01. A stock is expected to renum 20 percent if the economy booms, and 5 percent
ID: 2721320 • Letter: 0
Question
01. A stock is expected to renum 20 percent if the economy booms, and 5
percent if the economy is poor. You have been told that this stock has
an expected return of 11 percent. If that is the case what is the
probability of a poor economy?
A. 0.15
B. 0.30
C. 0.45
D. 0.60
E. 0.75
2 Wicd Co.just paid its first annual dividend of $.60 a share, The firm plans to
increase the dividend by 1.5 percent per year indefinitely. What is the
firm's cost of equity if the current stock price is $9.87 a share?
5.17 percent
5.67 percent
6.17 percent
6.67 percent
7.67 percent
3. LibreOffice has 85,000 shares of common stock outstanding at
a price of $62 a share. They also have 10,000 shares of preferred stock
outstanding at a price of S85 a share. The firm has 10,000 8 percent,
20-year bonds outstanding, with a face value of $1,000, currently
trading at 101 percent of face value. The bonds pay interest
semiannually. What is the capital structure weight of the firm's debt if
the tax rate is 35 percent?
a, 32.00 percent
b, 36.16 percent
c. 40.48 percent
d. 51.75 percent
e, 62.27 percent
04. The gMTPCompany has a pre-tax cost of debt of 7 percent, and a tax rate of 35 percent. The
cost of equity is 12 percent. Debt makes up 37.5 percent of the firm's
financing What is the firm's weighted average cost of capital
6.58 percent
9.21 percent
10.01 percent
10.13 percent
11.11 percent
05. You sell a call option on a share of stock for a premium of $4, The current
market price of the stock is $47 and the strike price on the option is
S50. What is your break-even stock price at maturity?
a, 43
b, 46
c 47
d 51
e 54
06. An investor enters into a short forward contract on 100K
EUR for 1.5 USD each. What is the investor s profit if the exchange rate
at the end of the contract is 1.52 USD/EUR?
a, -2000
b, -1000
c, 1000
d, 2000
e, 3000
Explanation / Answer
Question 1:
Lets assume the probability of economy poor is p, so the probability of economy boom would be 1-p.
Expected return = sum of P x R
0.11 = 0.05 x p + 0.20 x (1-p)
0.11 = 0.05 p + 0.20 -0.20p
0.09 = 0.15p
P= 0.09/0.15
P= 0.60
Hence, probability of poor economy would be 0.60.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.