percent for four of the last five years. If the average return of the stock over this period was 11 percent, what was the stock's return for the missing year? What is the standard deviation of the stock's returns?

Jeremy Stubbs

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01:23

Problem 20

A stock has had returns of 36 percent, 19 percent, 27 percent, -7 percent, 6 percent, and 13 percent over the last six years. What are the arithmetic and geometric returns for the stock? What are the arithmetic and geometric returns for the stock?

Liuxi Sun

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03:19

Problem 21

Artebometic and Geometric Peicriss. A stock has had the following year-end
prices and dividends: What are the arithmetic and geometric returns for the stock?

Julie Silva

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03:50

Problem 22

Refer to Table 10.1 in the text and look at the period from 1973 through 1980
a. Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index) for this period.
b. Calculate the standard deviation of Treasury bill returns and inflation over this time period. c. Calculate the real return for each year. What is the average real return for Treasury bills?
d. Many people consider Treasury bills to be risk-free. What does this tell you about the potential risks of Treasury bills?

Melissa A

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02:46

Problem 23

You bought one of Rocky Mountain Manufacturing Co.'s 8 percent coupon bonds one year ago for $\$ 1,028.50 .$ These bonds make annual payments and mature nine years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 7 percent. If the inflation rate was 4.8 percent over the past year, what would be your total real return on investment?

Dale Sanford

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01:36

Problem 24

Suppose the returns on long-term government bonds are normally distributed. Based on the historical record, what is the approximate probability that your retum on these bonds will be less than -3.4 percent in a given year? What range of returns would you expect to see 95 percent of the time? What range would you expect to see 99 percent of the time?

Jennifer Stoner

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01:36

Problem 25

Assuming that the returns from holding small company stocks are normally distributed, what is the approximate probability that your money wili double in value in a single year? What about triple in value?

Jennifer Stoner

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01:12

Problem 26

In the previous problem, what is the probability that the return is less than -100 percent (think)? What are the implications for the distribution of retums?

Sheryl Ezze

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01:54

Problem 27

Suppose the returns on Iarge-company stocks are normally distributed. Based on the historical record, use the NORMDIST function in Excel $^{\otimes}$ to determine the probability that in any given year you will lose money by investing in common stock.

Nick Johnson

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02:14

Problem 28

Suppose the returns on long-term corporate bonds and T-bills are normally distributed. Based on the historical record, use the NORMDIST function in Excel $^{\oplus}$ to answer the following questions:
a. What is the probability that in any given year, the return on long-term corporate bonds will be greater than 10 percent? Less than 0 percent?
b. What is the probability that in any given year, the return on T-bills will be greater than 10 percent? Less than 0 percent?
c. $\quad$ In 1979 , the return on long-term corporate bonds was -4.18 percent. How likely is it that such a low return will recur at some point in the future? T-bills had a return of 10.32 percent in this same year. How likely is it that such a high return on T-bills will recur at some point in the future?

Nick Johnson

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