ALL WORK MUST BE DONE IN EXCELChapter 11: Answer Questions 11.1 , 11.3 on page 379 and problem 17 on page 382 of your textbook. Chapter 13 Leverage and Capital Structure: Critical thinking: Questions 13.5,13.7,13.10 on pages 449/450 Exercises: Problem One: 1 on page 450 of your textbookCHAPTER 11

Risk and Return

CHAPTER REVIEW AND SELF-TEST PROBLEMS

11.1 Expected Return and Standard Deviation. This problem will give you

are two assets and three states of the economy:

some practice calculating measures of prospective portfolio performance. There

(1)

State of

(2)

Probability

of State

of Economy

(3)

Stock A

Rate of Return

if State Occurs

(4)

Stock B

Rate of Return

if State Occurs

Economy

Recession

Normal

Boom

.10

.60

.30

-.20

.10

.70

.30

.20

.50

What are the expected returns and standard deviations for these two stocks? (See

Problem 7.)

11.2 Portfolio Risk and Return. In the previous problem, suppose you have

$20,000 total. If you put $6,000 in Stock A and the remainder in Stock B, what will

be the expected return and standard deviation on your portfolio? (See Problem 10.)

11.3 Risk and Return. Suppose you observe the following situation:

Expected Return

Security

Beta

Cooley, Inc.

Moyer Co.

1.6

1.2

19%

16

If the risk-free rate is 8 percent, are these securities correctly priced? What would

the risk-free rate have to be if they are correctly priced? (See Problems 19, 20.)

11.4 CAPM. Suppose the risk-free rate is 8 percent. The expected return on the

market is 14 percent. If a particular stock has a beta of .60, what is its expected

return based on the CAPM? If another stock has an expected return of 20 percent,

what must its beta be? (See Problem 13.)

11.1

Answers to Chapter Review and Self-Test Problems

The expected returns are just the possible returns multiplied by the associated

probabilities:

E(R) = .10 X -.20+.60 X .10+.30 X.70 = 25%

E(R) = .10 .30 +.60 X .20 + .30 .50 = 30%

The variances are given by the sums of the squared deviations from the expected

returns multiplied by their probabilities:

o = .10 X (-.20 -25)2 + .60 X (.10 – 25)2 +.30 X (.70 – .25)2

= .10 X -.452 + .60 X -.152 + .30 X .452

= 19.X.2025 + .60 X .0225 +.30 X.2025

LO4

LO4

204

stock be?

15. Using CAPM. A stock has an expected return of 10.9 percent, its beta is.85, and

the risk-free rate is 4.6 percent. What must the expected return on the market be?

16. Using CAPM. A stock has an expected return of 12.5 percent and a beta of

1.15, and the expected return on the market is 11.5 percent. What must the risk-free

rate be?

17. Using CAPM. A stock has a beta of 1.15 and an expected return of 10.4 percent.

A risk-free asset currently earns 3.8 percent.

a. What is the expected return on a portfolio that is equally invested in the two

assets?

b. If a portfolio of the two assets has a beta of .7, what are the portfolio weights?

If a portfolio of the two assets has an expected return of 9 percent, what is its

beta?

C.

04

d. If a portfolio of the two assets has a beta of 2.3, what are the portfolio weights?

How do you interpret the weights for the two assets in this case? Explain.

18. Using the SML. Asset W has an expected return of 12.1 percent and a beta of

1.18. If the risk-free rate is 3.7 percent, complete the following table for portfolios of

Asset W and a risk-free asset. Illustrate the relationship between portfolio expected

return and portfolio beta by plotting the expected returns against the betas. What is

the slope of the line that results?

Percentage of Portfolio

in Asset W

Portfolio

Expected Return

Portfolio

Beta

0%

25

Long-Term Financing

13.3 Optimal Capital Structure. Is there an easily identifiable debt-equity ratio

PART 7

that will maximize the value of a firm? Why or why not?

13.4 Observed Capital Structures. Refer to the observed capital structures given

in Table 13.5 of the text. What do you notice about the types of industries with

respect to their average debt-equity ratios? Are certain types of industries more

likely to be highly leveraged than others? What are some possible reasons for this

observed segmentation? Do the operating results and tax history of the firms play

a role? How about their future earnings prospects? Explain.

