Question: The expected return on stock A is

> Basic Electric Motors is a division of Basic Electric Products Corporation. The division manufactures and sells an electric switch used in a wide variety of applications. During the coming year, it expects to sell 200,000 units for $8 per unit. Ester Mad

> AFN Company produces plastic that is used for injectionmoulding applications such as gears for small motors. In 2020, the first year of operations, AFN Company produced 4,000 tonnes of plastic and sold 3,500 tonnes. In 2021, the production and sales resu

> Blue Mountain Products manufactures and sells a variety of camping goods. Recently, the company opened a new plant to manufacture a lightweight, self-standing tent. Cost and sales data for the first month of operations (June 2020) are as follows: Calcula

> During its second year of operations, TGS Corporation produced 3,000 units and sold 2,800 units at $60 each. The beginning inventory comprised 100 units, and costs were unchanged from the previous year. Costs incurred during the second year were as follo

> Hardwood Inc. produces mostly wooden crates used for shipping products by ocean freighter. In 2020, Hardwood incurred the following costs: Calculate the manufacturing cost under absorption and variable costing and explain the difference. Wood used ……………

> Ortiz Company produced 9,000 units during the past year but sold only 8,200 of the units. The following additional information is also available: Determine the ending inventory under variable costing; determine whether absorption or variable costing woul

> Empey Manufacturing produces towels to be sold as souvenirs at sporting events throughout the world. Assume that units produced equalled units sold in 2020. The company's variable-costing income statement and other data are as follows: Calculate the prod

> Information for Bob's Company is provided in E8.19. Calculate the product cost and prepare an income statement under normal costing. Instructions a. Assume the company uses normal costing and uses the budgeted volume of 93,860 units to allocate the fixe

> Information for Bob's Company is provided in E8.19. Calculate the product cost and prepare an income statement under absorption costing. Instructions a. Assuming the company uses absorption costing, calculate Bob's manufacturing cost per unit for 2020.

> Determine whether each of the following costs would be classified as product costs or period costs under an absorption-costing system. Identify costs as product costs or period costs under absorption costing. Product Cost Period Cost Commission fees

> Bob's Company builds custom fishing lures for sporting goods stores. In its first year of operations, 2020, the company incurred the following costs: Calculate the product cost and prepare an income statement under variable costing. Variable cost per un

> Information for Asian Windows is given in E8.17. Calculate total product cost and prepare an income statement using normal costing. Instructions a. Assume the company uses normal costing and uses the budgeted volume of 8,000 units to allocate the fixed

> Asian Windows manufactures a hand-painted bamboo window shade for standard-size windows. Production and sales data for 2020 are as follows: Prepare income statements under absorption costing and variable costing. Instructions a. Prepare an income state

> Wu Equipment Company manufactures and distributes industrial air compressors. The following data are available for the year ended December 31, 2020. The company had no beginning inventory. In 2020, it produced 1,500 units but sold only 1,200 units. The u

> Information for Fresh Air Products is given in D8.12. Calculate total product cost and prepare an income statement using throughput costing. Instructions a. Assuming the company uses throughput costing: 1. Calculate the manufacturing cost per unit. 2. P

> Information for Fresh Air Products is given in D8.12. Calculate total product cost and prepare an income statement using normal costing. Instructions a. Assume the company uses normal costing and uses the budgeted volume of 13,500 units to allocate the

> Information for Fresh Air Products is given in D8.12. Calculate total product cost and prepare an income statement using variable costing. Instructions a. Assuming the company uses variable costing: 1. Calculate the manufacturing cost per unit. 2. Prepa

> Fresh Air Products manufactures and sells a variety of camping products. Recently the company opened a new plant to manufacture a deluxe portable cooking unit. Cost and sales data for the first month of operations are shown below: Calculate total product

> Caspian Company produced 20,000 units and sold 18,000 during the current year. Under absorption costing, net income was $25,000. Fixed overhead was $190,000. Determine the net income under variable costing. Determine net income under variable costing.

