Suppose you want to start a business and you have to decide
on the best organizational form. Explain to classmates the purpose of the
business and the reason you chose this business. Briefly describe what type of
business and organizational form you selected. Explain why you selected that
form over alternative forms.
Unit II Discussion Board
Go to www.cnbc.com and explore the video tab in the top
banner menu. In the search box, enter the key terms reporting and estimate in separate
searches. As you learned in this unit, there are various sources of
information. Watch at least two videos, briefly describe one of the videos
viewed, and provide a summary of information the video contained and how it
fits in with this unit.
Unit III Discussion Board
John Jetison believes he would need $500,000 to retire today
and keep his same lifestyle. If Jetison estimates he will retire in 20 years,
how much should he put away each month to have the equivalent of $500,000 in 20
years if the interest he can earn is 5%? If the interest rate changes to 3%,
what will Jetison need to save each month? Picture cash flows on a timeline and
present it when providing your answer. Think about your own retirement; what
would the timeline look like? In what ways could you better prepare for
retirement?
Unit IV Discussion Board
Go to www.cnbc.com and explore the video tab by using the
key term diversification. As you learned in this unit, there are various
sources of information. Watch at least three videos you find, list the videos
you viewed, and provide a summary of the type of information the video
contained and how it relates to this unit.
Unit V Discussion Board
Go to www.cnbc.com and explore the video tab by using
several different key terms such as stock pricing, stock valuation, and bond
prices. Watch at least two videos you find. List the videos you viewed, and
provide a summary of the type of information that the video contained and how
it relates to the models, variables and the process of valuation. How can you
apply valuation techniques to your personal investment strategy if you have
money to invest?
Unit VI Discussion Board
Go to www.cnbc.com and explore the video tab using the key
term diversification. As you learned in this unit, there are various sources of
information. Watch at least three videos you find, list the videos you viewed,
and provide a summary of the type of information that the video contained and
how it relates to this unit. Suppose you win the lottery. What would you do if
you decided to invest the money in the market? How would you diversify your
portfolio and why?
Unit VII Discussion Board
Go to www.cnbc.com and explore the video tab using the key
term capital investment. As you learned in this unit, there are various sources
of information. Watch at least three videos you find and provide a summary of
the type of information that the video contained and how it relates to this
unit. How does your current or past company you work for, or one that you know
of, evaluate capital investments?
Unit VIII Discussion Board
Think about Unit VII and the importance of understanding the
cost of capital to a business. Comment on why it is important, and explain why
as debt increases (in capital structure), eventually the WACC will increase
(despite the fact debt is usually the lower cost component cost of capital).
How does your current or past company, or one you know of, decide on its cost
of capital? Finally, What assignments/assessments from this course aligned with
your profession? How can the lessons you have learned positively affect your
career success (now or in the future)?
Unit I
Assessment
Question 1 Explain what a firm’s goal is from both a
shareholder and stakeholder approach.
Your response should be at least 75 words in length.
Question 2 Discuss three main organizational forms used in
forming a business.
Your response should be at least 75 words in length.
Question 3 Review how managers responding to incentives may
result in an agency problem.
Your response should be at least 75 words in length.
Question 4 Explain five fundamental principles underlying
the study of finance.
Your response should be at least 75 words in length.
Question 5 Distinguish between equity and debt securities
and how they are used to raise capital.
Your response should be at least 75 words in length.
Unit II Assignment
Use the provided Excel template to submit your responses to
each of the study problems from the textbook below:
? 3-13, p. 72. Review of financial statements
? 3-15, p. 73. Analyzing the cash flow statement
? 4-25, p. 116. Calculating financial ratios
Each question has a corresponding worksheet (look for the
tab along the bottom of the workbook). The cells can be adjusted, added, or
removed as necessary.
Unit 5 assignment
Question 1. (30 points total)Use this balance sheet and
income statement from Carver Enterprises to complete partsa and b: 
a.
(15 points) Prepare a common size balance sheet
for Carver Enterprises. Complete the common-size balance sheet: (Round to one
decimal place.)
b.
(15
points) Prepare a common-size income statement for Carver Enterprises.Complete
the common-size income statement: (Round to one decimal place.)
Question 2.(10 points total) Use this data table of Campbell
Industries liabilities and owners’ equity to complete partsa and b.
a.
(5 points) What percentage of the firm’s assets
does the firm finance using debt (liabilities)? (Round to one decimal place.)
b.
