Ch 8 Terminology
Risk an investor would face if the investor held only one asset
What is stand-alone risk?
Has features similar to bonds and features similar to stocks.
What is preferred stock?
The CV of a stock with expected return = 16% and standard deviation = 29%.
What is 1.813?
The price today of a stock that just paid a $5 dividend with a growth rate of 4% and you require a 16% return on your investment.
What is $43.33?
Risk that can be eliminated
What is diversifiable/unsystematic risk?
The rate of return expected to be realized from an investment.
What is expected rate of return?
When each stock's expected return equal its required return as seen by the marginal investor.
What is market equilibrium?
Stock's expected return if it has the following distribution:
Economic Conditions Probability Rate of Return
Bad 0.25 -10%
Average 0.60 13%
Good 0.15 23%
What is 13.75%?
The growth rate of Albright Motors which is expected to pay a year-end dividend of $3 per share. The stock currently sells for $30 a share and the required rate of return on the stock is 16%.
What is 6%?
Ranges from -1 to +1
What is correlation coefficient?
A statistical measure of variability.
What is standard deviation?
Model used to find the value of a stock today by calculating the present value of an infinite stream of dividends.
What is the dividend discount model?
The required rate of return of Stock R if the risk-free rate is 2%, risk premium is 6% and beta is 0.8.
What is 6.8%?
The dividend yield of Firm B which just paid a $2 dividend and have an anticipated growth rate of 6%. The stock currently sells for $35.
What is 6.06%?
The common stock price per share of Lee Inc. which has a total corporate value of $300M. Its balance sheet shows $50M in notes payable, $20M in long-term debt, $10M in preferred stock, and $220 in total common equity. The firm has 20M shares of common stock outstanding.
What is $11?
Tendency of two variables/stocks to move together
What is correlation?
The present value at a future point in time of all future cash flows when we expect stable growth rate forever.
What is horizon value?
The fund's beta of a $2M portfolio invested $800,000 in Stock A and $1,200,000 in Stock B. Stock A has beta of 1.2 and Stock B has beta of 0.7
What is portfolio beta = 1?
The last dividend paid by Phillip Industries. Phillip's stock has a required rate of return of 12%, sells for $50 per share today, and dividend is expected to grow at a constant rate of 5%.
What is $3.33?
You are a risk averse investor. You will choose stock ____ if held in isolation and stock ____ if held in a portfolio.
Stock A: SD = 20% and Beta = 1.30
Stock B: SD = 14% and Beta = 0.55
Stock C: SD = 23% and Beta = 0.39
What is B and C?
A metric that shows the extent to which a given stock's returns move up and down with the stock market.
What is beta coefficient?
Gives stockholders the right to purchase on a pro rata basis new issues of common stock (protect against dilution).
What is preemptive right?
The standard deviation of a stock with the following distributions: Expected Rate of Return = 11%
Performance Probability Rate of Return
Below Avg 0.2 -5%
Average 0.5 12%
Above Avg 0.3 20%
What is 8.72%?
The price today of Rogers Robotics if it just paid a dividend of $1.00 and the dividends will grow at a rate of 10% in Year 1, 20% in Year 2, and become constant at a rate of 5% in Year 3. The required rate of return is 10%.
What is $25?
Total market value today of Klein Company if the firm is expected to generate FCFs of $100 in Year 1, $120 in Year 2, and $300 in Year 3. The FCF is expected to grow at a constant rate of 3% after Year 3. The firm's WACC is 8% and the firm has $50 in non-operating assets.
What is $5,390?