> Information for Rafael Corp. is given in BE8.8. Prepare absorption-costing income statement and reconcile the difference in net income under the two approaches. a. Prepare an absorption-costing income statement. b. Reconcile the difference between the ne

> Determine whether each of the following costs would be classified as product costs or period costs under a variable-costing system: Identify costs as product costs or period costs under variable costing. Product Cost Period Cost Commission fees for

> Next year Dillon Mechanical Inc ’s EPS is expected to be $4. The firm is not expected to pay any dividends for the next four years. In year 5, a dividend of $1.50 is expected and subsequent dividends are expected to grow at 5 percent per year. The next y

> Investors demand a rate of return of 15 percent on Sweet Life Food Inc. ’ s common shares. These shares are currently trading at $20 per share. Dividend payout for the current year is expected to be $1 per share. a. What is the implied long‐term growth r

> Prime Tire’s current dividend is $4. Dividends are expected to grow by 25 percent for years 1 to 3 and 10 percent thereafter. The required rate of return on the stock is 15 percent. What is Prime’s current stock price?

> Peele Clothiers Ltd. ’ s current dividend is $3.60. Dividends are expected to grow by 9 percent for years 1 to 3, 6 percent for years 4 to 7, and 2 percent thereafter. The required rate of return on the stock is 12 percent. What is the current stock pric

> Peak’s Organic Foods’ current dividend is $4. You expect the growth rate to be 10 percent for years 1 to 5, and 3 percent from years 6 to infinity. The required rate of return on this firm’s equity is 12.5 percent. Determine the following: a. The expecte

> OK Natural Foods’ current dividend is $5. You expect the growth rate to be 0 percent for years 1 to 5, and 2 percent for years 6 to infinity. The required rate of return on this firm’s equity is 10 percent. Determine the following: a. The expected divide

> Latta Incorporated has announced an annual dividend of $5.00. The firm has zero growth and the required rate of return for this type of firm is 10 percent. Assuming that the ex‐dividend date is January 20, calculate the expected stock price for Latta on

> Spinnaker Supplies Ltd. currently doesn’t pay any dividends but is expected to start paying dividends in five years. The first dividend is expected to be $1.80 and is expected to grow at 4.5 percent thereafter. The required rate of return for the firm

> Parker Imports Ltd. is expected to pay a $2 dividend in one year. The required rate of return is 9 percent. The firm uses a dividend payout ratio of 25 percent. Calculate the leading P/E ratio in the following cases: a. Expected growth rate 4 percent i.

> Ibis Company is expected to pay a $1.50 dividend next year. Dividends are expected to grow at 3 percent forever and the required rate of return is 7 percent. a. What is the price of Ibis today? b. What is the expected dividend yield? c. What is the expec

> Calculate the correlation coefficient ( ρ AB ) for the following situation: Еxpected Return on Return on Stock A in Stock B in Еxpected Probability of Occurrence This State This State State of the Economy High growth 25% 40% 55% Moderate g

> You have just been to see your broker at Acclaim Capital Inc. for advice about investing in the Empire Bank. The broker indicates that the Empire Bank has three different types of securities: debt, preferred shares, and common shares. She states: “Debt i

> FinCorp Inc. purchased a stock for $50. It expects to hold the stock for two years, receive a dividend of $1.50 at the end of each year, and sell the stock immediately after receiving the second dividend. Assume dividends are held in a zero‐interest savi

> How can we estimate the investor’s required rate of return for a traditional preferred share?

> How is a traditional preferred share valued?

> In what ways are preferred shares different from bonds?

> Why can the P/E ratio be viewed as a type of payback period?

> How do we generate a portfolio with a higher expected rate of return than that on the tangent portfolio?

> Why is the tangent portfolio so important?

> What is the risk of a portfolio consisting of a risk-free asset and a risky security?

> What is risk aversion and how do we know investors are risk averse?

> FinCorp Inc. is interested in the tradeoff between investing in two stocks, ABC and DEF. The expected return on ABC is 6 percent and on DEF is 18 percent. a. Graph the relationship between the expected return on the portfolio and the weight in DEF. b. Wh

> Why is the Sharpe ratio frequently referred to as a ‘risk-adjusted’ measure of performance?

> When is the expected return equal to the required return?