13.5 Financial Leverage. Why is the use of debt financing referred to as using

financial “leverage”?

13.6 Homemade Leverage. What is homemade leverage?

13.7 Bankruptcy and Corporate Ethics. As mentioned in the text, some firms

– have filed for bankruptcy because of actual or likely litigation-related losses. Is

this a proper use of the bankruptcy process?

13.8 Bankruptcy and Corporate Ethics. Firms sometimes use the threat of a

bankruptcy filing to force creditors to renegotiate terms. Critics argue that in such

an ethical tactic?

cases, the firm is using bankruptcy laws “as a sword rather than a shield.” Is this

13.9 Bankruptcy and Corporate Ethics. As mentioned in the text, Continental

Airlines filed for bankruptcy, at least in part, as a means of reducing labor costs.

Whether this move was ethical, or proper, was hotly debated. Give both sides of

the argument.

13.10 Capital Structure Goal. What is the basic goal of financial management with

regard to capital structure?

AND PROBLEMS connect Select problems are available in McGraw-Hill

|FINANCE

section of the preface for more information.

1. EBIT and Leverage. Kaelea, Inc., has no debt outstanding and a total

market value of $125,000. Earnings before interest and taxes, EBIT, are

projected to be $10,400 if economic conditions are normal. If there is strong

expansion in the economy, then EBIT will be 20 percent higher. If there is

a recession, then EBIT will be 35 percent lower. Kaelea is considering a

$42,000 debt issue with a 6 percent interest rate. The proceeds will be used

to repurchase shares of stock. There are currently 6,250 shares outstanding:

Ignore taxes for this problem.

a.

Calculate parn

LO 1

Whether this move was ethical, O

the argument.

13.10 Capital Structure Goal. What is the basic goal of financial management with

regard to capital structure?

Select problems are available in McGraw-Hill

Connect. Please see the packaging options

section of the preface for more information.

|FINANCE

LO 1

-13)

1. EBIT and Leverage. Kaelea, Inc., has no debt outstanding and a total

market value of $125,000. Earnings before interest and taxes, EBIT, are

projected to be $10,400 if economic conditions are normal. If there is strong

expansion in the economy, then EBIT will be 20 percent higher. If there is

a recession, then EBIT will be 35 percent lower. Kaelea is considering a

$42,000 debt issue with a 6 percent interest rate. The proceeds will be used

to repurchase shares of stock. There are currently 6,250 shares outstanding.

Ignore taxes for this problem.

a. Calculate earnings per share, EPS, under each of the three economic scenarios

before any debt is issued. Also, calculate the percentage changes in EPS when

the economy expands or enters a recession.

b. Repeat part (a) assuming that Kaelea goes through with recapitalization. What

do you observe?

2. EBIT, Taxes, and Leverage. Repeat parts (a) and (b) in Problem 1 assuming

Kaelea has a tax rate of 35 percent.

3. ROE and Leverage. Suppose the company in Problem 1 has a market-to-book

ratio of 1.0.

Calculate return on equity, ROE, under each of the three economic scenarios

LO 2

LO 2

а. .

Purchase answer to see full

attachment

#### Why Choose Us

- 100% non-plagiarized Papers
- 24/7 /365 Service Available
- Affordable Prices
- Any Paper, Urgency, and Subject
- Will complete your papers in 6 hours
- On-time Delivery
- Money-back and Privacy guarantees
- Unlimited Amendments upon request
- Satisfaction guarantee

#### How it Works

- Click on the “Place Order” tab at the top menu or “Order Now” icon at the bottom and a new page will appear with an order form to be filled.
- Fill in your paper’s requirements in the "
**PAPER DETAILS**" section. - Fill in your paper’s academic level, deadline, and the required number of pages from the drop-down menus.
- Click “
**CREATE ACCOUNT & SIGN IN**” to enter your registration details and get an account with us for record-keeping and then, click on “PROCEED TO CHECKOUT” at the bottom of the page. - From there, the payment sections will show, follow the guided payment process and your order will be available for our writing team to work on it.