Finance Investment Analysis

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Q 26/27

  1. Discuss the overall purpose people have for investing. Define investment.

4. Discuss why you would expect the saving-borrowing pattern to differ by occupation (for example, for a doctor versus a plumber).

 7.   Discuss the three components of an investor’s required rate of return on an investment. 

8.   Discuss the two major factors that determine the market nominal risk-free rate (NRFR).Explain which of these factors would be more volatile over the business cycle. 

9.   Briefly discuss the five fundamental factors that influence the risk premium of an investment. 

10.   You own stock in the Gentry Company, and you read in the financial press that a recent bond offering has raised the firm’s debt/equity ratio from 35 percent to 55 percent. Discuss the effect of this change on the variability of the firm’s net income stream, other factors being constant. Discuss how this change would affect your required rate of return on the common stock of the Gentry Company.

12.   Explain why you would change your nominal required rate of return if you expected the rate of inflation to go from 0 (no inflation) to 4 percent. Give an example of what would happen if you did not change your required rate of return under these conditions. 

15.   Give an example of a liquid investment and an illiquid investment. Discuss why you con-sider each of them to be liquid or illiquid.


1.   On February 1, you bought 100 shares of stock in the Francesca Corporation for $34 a share and a year later you sold it for $39 a share. During the year, you received a cash dividend of $1.50 a share. Compute your    HPR    and   HPY    on this Francesca stock investment. 

3.   At the beginning of last year, you invested $4,000 in 80 shares of the Chang Corporation. During the year, Chang paid dividends of $5 per share. At the end of the year, you sold the 80 shares for $59 a share. Compute your total   HPY    on these shares and indicate how much was due to the price change and how much was due to the dividend income. 

4.   The rates of return computed in Problems 1, 2, and 3 are nominal rates of return. Assuming that the rate of inflation during the year was 4 percent, compute the real rates of return on these investments. Compute the real rates of return if the rate of inflation was 8 percent. 

6.   You are considering acquiring shares of common stock in the Madison Beer Corporation. Your rate of return expectations are as follows: 


Possible Rate of Return                   Probability
-0.10 0.30
0.00 0.10
0.10 0.30
0.25 0.30

Compute the expected return [E( R̭i )] on your investment in Madison Beer.

12.   Assume that the consensus required rate of return on common stocks is 14 percent. In addition, you read in   Fortune   that the expected rate of inflation is 5 percent and the estimated long-term real growth rate of the economy is 3 percent. What interest rate would you expect on U.S. government T-bills? What is the approximate risk premium for common stocks implied by these data?