FIN 4320 Assignment Maths
Assignment for Fin 4320
Problem 1:
Here are data on two companies. The T-Bill rate is 4% and the market risk premium is 6%
CompanyVictoria StoreHouston Store
Forecasted return 12 % and 11 %
Standard Deviation of Returns 8 % and 10 %
Beta 1.5 and 1.0
a. Estimate the expected return for each company according to CAPM
b. Characterize each company as underpriced, overpriced, or properly priced according to CAPM
c. Another company, Sugar Land store, has a beta of 2.0. Assuming efficient market hypothesis
(CAPM holds), estimate the expected rate of return for a portfolio consisting of 1/3 Victoria
stock, 1/3 Houston stock, and 1/3 Sugar Land store.
Prblem 2:
Problem 3:
Sugar Land Co. is a fast growing firm and no dividend will be paid on the stock over the next 9
years. The company then will pay a $12 dividend per share in year 10 and will increase the
dividend by 5 percent forever. If the required rate of return for this stock is 13 %, what should
be the intrinsic value of Sugar Land Co.?
aProblem 4:
Victoria bond is a premium bond with 8% coupon. Houston bond is a 4 % coupon bond currently selling at a discount. Both bonds make annual payments and have a yield to maturity (YTM) of 6%, and have 5 years till maturity.
a. Estimate their prices (Bond prices).
b. Estimate their current yields
c. If interest rates remain unchanged by next year, estimate their prices a year from now.
d. Estimate their first year capital gain yields. Hint: CGY = (P1-P0)/P0