> 1. What is the expected return and standard deviation of a portfolio consisting of $7,500 invested in a risk free asset with an 8‐percent rate of return, and $2,500 invested in a risky security with a 20‐percent rate of return and a 25‐percent standard d

> Four risk factors, F 1 , F 2 , F 3 , and F 4 , have been identified to determine the required rate of return, as follows: ERi a0 bi1 F1 bi2 F2 bi3 F3 bi4 F4, where a0 , is the expected return on a security with zero systematic risk. Calculate the require

> You invested $100,000 in the following stocks: If the risk‐free rate is 5 percent and the market risk premium is 8 percent, what is the expected return on your portfolio? Stock Amount Beta АВС $20,000 0.8 DEF $30,000 1.2 GHI $15,000

> The variance of the market returns is 0.0576, and the covariance of the returns on ABC stock and the market is 0.09504. If the risk‐free rate is 5 percent and the market risk premium is 8 percent, what is the required rate of return of ABC?

> Stock A has a beta of 1.8 and an expected return of 20 percent. Stock B has a beta of 1.2 and an expected return of 14 percent. If CAPM holds, what should the return on the market and the risk‐free rate be?

> Assuming CAPM is valid, can we have a situation where stock A has a required rate of return of 15 percent and a beta of 1.4, and stock B has a required rate of return of 20 percent and beta of 1.2?

> Determine the beta of QTax based on the following information: • Market expected return is 9 percent; standard deviation is 12 percent • R isk‐free rate is 3 percent • Current dividend is $4 • Dividend growth rate is 4 percent • Current stock price is $3

> Data on the daily performance of Carraway Corporation have been partially completed in the following table. Fill in the missing data. The closing price on one day is assumed to be the opening price for the next day. Carraway Corporation Performance T

> Which of the following are examples of systematic (market) risks? Which are examples of unsystematic (unique) risks? a. Inflation risk b. CFO’ s fraudulent activities c. Changes in interest rates d. Product tampering e. Political risk f. CEO’ s aversion

> You are valuing the Vancouver Rain‐Making Company (VRM) and need to calculate the following: a. Required rate of return (assume the market risk premium is 8 percent, the risk‐free rate is 3 percent, and the beta is 1.28) b. Price of VRM based on the curr

> Estimate the beta of the following stock: market risk premium = 25 percent, RF = 6 percent, P0 = $10, expected dividend at the end of the year = $2.50, P = $12.50 . Assume the market is in equilibrium.

> Stock FM has a standard deviation of 28 percent and a correlation coefficient of 0.7 with market returns. The standard deviation of market return is 16 percent, and the expected return is 13.5 percent. The risk‐free rate is 4.5 percent. a. What is the be

> TrenStar Inc. obtained the following incomplete information from ABC Company and has given you the task of completing the table. Security 1 Security 2 Weight in Beta Beta Security 1 Portfolio Beta Case 1 0.5 1.5 0.4 Case 2 0.65 0.5 1.3 Case 3 1.1 1.9

> Calculate the missing values for the following five efficient portfolios. The expected return on the market is 8 percent, with a standard deviation of 5 percent, and the risk‐free rate is 2 percent. Еxpected Portfolio Return Standar

> Jackie borrowed $1,000 at the risk‐free rate of 6 percent. She invested the borrowed money and her own money of $2,500 in a portfolio with a 15‐percent rate of return and a 25‐percent standard deviation. What is the expected return and standard deviation

> Why is the CAPM called a single-factor model?

> Briefly describe the strengths and weaknesses of the Fama-French model and the APT.

> Describe some of the criticisms of the CAPM, including Roll’s critique.

> To achieve a zero standard deviation for a portfolio, calculate the weights of stock A and stock B, assuming the correlation coefficient is −1. Expected Expected Return on Return on Probability Stock A in Stock B in of Occurrence Th

> You are forecasting the returns for PVC Company, a plumbing supply company, which pays a current dividend of $10. The dividend is expected to grow at a rate of 3 percent. You have identified two public companies, ABC and VJK, which appear to be comparabl

> Your client is confused. He owns shares in the Whistler Snow‐Making Company (WSMC) and wants you to explain your recommendation. Both of you agree on the following: WSMC has an expected return of 12 percent, a standard deviation of 9 percent, and a beta

> Obtain monthly returns for BlackBerry, the Royal Bank of Canada, and the S&P/TSX Composite Index for January to December 2015. (Note: Monthly historical prices, adjusted for dividends, are available from http:// ca.finance.yahoo.com. To obtain the data,

> Three of your friends (Jean, Evan, and Lee) are having an argument about investments and, because you have taken this course, have come to you for advice. The possible investments are set out in the following table. (Assume you cannot mix risky investmen