If Campbell were to purchase a new warehouse for
$1.3 million and finance it entirely with long-term debt, what would be the
firm’s new debt ratio?
Question 3. (10 points total)(Liquidity analysis)Airspot
Motors, Inc. has $2,433,200 in current assets and $869,000 in current
liabilities. The company’s managers want to increase the firm’s inventory,
which will be financed using short-term debt. How much can the firm increase
its inventory without its current ratio falling below 2.1 (assuming all other
assets and current liabilities remain constant)?(Round to onedecimal place.)
Question 4. (10 points total)(Efficiency analysis)Baryla
Inc. manufactures high quality decorator lamps in a plant located in eastern
Tennessee. Last year the firm had sales of $93 million and a gross profit
margin of 45 percent.
a.
(5 points) How much inventory can Baryla hold
and still maintain an inventory turnover ratio of at least 6.3 times?(Round to
onedecimal place.)
b.
(5 points) Currently, some of Baryla’s inventory
includes $2.3 million of outdated and damaged goods that simply remain in
inventory and are not salable. What inventory ratio must the good inventory
maintain in order to achieve an overall turnover ratio of at least 6.3
(including the unsalable items)? (Round to onedecimal place.)
Question 5. (15points total)(Profitability and capital
structure analysis)In the year that just ended, Callaway Lighting had sales of
$5,470,000 and incurred cost of goods sold equal to $4,460,000. The firm’s
operating expenses were $128,000 and its increase in retained earnings was
$42,000 for the year. There are currently 99,000 common stock shares
outstanding and the firm pays a $4.770 dividend per share. The firm has
$1,180,000 in interest-bearing debt on which it pays 7.7 percent interest.
a.
(5 points) Assuming the firm’s earnings are
taxed at 35%, construct the firm’s income statement.
b.
(5 points) Calculate the firm’s operating profit
margin and net profit margin.(Round to one decimal place.)
c.
(5 points) Compute the times interest earned
ratio.
What does this tell you about Callaway’s ability to pay its interest
expense? (Fill in the blank with the times interest earned ratio from above and
select the best choice.)
1) Callaway’s operating income
can fall as much as______ times the interest expense and the company would
still be able to service its debt.
2) Callaway’s interest expense is
_______ times higher than its competitors.
3) Callaway’s gross profit can
fall as much as ______ times and still be able to service its debt.
4) Callaway’s operating income
can fall as much as ______ times and still be able to repay its debt.
What is the fin’s return on equity? (Select the best choice.)
1) The firm’s return on equity is
the same as the net profit margin, 9.4%.
2) The firm’s return on equity is
the sum of the operating profit margin and the net profit margin, 25.5%.
3) There is not enough
information to answer this question.
4) The firm’s return on equity is the same as
the operating profit margin, 16.1%.
Question 6. (5 points total)(Market value analysis) Lei
Materials’ balance sheet lists total assets of $1.16 billion, $132 million in
current liabilities, $415 million in long-term debt, $613 million in common
equity, and 58 million shares of common stock. If Lei’s current stock price is
$52.08, what is the firm’s market-to-book ratio? (Round to one decimal place.)
Question 7. (5 points total) (DuPont analysis)Bryley, Inc.
earned a net profit margin of 5.1 percent last year and had an equity
multiplier of 3.49. If its total assets are $109 million and its sales are $157
million, what is the firm’s return on equity?(Round to one decimal place.)
Question 8. (15 points total)(Calculating financial ratios)
Use the balance sheet and income statement for the J. P. Robard Mfg. Company to
calculate the following ratios:
Current ratio(Round to two decimal places.)
Times interest earned(Round to two decimal places.)
Inventory turnover(Round to two decimal places.)
Total asset turnover(Round to two decimal places.)
Operating profit margin(Round to one decimal places.)
Operating return on assets(Round to one decimal places.)
Debt ratio (Round to one decimal places.)
Average collection period(Round to one decimal places.)
Fixed asset turnover(Round to two decimal places.)
Return on equity(Round to one decimal places.)
Unit 6 assignment
Question 1:(10 points).(Bond valuation) Calculate the value
of a bond that matures in 12 years and has $1,000 par value. The annual coupon
interest rate is 9 percent and the market’s required yield to maturity on a
comparable-risk bond is 12 percent. Round to the nearest cent.
