Question: Demonstrate your understanding of financial concepts by completing the following problems. Where appropriate, show or explain your work. You may use Excel to work on the problems.
Calculating returns: Last year you bought a share of 7.25 percent preferred stock for $63.75. Your stock's market price is now $66.92.
Calculate your total return for last year.
Calculating returns: You bought a stock three months ago for $24.87 per share. The stock pays no dividends and is currently priced at $26.35. Calculate the APR of your investment. What is the effective annual rate (EAR)?
Determining portfolio weights: A portfolio contains 65 shares of Stock A selling for $32 per share and 175 shares of Stock B selling for $26 per share. Calculate the portfolio weight for each stock.
Portfolio expected return: You own a portfolio that has $4,600 invested in Stock Y and $5,200 invested in Stock Z. What is the expected return on the portfolio if the expected returns on these stocks are 9.75 percent and 16.50 percent?
Using the capital asset pricing model (CAPM): A stock has a beta of 1.65, and the projected return on the market is 12.25 percent, with a risk-free rate of 4.75 percent. Calculate the projected return on this stock.
Calculating cost of equity: The Denton Corporation's common stock has a beta of 1.45 and a risk-free rate of 5.75 percent. What is Denton's cost of equity if the projected return on the market is 13 percent?
Calculating the weighted average cost of capital (WACC): If Metro Company has the following features, what is its WACC?
A target capital structure of 65 percent common stock.
A target of 35 percent debt.
Cost of equity is 14 percent.
Cost of debt is 6 percent.
The tax rate is 35 percent.