> A lawyer prosecuting a lawsuit against The Brokerage Company has hired you to conduct an investigation into the advice the company has been giving its clients. You observe that clients have invested in the following portfolios: Evaluate the advice The Br

> TrenStar Inc. has five clients with different risk and return preferences. The market portfolio has an expected return of 12 percent, with a standard deviation of 16 percent. The risk‐free rate is 4 percent. Each client has $2,500 to in

> TrenStar Inc. is planning to offer several investments to investors and is in the process of designing its marketing materials. Each investment’ s value in the future will be related to the return on the S&P/TSX Composite Index over

> Portfolio A has a beta of 0.82. Portfolio B has a beta of 1.05. RF is 3 percent and the market risk premium is 6 percent. Calculate the required rate of return of A and B. If the expected rate of return for both portfolio A and B is 8.5 percent, what inv

> Suppose you have a portfolio that has $100 in stock A with a beta of 0.9, $400 in stock B with a beta of 1.2, and $300 in the risk‐free asset. You have another $200 to invest. You wish to achieve a beta for your whole portfolio to be the same as the mark

> You are following five different stocks and need to issue a recommendation (buy, hold, or sell) to your customers. The market return is 10 percent, with a standard deviation of 15 percent. The risk‐free rate is 3 percent. The CAPM is as

> On Monday you invested $182 in Dettall Ltd. Dettall has earned daily returns of −8 percent, 18 percent, −30 percent, 6 percent, 7 percent, and −5 percent. What is the value of your investment at the end of the six days?

> State Roll’ s critique concerning the CAPM.

> The risk‐free rate is 5 percent, the risk premium is 6 percent, and stock A has an expected return of 15.5 percent. What is the beta of stock A?

> The idea behind CAPM is that investors should not be compensated for diversifiable risk. Why not?

> The current price of a stock is $20. It is expected to rise to $22 in one year and pay an annual dividend of $1 during the year. The RF is 4 percent, the ER M is 10 percent, and the stock’s beta is 1.6. Determine whether the stock is overvalued, underval

> Which security, A, B, or C, will provide the greatest return per unit of risk when combined with the risk free asset with a 5 percent rate of return? ERA = 20 percent, σA = 5 percent ERB = 25 percent, σB = 10 percent ERC = 30 percent, σC = 15 percent

> If a security’ s total risk (variance) increases, does that mean the beta must have increased? Explain.

> What is the beta of the following? a. Risk‐free asset b. Market portfolio

> How do you determine if a portfolio or security is undervalued, correctly valued, or overvalued?

> State three of the assumptions underlying the capital asset pricing model (CAPM).

> Today, you observe the market portfolio has an expected return of 13 percent, with a standard deviation of 7 percent. The risk‐free rate is 2 percent. If only the risk‐free rate increases (i.e., there are no changes to the expected risk and returns of th

> FinCorp Inc. conducted an extensive analysis of the economy and concluded that the probability of a recession next year is 30 percent, the probability of a boom is 45 percent, and the probability of a stable economy is 25 percent. Your boss has estimated

> For the following decisions, indicate if they are consistent with risk aversion or risk loving. a. Buying a lottery ticket b. Buying fire insurance on your house c. Jaywalking on St. Catherine Street in Montreal d. Backing up your computer

> If the market risk premium increases will securities become over or under valued?

> If a security’s correlation with the market return increases, will its beta get larger or smaller?

> What is the slope of the CML, and why can it be reviewed as the market price of risk for efficient portfolios according to the CML?

> What is a characteristic line, and why is it useful?

> Assuming the CAPM holds, if the expected return on a diversified portfolio lies above the CML, should an investor buy or sell the portfolio?

> Why is beta a measure of market risk for a security?

> Why is the GM return a better estimate of long run investment performance than the AM return?

> What is the difference between ex ante and ex post returns?

> Why do the income and capital gains component of the total return differ between common shares and bonds?

> State three of the most important assumptions underlying Markowitz’s notion of efficient portfolios.

> 1. Calculate the capital gain return for a stock that was purchased at $32 one year ago and is now worth $34. It paid four quarterly dividends of $1.50 per share each throughout the year. a. 9.75 percent b. 6.25 percent c. 13.50 percent d. 11.00 percent

> Why would we sometimes want to use scenario based risk measures rather than the standard deviation of actual returns over a long time period?

> What is the difference between estimating a scenario-based (probability) estimate of risk versus a historic data-based estimate of risk?