Question 2: (10 points).(Bond valuation) Enterprise, Inc.
bonds have an annual coupon rate of 11 percent. The interest is paid
semiannually and the bonds mature in 9 years. Their par value is $1,000. If the
market’s required yield to maturity on a comparable-risk bond is 14 percent,
what is the value of the bond? What is its value if the interest is paid
annually and semiannually? (Round to the nearest cent.)
a. The value of the Enterprise bonds if the interest is paid
semiannually is
b. The value of the Enterprise bonds if the interest is paid
annually is
Question 3: (10 points).(Yield to maturity) The market price
is $750 for a 20-year bond ($1,000 par value) that pays 9 percent annual
interest, but makes interest payments on a semiannual basis (4.5 percent
semiannually). What is the bond’s yield to maturity? (Round to two decimal
places.)
The bond’s yield to maturity is
Question 4: (10 points).(Yield to maturity) A bond’s market
price is $950. It has a $1,000 par value, will mature in 14 years, and has a
coupon interest rate of 8 percent annual interest, but makes its interest
payments semiannually. What is the bond’s yield to maturity? What happens to the
bond’s yield to maturity if the bond matures in 28 years? What if it matures in
7 years?(Round to two decimal places.)
The bond’s yield to maturity if it matures in 14 years is
The bond’s yield to maturity if it matures in 28 years is
The bond’s yield to maturity if it matures in 7 years is
Question 5: (15 points).(Bond valuation relationships)
Arizona Public Utilities issued a bond that pays $70 in interest, with a $1,000
par value and matures in 25 years. The markers required yield to maturity on a
comparable-risk bond is 8 percent.(Round to the nearest cent.)For questions
with two answer options (e.g. increase/decrease) choose the best answer and
write it in the answer block.
Question
a. What is the value of the bond if the markers required
yield to maturity on a comparable-risk bond is 8 percent?
b. What is the value of the bond if the markers required
yield to maturity on a comparable-risk bond increases to 11 percent?
c. What is the value of the bond if the market’s required
yield to maturity on a comparable-risk bond decreases to 7 percent?
d. The change in the value of a bond caused by changing
interest rates is called interest-rate risk. Based on the answer: in parts b
and c, a decrease in interest rates (the yield to maturity) will cause the
value of a bond to (increase/decrease):
By contrast in interest rates will cause the value to
(increase/decrease):
Also, based on the answers in part b, if the yield to
maturity (current interest rate) equals the coupon interest rate, the bond will
sell at (par/face value):
exceeds the bond’s coupon rate, the bond will sell at a
(discount/premium):
and is less than the bond’s coupon rate, the bond will sell
at a (discount/premium):
e. Assume the bond matures in 5 years instead of 25 years,
what is the value of the bond if the yield to maturity on a comparable-risk
bond is 8 percent? $ 960.07 Assume the bond matures in 5 years instead of 25
years, what is the value of the bond if the yield to maturity on a
comparable-risk bond is 11 percent?
f. Assume the bond matures in 5 years instead of 25 years,
what is the value of the bond if the yield to maturity on a comparable-risk
bond is 7 percent?
g. From the findings in part e, we can conclude that a
bondholder owning a long-term bond is exposed to (more/less) interest-rate risk
than one owning a short-term bond.
Question 6: (5 points).(Measuring growth) If Pepperdine,
Inc.’s return on equity is 14 percent and the management plans to retain 55
percent of earnings for investment purposes, what will be the firm’s growth
rate?(Round to two decimal places.)
The firm’s growth rate will be
Question 7: (10 points).(Common stock valuation) The common
stock of NCP paid $1.29 in dividends last year. Dividends are expected to grow
at an annual rate of 6.00 percent for an indefinite number of years. (Round to
the nearest cent.)
a. If your required rate of return is 8.70 percent, the
value of the stock for you is:
b. You (should/should not) make the investment if your
expected value of the stock is (greater/less) than the current market price
because the stock would be undervalued.
Question 8: (10 points).(Measuring growth) Given that a
firm’s return on equity is 22 percent and management plans to retain 37 percent
of earnings for investment purposes, what will be the firm’s growth rate? If
the firm decides to increase its retention rate, what will happen to the value
of its common stock? (Round to two decimal places.)
a. The firm’s growth rate will be:
b. If the firm decides to increase its retention ratio, what
will happen to the value of its common stock? An increase in the retention rate
will (increase/decrease) the rate of growth in dividends, which in turn will
(increase/decrease) the value of the common stock.
