Comparing Arithmetic Mean Rate of Return Assignment Help With Solution

Comparing Arithmetic Mean Rate of Return Assignment Help

 
1.The following are annual rates of return for U.S. government T-bills and U.K. common stocks.
 

Year U.S. Government T-Bills U.K. Common Stock
2003 0.063 0.15
2004 0.081 0.043
2005 0.076 0.374
2006 0.09 0.192
2007 0.085 0.106

 
a. Compute the arithmetic mean rate of return and standard deviation of rates of return for the two series.
 
b. Discuss these two alternative investments in terms of their arithmetic average rates of return, their absolute risk, and their relative risk.
 
c. Compute the geometric mean rate of return for each of these investments. Compare the arithmetic mean return and geometric mean return for each investment and discuss this difference between mean returns as related to the standard deviation of each series.
 
 
2.During the past five years, you owned two stocks that had the following annual rates of return:
 

Year

Stock T

Stock B
1

0.19

0.08
2

0.08

0.03
3

−0.12

−0.09
4

−0.03

0.02
5

0.15

0.04

 
a.Compute the arithmetic mean annual rate of return for each stock. Which stock is most desirable by this measure?
 
b.Compute the standard deviation of the annual rate of return for each stock. (Use Chapter 1 Appendix if necessary.) By this measure, which is the preferable stock?
 
c.Compute the coefficient of variation for each stock. (Use the Chapter 1 Appendix if necessary.) By this relative measure of risk, which stock is preferable?
 
d.Compute the geometric mean rate of return for each stock. Discuss the difference between the arithmetic mean return and the geometric mean return for each stock. Discuss the differences in the mean returns relative to the standard deviation of the return for each stock.
 
 

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3.Private equity investors are planning to provide financing to Jones Machinery and has approached your firm to perform a valuation assessment of Jones. Jones Machinery has 3 million shares outstanding and a target capital structure consisting of 30 percent debt. The debt interest rate is 8 percent. Assume that the risk-free rate of interest is 3 percent and the return on the market is 9 percent. Jones’ historical free cash flow has averaged $4 million per year and is expected to grow at a constant rate of 5 percent a year; its beta is 1.2. Jones has $6 million in debt. The tax rate of Jones Machinery is 18 percent.
 
a. Calculate the required rate of return on equity using CAPM for Jones.
 
b. Calculate weighted average cost of capital of Jones.
 
c. Calculate the value of operations of Jones.
 
d. Calculate the value of the Jones’ equity.
 
4.Stock in Dragula Industries has a beta of 1.1. The market risk premium is 7 percent, and T-bills are currently yielding 5.00 percent. The company%u2019s most recent dividend was $1.40 per share, and dividends are expected to grow at a 7.0 percent annual rate indefinitely.
 
If the stock sells for $35 per share, what is your best estimate of the company%u2019s cost of equity?
 
 
5.Mullineaux Corporation has a target capital structure of 45 percent common stock, 15 percent preferred stock, and 40 percent debt. Its cost of equity is 14 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 7 percent. The relevant tax rate is 40 percent.
 
a)What is Mullineaux%u2019s WACC?
 
b)What is the aftertax cost of debt?
 
 

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