Calculating Risks and Returns

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.Problem 1. Calculating returns: A stock with an initial price of \$55 per share paid a dividend of \$1.75 per share throughout the year, with an ending price of \$59. Calculate the percentage total return of the stock.Problem 2. Calculating returns: One year ago, you bought an 8.75 percent coupon bond for \$1,065. Today the bond sells for \$990.Calculate the total real rate of return on the investment with a \$1,000 face value.Calculate your total nominal rate of return on the investment this past year.Problem 3. Holding period return: A stock has had returns of -19.52 percent, 17.82 percent, -11.93 percent, 21.35 percent, and 6.43 percent over the past five years, respectively. Calculate the holding period return for the stock.Problem 4. 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.Problem 5. 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)?Problem 6. 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.Problem 7. 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?Problem 8. 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.Problem 9. 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?Problem 10. 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.
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Complete a series of 10 problems in which you calculate risks and returns for
hypothetical companies.
Note: The assessments in this course build upon each other, so you are strongly
encouraged to complete them in sequence.
In this assessment, you will continue to examine the concept of risk in relation to
return. You will utilize statistical techniques of the capital asset pricing model
(CAPM) to compare market equilibrium to risk and return. The CAPM is used in
portfolio analysis.
You will consider the concept of beta in the CAPM, which is used to relate the risk of
a security to overall market risk. In addition, you will demonstrate how efficient the
market is in processing information concerning organizational risk and return and
market risk and return.
By successfully completing this assessment, you will demonstrate your proficiency
in the following course competencies and assessment objectives:
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Competency 1: Apply the theories, models, and practices of finance to the financial
management of the firm.
Calculate accurately the percentage total return, total dollar return, nominal rate of
return, and the holding period return.
Calculate accurately the effective annual rate (EAR), portfolio weights, and expected
return on a portfolio.
Calculate accurately the cost of equity and the weighted average cost of capital
(WACC).
Questions to Consider
To deepen your understanding, you are encouraged to consider the questions below
and discuss them with a fellow learner, a work associate, an interested friend, or a
What is the importance of portfolio diversification and its relationship to risk and
return?
What is a company’s return on investments likely to be, based on the assets held, the
expected rate of return, and the probability of that return? How might these factors
affect decisions about which assets to choose?
How much does a company pay to its security holders, considering the weights of
each component in a company’s capital structure?
Resources
Suggested Resources
The resources provided here are optional. You may use other resources of your
choice to prepare for this assessment; however, you will need to ensure that they
topics in this unit. The MBA-FP6016  Finance and Value Creation Library Guide can
help direct your research. The Supplemental Resources and Research Resources,
resources to help support you.
The following resources will provide assistance to complete the assessment.
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Assessment Problems  Helpful Tips [DOCX].
Excel Examples [XLS].
The following texts are designed to assist learners to master core concepts, solve
financial problems, and analyze results
https://www.boundless.com/finance/textbooks/boundless-finance-textbook/
Chapter 6, “Bond Valuation,” focusing on Section 8, which covers valuing bonds.
Chapter 7, “Stock Valuation,” focusing on Section 5.
Chapter 8, “Introduction to Risk and Return.” Sections 1, 2, and 5 are particularly
relevant to this assessment.
Chapter 10, “Introduction to the Cost of Capital.”
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The following texts are designed to assist learners to master core concepts, solve
financial problems, and analyze results.
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Ross, S. A., Westerfield, R. W., Jaffe, J. F., & Jordan, B. D. (2014). Corporate finance:
Core principles and applications (4th ed.). New York, NY: McGraw-Hill. – Available
from the bookstore
Chapter 10, “Risk and Return Lessons from Market History,” pages 287315.
Chapter 11, “Return and Risk: The Capital Asset Pricing Model (CAPM),” pages 316
356. Pay particular attention to page 343, the Real World case that focuses on “Beta,
Beta, Who’s Got the Beta?” This information will be used in a unit discussion.
Chapter 12, “Risk, Cost of Capital, and Capital Valuation,” pages 357389.
The text offers an introductory look at corporate finance.
Chapter 6, “Uncertainty, Default, and Risk,” pages 105-134.
Assessment Instructions
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.
Problem 1. Calculating returns: A stock with an initial price of \$55 per share paid a
dividend of \$1.75 per share throughout the year, with an ending price of \$59.
Calculate the percentage total return of the stock.
Problem 2. Calculating returns: One year ago, you bought an 8.75 percent coupon
bond for \$1,065. Today the bond sells for \$990.
1.
Calculate the total real rate of return on the investment with a \$1,000 face
value.
2. Calculate your total nominal rate of return on the investment this past year.
Problem 3. Holding period return: A stock has had returns of -19.52 percent, 17.82
percent, -11.93 percent, 21.35 percent, and 6.43 percent over the past five years,
respectively. Calculate the holding period return for the stock.
Problem 4. 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.
Problem 5. 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)?
Problem 6. 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.
Problem 7. 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?
Problem 8. 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.
Problem 9. 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?
Problem 10. Calculating the weighted average cost of capital (WACC): If Metro
Company has the following features, what is its WACC?
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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.
The assignment should be in an Excel format.

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