Question 9: (10 points).(Relative valuation of common stock)
Using the P/E ratio approach to valuation, calculate the value of a share of
stock under the following conditions:
• the
investor’s required rate of return is 13 percent,
• the
expected level of earnings at the end of this year (E1) is $8,
• the firm
follows a policy of retaining 40 percent of its earnings,
• the
return on equity (ROE) is 15 percent, and
• similar
shares of stock sell at multiples of 8.571 times earnings per share.
Now show that you get the same answer using the discounted
dividend model. (Round to the nearest cent.)
a. The stock price using the P/E ratio valuation method is:
b. The stock price using the dividend discount model is:
Question 10: (10 points) (Preferred stock valuation)
Calculate the value of a preferred stock that pays a dividend of $8.00 per
share when the market’s required yield on similar shares is 13 percent. (Round
to the nearest cent.)
a.
The value of the preferred stock is
b.
Unit 7 assignment
Instructions: Enter all answers directly in this worksheet.
When finished select Save As, and save this document using your last name and
student ID as the file name. Upload the data sheet to Blackboard as a .doc,
.docx or .rtf file when you are finished.
Question 1: (10 points). (Net present value calculation)
Dowling Sportswear is considering building a new factory to produce aluminum
baseball bats. This project would require an initial cash outlay of $4,000,000
and would generate annual net cash inflows of $900,000 per year for 7 years.
Calculate the project’s NPV using a discount rate of 5 percent. (Round to the
nearest dollar.)
a. If the discount rate is 5 percent, then the project’s NPV
is:
Question 2: (30 points). (Net present value calculation) Big
Steve’s, makers of swizzle sticks, is considering the purchase of a new plastic
stamping machine. This investment requires an initial outlay of $90,000 and
will generate net cash inflows of $19,000 per year for 11 years. To answer
Choose an item questions, click on the orange text and use the pull down menu
to select the best answer.
a. What is the project’s NPV using a discount rate of 7
percent? (Round to the nearest dollar.)
If the discount rate is 7 percent, then the project’s NPV
is:
Should the project be accepted?
The project should be accepted because the NPV is positive
and therefore adds value to the firm.
b. What is the project’s NPV using a discount rate of 16
percent?
If the discount rate is 16 percent, then the project’s NPV
is
Should the project be accepted?, it adds value to the firm
c. What is this project’s internal rate of return? (Round to
two decimal places.)
This project’s internal rate of return is:
%
Should the project be accepted? Why or why not?
If the project’s required discount rate is 7%, then the
project _________accepted because the IRR is lower than the required discount
rate.
If the project’s required discount rate is 16%, then the
project __________ accepted because the IRR is higher than the required
discount rate.
Question 3: (15 points). (Related to Checkpoint 11.2)
(Equivalent annual cost calculation) Barry Boswell is a financial analyst for
Dossman Metal Works, Inc. and he is analyzing two alternative configurations
for the firm’s new plasma cutter shop. The two alternatives that are denoted A
and B below perform the same task and although they each cost to purchase and
install they offer very different cash flows. Alternative A has a useful life of
7 years whereas Alternative B will only last for 3 years. The after-tax cash
flows from the two projects are as follows:
a. Calculate each project’s equivalent annual cost (EAC)
given a discount rate of 10 percent. (Round to the nearest cent.)
a. Alternative A’s equivalent annual cost (EAC) at a
discount rate of 10% is:
b. Alternative B’s equivalent annual cost (EAC) at a
discount rate of 10% is
b. Which of the alternatives do you think Barry should
select? Why? (Select the best choice below.)
a. This
cannot be determined from the information provided.
b. Alternative
B should be selected because its equivalent annual cost is less per year than
the annual equivalent cost for Alternative A.
c. Alternative
A should be selected because its equivalent annual cost is less per year than
the annual equivalent cost for Alternative B.
d. Alternative
A should be selected because it has the highest NPV.
Question 4: (10 points). (IRR calculation) What is the
internal rate of return for the following project: An initial outlay of $9,000
resulting in a single cash inflow of $15,424 in 7 years. (Round to the nearest
whole percent.)
a. The internal rate of return for the project is:
Question 5: (10 points). (IRR calculation) Jella Cosmetics
is considering a project that costs $750,000 and is expected to last for 9
years and produce future cash flows of $180,000 per year. If the appropriate
discount rate for this project is 17 percent, what is the project’s IRR? (Round
to two decimal places.)
a.
The project’s IRR is:
Question 6: (10 points) (IRR, payback, and calculating a
missing cash flow) Mode Publishing is considering a new printing facility that
will involve a large initial outlay and then result in a series of positive
cash flows for four years. The estimated cash flows associated with this
project are:
If you know that the project has a regular payback of 2.9
years, what is the project’s internal rate of return?
a. The IRR of the project is:
Question 7: (15 points) (Mutually exclusive projects and
NPV) You have been assigned the task of evaluating two mutually exclusive
projects with the following projected cash flows:
If the appropriate discount rate on these projects is 11
percent, which would be chosen and why? (Round to the nearest cent.)
a. The NPV of Project A is:
b. The NPV of Project B is:
Which project would
be chosen and why? (Select the best choice below.)
a. Cannor
choose without comparing their IRRs.
b. Choose A
because its NPV is higher.
c. Choose
both because they both have positive NPVs.
d. Choose B
because its NPV is higher.
Final exam
Question 1 (Analyzing the cash flow Statement) Goggle, Inc.
is an Internet firm that has experienced a period of very rapid growth in
revenues over the period 2008-2010. The cash flow statements for Goggle, Inc.
spanning the period are below.
Based solely on the cash flow statements for 2008 through
2010, select the statement that best describes the major activities of Goggle’s
management team over the period.
Question 2 When managers have little or no ownership in the
firm, they are less likely to work energetically for the company’s
shareholders. We call this type of conflict a(n) __________.
Question 3 (Analyzing the cash flow Statement) Goggle, Inc.
is an Internet firm that has experienced a period of very rapid growth in
revenues over the period 2007-2010. The cash flow statements for Goggle, Inc.
spanning the period are below. Choose the best answer for the following
question using the information found in these statements:
What years did Goggle generate positive cash flow from its
operations?
Question 4 (Analyzing the cash flow Statement) Goggle, Inc.
is an Internet firm that has experienced a period of very rapid growth in
revenues over the period 2008-2010. The cash flow statements for Goggle, Inc.
spanning the period are below. Choose the best answer for the following
question using the information found in these statements:
Describe Goggle’s main source of financing in the financial
markets over the period.
Question 5 (Analyzing
the cash flow Statement) Goggle, Inc. is an Internet firm that has experienced
a period of very rapid growth in revenues over the period 2008-2010. The cash flow
statements for Goggle, Inc. spanning the period are below. Choose the best
answer for the following question using the information found in these
statements:
Cash Flow Statement
How much did Goggle invest in new capital expenditures over
the period? (Round to the nearest integer.)
Question 6 (Bond valuation) The 8-year $1,000 par bonds of
Vail Inc. pay 12 percent interest. The market’s required yield to maturity on a
comparable-risk bond is 7 percent. The current market price for the bond is
$1,130.
What is your yield to maturity on the Vail bonds given the
current market price of the bonds? (Round to two decimal places.)
What should be the value of the Vail bonds given the yield
to maturity on a comparable risk bond? (Round to the nearest cent.)
Should you purchase the bond at the current market price?
Question 7 (Common stock valuation) The common stock of NCP
paid $1.21 in dividends last year. Dividends are expected to grow at an annual
rate of 6.40 percent for an indefinite number of years.
If your required rate of return is 9.30 percent, what is the
value of the stock for you?
Should you make the investment?
Question 8 (DuPont analysis) Dearborn Supplies has total
sales of $150 million, assets of $109 million, a return on equity of 30
percent, and a net profit margin of 7.6 percent. What is the firm’s debt ratio?
Question 9 (Expected rate of return and risk) Syntex, Inc.
is considering an investment in one of two common stocks.
Expected Rate of Return
Given the information in the table, what is the expected
rate of return for stock B?
What is the standard deviation of stock B?
What is the expected rate of return for stock A?
Based on the risk (as measured by the standard deviation)
and return of each stock which investment is better? (Round to 2 decimal
places)
Question 10 (Review of financial statements) Prepare a
balance sheet and income statement for the Warner Company from the scrambled
list of items found here in order to answer the question below. The statements
do not need to be submitted, only your response to the question.
Financial Statement
What can you say about the firm’s financial condition based
on the prepared financial statements?
Question 11 (Cost of preferred stock) The preferred stock of
Walter Industries Inc. currently sells for $35.67 a share and pays $3.49 in
dividends annually. What is the firm’s cost of capital for the preferred stock?
Question 12 (Cost of common equity) The common stock for the
Hetterbrand Corporation sells for $59.17, and the last dividend paid was $2.24.
Five years ago the firm paid $1.54 per share, and dividends are expected to
grow at the same annual rate in the figure as they did over the past five
years.
What is the estimated cost of common equity to the firm
using the dividend growth model? (Round to 2 decimal places.)
Hetterbrand’s CFO has asked his financial analyst to
estimate the firm’s cost of common equity using the CAPM as a way of validating
the earlier calculations. The risk-free rate of interest is currently 4.1
percent, the market risk premium is estimated to be 4.2 percent, and
Hetterbrand’s beta is 0.78. What is your estimate of the firm’s cost of common
equity using this method? (Round to 2 decimal places.)
Question 13 (Weighted average cost of capital) The target
capital structure for QM Industries is 37 percent common stock, 8 percent
preferred stock, and 54 percent debt. If the cost of common equity for the firm
is 17.6 percent, the cost of preferred stock is 10.6 percent, the before-tax
cost of debt is 7.7 percent, and the firm’s tax rate is 34 percent, what is
QM’s weighted average cost of capital?
Question 14 (Weighted average cost of capital) As a
consultant to GBH Skiwear, you have been asked to compute the appropriate
discount rate to use in the evaluation of the purchase of a new warehouse
facility. You have determined the market value of the firm’s current capital
structure (which the firm considers to be its target mix of financing sources)
as follows:
Weighted average cost of capital
To finance the purchase, GBH will sell 20-year bonds with a
$1,000 par value paying 8.4 percent per year (paid semiannually) at the market
price of $929. Preferred stock paying a $2.51 dividend can be sold for $34.03.
Common stock for GBH is currently selling for $49.09 per share. The firm paid a
$4.06 dividend last year and expects dividends to continue growing at a rate of
4.5 percent per year into the indefinite figure. The firm’s marginal tax rate
is 32 percent.
Calculate component weights of capital:
What is the weight of debt in the firm’s capital structure?
What is the weight of preferred stock in the firm’s capital
structure?
What is the weight of common stock in the firm’s capital
structure?
Calculate component costs of capital:
What is the after-tax cost of debt for the firm?
What is the cost of preferred stock for the firm?
What is the cost of common equity for the firm?
Calculate the firm’s weighted average cost of capital.
What is the discount rate you should use to evaluate the
warehouse project? (Round to 3 decimal places.)
Unit 3 assessment
Question 1 Sarah Wiggum would like to make a single investment
and have $1.6 million at the time of her retirement in 35 years. She has found
a retirement fund that will earn 3% annually. How much will Sarah have to
invest today? If she earned an annual return of 20%, how soon could she then
retire?
Question 2 Much to your surprise, you were selected to
appear on the TV show, “The Price is Right.” As a result of your
prowess in identifying how many rolls of toilet paper an average American
family keeps on hand, you win the opportunity to choose one of the following:
$2,000 today, $10,000 in 10 years, or $31,000 in 29 years. Assuming you can
earn 12% on your money, which should you choose?
Question 3 To pay for your education, you have taken out
$28,000 in student loans. If you make monthly payments over 13 years at 5%
compounded monthly, how much are your monthly student loan payments?
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Question 4 What is the present value of a perpetual stream
of cash flow that pays $80,000 at the end of one year and grows at a rate of 5%
indefinitely? The rate of interest used to discount the cash flows is 10%. What
is the present value of the growing perpetuity?
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Question 5 How much do you have to deposit today so that,
beginning 11 years from now, you can withdraw $9,000 a year for the next 8
years (periods 11 through 18) plus an additional amount of $18,000 in the last
year (period 18)? Assume an interest rate of 6%.
Unit IV Assessment
Question 1
The common stock of Plaxo Enterprises had a market price of
$9.45 on the day you purchased it just 1 year ago. During the past year, the
stock paid a dividend of $1.43 and closed at a price of $11.66. What rate of
return did you earn on your investment in Plaxo’s stock? The rate of return you
earned on Plaxo’s stock is what percent?
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Question 2
Caswell Enterprises had the following end-of-year stock
prices over the last five years and paid no dividends.
Time Caswell
1 $12
2 9
3 7
4 6
5 8
Calculate the average rate of return for each year from the
above information.
What is the arithmetic average rate of return earned by
investing in Caswell’s stock over this period?
What is the geometric average rate of return earned by
investing in Caswell’s stock over this period?
Considering the beginning and ending stock prices for the
five-year period are the same, which type of average rate of return best
describes the annual rate of return earned over the period (arithmetic
